Lido DAO Ruling: A huge blow to decentralized governance

First conceived in 2016, decentralized autonomous organizations (DAOs) have been crypto’s response to the question of how to direct the affairs of a decentralized protocol.

The latest development in the ongoing legal saga surrounding decentralized autonomous organizations (DAOs) could have far-reaching implications for the future of decentralized finance (DeFi).

On Monday, a federal judge ruled that a decentralized autonomous organization (DAO) could be held liable for the actions of its members, opening the door for further legal actions against DAOs and their participants.

The ruling stems from a lawsuit filed last year by Andrew Samuels, a Lido token (LDO) holder, who alleged that Lido DAO and several venture capital firms that participated in the DAO's token sale violated federal securities laws by offering and selling unregistered securities.

Samuels also claimed that Lido DAO, which is not legally incorporated, is a general partnership under California law, and that its members, including the VCs, are jointly liable for the DAO's debts and obligations.

In his ruling, U.S. District Judge Vince Chhabria largely agreed with Samuels' argument, finding that he had "sufficiently alleged that the DAO had a partnership-like relationship with the VCs and that the VCs played a role in soliciting the purchase of Lido tokens."

The judge noted that the plaintiff had argued that the VCs "participated in discussions about exchange listings, which at least solicited the purchase of Lido tokens by others on those exchanges."

However, the judge dismissed Samuels' claims against Robot Ventures, one of the VCs named in the lawsuit, and also agreed with Lido DAO's argument that it could not be held liable for the actions of Robot Ventures.

Following the ruling, a lawyer for Andreessen Horowitz (a16z), one of the VCs named in the lawsuit, expressed disappointment with the decision and said that it had "broad implications for DAO participation."

"We believe the Court erred in its analysis and will continue to defend a16z's role in supporting decentralized protocols," the lawyer added.

notably, this is not the first time that a court has ruled that a DAO can be considered a general partnership.

Earlier this year, a federal judge in California allowed a group of users who lost funds in a bZx exploit to proceed with a lawsuit against the decentralized exchange's DAO.

In another case, a judge allowed a class action lawsuit against Compound Labs, the creator of the decentralized lending protocol Compound, to proceed with claims that the protocol's governance token was an unregistered security.

These rulings could have a significant impact on the way that DAOs are structured and operate in the future.

If DAOs are to be held to the same standards as general partnerships, then their members could face increased personal liability for the actions of the DAO.

This may lead some DAOs to seek legal recognition and protection by forming limited liability companies (LLCs) or other types of legal entities.