DAO votes to give $5M seed money back to YGG openly breaking contract

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In May, the Mer­it Cir­cle DAO vot­ed in favor of a pro­pos­al to remove one of its seed investors and return their ini­tial invest­ment. The pro­pos­al claimed that Yield Guild Games had not offered suf­fi­cient val­ue beyond their fis­cal invest­ment. Today, Mer­it Cir­cle Ltd and Yield Guild Games issued a joint state­ment.

The Proposal

The pro­pos­al named MIP-13 “aimed to demon­strate the lack of val­ue YGG has pro­vid­ed the DAO since becom­ing a seed investor.” It continues,

“It also aims to can­cel YGG’s SAFT, refund their ini­tial invest­ment, and remove their MC seed tokens.

The author of this pro­pos­al, pro­pos­es to find a solu­tion to ter­mi­nate the finan­cial oblig­a­tions the Mer­it Cir­cle DAO has with YGG, through remov­ing YGG’s seed tokens and refund­ing their ini­tial 175K USDC contribution.”

Accord­ing to the notes added to the pro­pos­al, “YGG and YGG co-founder Gab­by Dizon invest­ed $175k at a price of $0.032, which gives them 5,468,750 MC tokens in total.” By refund­ing YGG in USDC, it would miss out on unre­al­ized gains as the token peaked at $0.99 on May 28, the day the pro­pos­al passed. The pro­pos­al was lat­er updat­ed with the fol­low­ing para­graph after YGG agreed to set­tle out of court to avoid a lengthy trial.

“Mer­it Cir­cle ltd has argued for a clause, that will give time for Mer­it Cir­cle ltd and YGG to pro­pose a solu­tion that would be more ben­e­fi­cial for the DAO and all par­ties involved in case of a YES vote. Author deemed this a fair ask and accept­ed the clause.”

In an update to the com­mu­ni­ty forum post where the pro­pos­al was ini­tial­ly sug­gest­ed, the author states:

“it is worth men­tion­ing that YGG didn’t even have a gov­er­nance account, or any gov­er­nance posts until two weeks ago. We’re talk­ing over half a year of nothing.”

The Counterproposal

With sup­port from Yield Guild Games, MIP-14 was sub­mit­ted by Mer­it Cir­cle Ltd as a coun­ter­pro­pos­al in align­ment with the amend­ment to MIP-13.

“In light of the recent­ly passed pro­pos­al (MIP-13), the Mer­it Cir­cle DAO is oblig­ed to rene­go­ti­ate the terms of the finan­cial agree­ments made between the DAO and Yield Guild Games.

This pro­pos­al votes on the following;

  • The Mer­it Cir­cle DAO buys out the YGG and Nifty Fund allo­ca­tion, a total of 5,468,750 $MC tokens at 0.32$. For a total of $1,750,000 USDC.
  • A legal agree­ment will be signed, enforc­ing the buy-out offer legal­ly and pro­tect­ing both sides against future litigation.”

Yield Guild Games accept­ed 30 cents on the dol­lar and a 10X return on its ini­tial invest­ment. Accord­ing to our coin data, Mer­it Cir­cle (MC) has $4.6 mil­lion in dai­ly vol­ume. There­fore, had Yield Guild Games attempt­ed to sell its 5.4 mil­lion unlocked tokens on the open mar­ket, it would most like­ly crash the price. As a result, $0.32 per token may not be as bad a deal as it looks if it had planned to liquidate.

The Legal Debate

Mer­it Cir­cle DAO was set up by Mer­it Cir­cle Ltd, which received invest­ment from Yield Guild Games. Mer­it Cir­cle DAO decid­ed that Yield Guild Game’s orig­i­nal invest­ment should be returned due to a lack of value.

Yield Guild Games invest­ed in Mer­it Cir­cle Ltd, not Mer­it Cir­cle DAO, so the legal impli­ca­tions of the deci­sion are murky. If Mer­it Cir­cle DAO has the legal right to man­age the funds invest­ed by Yield Guild Games, then there is a lay­er of sep­a­ra­tion that could put Yield Guild Games’ cap­i­tal at risk. Mer­it Cir­cle DAO did not vote to revoke Yield Guild Games’ invest­ment but returned the invest­ment at its orig­i­nal value.

It is unlike­ly that a legal prece­dent has been set to define the legal rela­tion­ship between a DAO and its found­ing company’s con­trac­tu­al oblig­a­tions. The uncer­tain legal land­scape and the pos­si­bil­i­ty of a lengthy legal bat­tle like­ly fac­tored into the deci­sion to set­tle. In the forum post for MIP-14, Mer­it Cir­cle Ltd stat­ed, “both par­ties have giv­en it their all to work things out in a friend­ly but pro­fes­sion­al way.”

It appears that Mer­it Cir­cle Ltd and Mer­it Cir­cle DAO were not com­plete­ly aligned, at least pub­li­cal­ly. Mer­it Cir­cle Ltd claims that

“It is clear there needs to be a more clear align­ment between the absolute pow­er of the DAO and the agree­ments it makes in the past, present and future.”

It is pos­si­ble that DAO mem­bers with­in Mer­it Cir­cle Ltd did not real­ize the impli­ca­tions of MIP-13 as it com­ment­ed when it passed, “what may seem ben­e­fi­cial for an orga­ni­za­tion at first glance can bring seri­ous adverse effects in the long-run.”

The Joint Statement

On June 14, 2021, some 16 days after MIP-13 passed, Mer­it Cir­cle Ltd and Yield Guild Games issued a joint state­ment  adding val­ue beyond fis­cal sup­port “was not a require­ment of the orig­i­nal SAFT that was signed by Mer­it Cir­cle Ltd and Yield Guild Games.” It fur­ther states, “Yield Guild Games added val­ue in many dif­fer­ent ways although they were not often called upon to do so.”

The state­ment acknowl­edges the “dan­ger a prece­dent like this could set for the Mer­it Cir­cle DAO and the indus­try as a whole if agree­ments are not upheld, and investors are not respect­ed.” It also out­lines five core con­tri­bu­tions Yield Guild Games made to Mer­it Cir­cle since its invest­ment. The con­tri­bu­tions alleged­ly involve sup­port in rais­ing addi­tion­al funds, using the YGG brand, offer­ing addi­tion­al funds, and indus­try advice.

Legal Implications

Yield Guild Games will be com­pen­sat­ed at a price of $0.32, and any “for­mal rela­tion­ship between the Mer­it Cir­cle DAO and Yield Guild Games” will be ter­mi­nat­ed. Whether this for­mal rela­tion­ship legal­ly exist­ed is the sub­ject of the entire debate. How­ev­er, adding this clause clos­es the door to future poten­tial litigation.

While this inci­dent did not end in court, it high­lights a poten­tial dan­ger for investors con­cern­ing DAO-based projects. Would Yield Guild Games have won in court? We’ll nev­er know, but per­haps we’ll now see more DAOs test the bound­aries of this strange new dig­i­tal world.

Post­ed In: DAOs, Invest­ments

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