DAO gives $5M to YGG, breaching contract

The Merit Circle DAO has voted to refund Yield Guild Games' investment capital. In the DAO's opinion, YGG did not provide enough value.

The Merit Circle DAO voted in favor of removing one of its seed investors and returning their initial investment in May. According to the proposal, Yield Guild Games did not provide enough value beyond their financial investment. Merit Circle Ltd and Yield Guild Games released a joint statement today.

The Concept

The MIP-13 proposal "sought to demonstrate the lack of value YGG has provided the DAO since becoming a seed investor." It goes on, 

“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 proposal's notes, "YGG and YGG co-founder Gabby Dizon invested $175k at a price of $0.032, giving them a total of 5,468,750 MC tokens." By refunding YGG in USDC, it would forfeit unrealized gains since the token peaked at $0.99 on May 28, the day the proposal was approved. After YGG agreed to settle out of court to avoid a lengthy trial, the proposal was later updated with the following paragraph.

“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 tenfold return on investment. Merit Circle (MC) has a daily volume of $4.6 million, according to our coin data. As a result, if Yield Guild Games tried to sell its 5.4 million unlocked tokens on the open market, the price would most likely crash. As a result, $0.32 per token may not be such a bad deal as it appears if it intended to liquidate.

The Legal Controversy

Merit Circle DAO was founded by Merit Circle Ltd, which was funded by Yield Guild Games. Due to a lack of value, Merit Circle DAO determined that Yield Guild Game's initial investment should be returned.

Because Yield Guild Games invested in Merit Circle Ltd rather than Merit Circle DAO, the legal implications of the decision are unclear. If Merit Circle DAO has the legal authority to manage Yield Guild Games' funds, there is a layer of separation that could put Yield Guild Games' capital at risk. Merit Circle DAO did not vote to withdraw Yield Guild Games' investment, but instead returned it at its original value.

It is unlikely that a legal precedent has been established to define the contractual obligations of a DAO and its founding company. The uncertain legal landscape and the prospect of a protracted legal battle most likely influenced the decision to settle. Merit Circle Ltd stated in the MIP-14 forum post that "both parties have given it their all to work things out in a friendly but professional manner."

Merit Circle Ltd and Merit Circle DAO did not appear to be completely aligned, at least publicly. Merit Circle Ltd asserts 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 Merit Circle Ltd DAO members were unaware of the implications of MIP-13, as it stated when it was passed, "what may appear beneficial for an organization at first glance can bring serious adverse effects in the long run."

The Joint Declaration

Merit Circle Ltd and Yield Guild Games issued a joint statement on June 14, 2021, some 16 days after MIP-13 passed, adding that value beyond fiscal support "was not a requirement of the original SAFT that was signed by Merit Circle Ltd and Yield Guild Games." It goes on to say, "Yield Guild Games added value in many different ways, even though they were not frequently called upon to do so."

The statement recognizes the "danger that a precedent like this could set for the Merit Circle DAO and the industry as a whole if agreements are not followed and investors are not respected." It also details the five most important contributions Yield Guild Games has made to Merit Circle since its investment. The contributions are said to include assistance in raising additional funds, the use of the YGG brand, the offering of additional funds, and industry advice

Legal Consequences

Yield Guild Games will be paid $0.32, and any "formal relationship between the Merit Circle DAO and Yield Guild Games" will be dissolved. The entire debate revolves around whether or not this formal relationship existed legally. However, including this clause eliminates the possibility of future litigation.

While this incident did not end up in court, it does highlight a potential risk for investors when it comes to DAO-based projects. Would Yield Guild Games have been successful in court? We'll never know, but perhaps more DAOs will now test the limits of this strange new digital world.

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