Court Rules Lido DAO Members Liable Under Partnership Laws

The case focuses on the decentralized governing body behind the popular liquid staking protocol (LSP). Nevertheless, this precedent marks a landmark decision with significant implications for decentralized governance.

A federal court in California has ruled that members of the Lido DAO can be held liable under state partnership laws. The case, brought by a purchaser of Lido's native LDO tokens, centered on the decentralized governing body behind the popular liquid staking protocol (LSP). While the ruling pertains to Lido DAO, its precedent has broader implications for decentralized governance.

Andrew Samuels filed a class-action suit in December, alleging that Lido's LDO tokens were sold as unregistered securities. He claimed to have purchased the tokens on the secondary market in April and May 2023 through the Gemini exchange. His lawsuit aimed to hold the DAO liable for his financial losses due to the declining value of the tokens.

In his complaint, Samuels argued that the DAO actively solicited token purchases on exchanges, which violated securities laws. The court agreed with this argument, stating that the DAO's structure and activities subjected it to general partnership liability.

"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," the court noted.

The ruling, issued on Monday by Judge Vince Chhabria of the US Northern District Court of California, rejected Lido DAO's claim that it operates as a non-legal entity immune to traditional legal frameworks. Instead, the court classified the DAO as a general partnership, rendering its participants liable for its operations and debts.

The court identified specific participants, including prominent venture capital (VC) firms Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management. According to the ruling, these VCs qualify as general partners due to their active involvement in Lido DAO's governance and operations. However, another investor, Robot Ventures, was dismissed from the lawsuit due to insufficient evidence of direct participation.

The court's decision marks a significant moment in the legal treatment of decentralized autonomous organizations (DAOs). DAOs are designed to operate without centralized control, but the court found that Lido DAO's structure — where token holders collectively govern decisions and earn staking rewards — met California's definition of a general partnership.

"[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," Judge Chhabria wrote in his ruling.

This decision suggests that mere association with a DAO may not be enough to establish liability; instead, active involvement in governance or operations is required.

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 severe setback for decentralized governance.

"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," Jennings wrote in a statement on X (formerly Twitter).

The decision highlights the risks for participants in DAOs, especially those involved in governance or decision-making processes. By rejecting the argument that a DAO's decentralized structure shields its participants 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 is established 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, particularly for decentralized projects that rely on token-based governance models. Moving forward, DAOs may need to reconsider 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," Chief Apostle of RWA commented.

The 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.

Lido DAO's LDO token is down nearly 2% on this news. At the time of writing, it is trading at $1.18.