A federal court in California has ruled that members of the Lido DAO can be held liable under state partnership laws. This case is about the decentralized governing body behind the popular liquid staking protocol (LSP). It sets a significant legal precedent for decentralized governance.
Andrew Samuels brought the lawsuit after buying Lido’s native LDO tokens on the secondary market in April and May 2023 via the Gemini exchange. Later, in December, he filed a class-action lawsuit. He claimed the tokens were sold as unregistered securities and blamed the DAO for his financial losses due to their declining value.
In his complaint, Samuels argued that the DAO actively solicited token purchases on exchanges, which violated securities laws. The court agreed, ruling that the DAO’s structure and activities made it subject to general partnership liability.
The court noted, “The statutory phrase ‘offers or sells’ has been construed broadly to include solicitation of securities purchases. Samuels has sufficiently alleged that Lido DAO solicited these purchases, making it liable.”
This ruling, issued by Judge Vince Chhabria of the US Northern District Court of California, dismissed Lido DAO’s claim that it operates as a non-legal entity. Instead, the court classified the DAO as a general partnership, holding its participants accountable for its operations and liabilities.
The judge identified specific participants, including well-known venture capital firms like Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management. These firms were deemed general partners due to their active involvement in Lido DAO’s governance and operations. However, Robot Ventures was dismissed from the lawsuit due to insufficient evidence of direct participation.
This decision marks a pivotal moment in the legal treatment of decentralized autonomous organizations (DAOs). DAOs are designed to operate without centralized control. However, the court found that Lido DAO’s structure—where token holders govern decisions and earn staking rewards—fits California’s definition of a general partnership.
Judge Chhabria wrote, “[This case] raises critical questions about the ability of individuals in the crypto ecosystem to shield themselves from liability through novel legal arrangements tied to decentralized financial instruments.”
This ruling indicates that merely being associated with a DAO may not be enough to avoid liability. Active involvement in governance or operations is necessary.
The ruling has sparked concern in the crypto and blockchain community. Miles Jennings, General Counsel and Head of Decentralization at a16z crypto, described the decision as a serious setback for decentralized governance.
Jennings stated, “Under the ruling, any DAO participation (even posting in a forum) could be sufficient to hold DAO members liable for the actions of other members under general partnership laws.”
This decision highlights the risks for DAO participants, particularly those involved in governance or decision-making processes. By rejecting the argument that a DAO’s decentralized structure protects its members from liability, the court has set a precedent that could impact other DAOs and their contributors.
The ruling emphasized that a general partnership can exist even without the explicit intent to form one. It’s enough if two or more individuals associate to co-own and operate a business for profit.
This case has far-reaching implications for the crypto industry, especially for decentralized projects that rely on token-based governance models. Moving forward, DAOs may need to rethink their structures and establish legal entities to protect participants from similar liability risks.
“Every DAO will require a legal wrapper, a careful choice of jurisdiction, and compliance with laws of security (token) issuance unless the law changes,” commented the Chief Apostle of RWA.
This decision signals a challenging road ahead for Lido DAO and its participants as they navigate the legal and regulatory landscape. Meanwhile, other DAOs and decentralized projects may face increased scrutiny as courts and regulators examine their operations under traditional legal frameworks.
In response to this news, Lido DAO’s LDO token has dropped nearly 2%, trading at $1.18 as of now.