Lido DAO Ruling Sparks Legal Concerns Across Crypto Community

A federal court in California has ruled that members of the Lido DAO can be held liable under state partnership laws. 

Tile 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.

Court Rules Lido DAO Members Liable Under Partnership Laws

Andrew Samuels brought the lawsuit after purchasing Lido’s native LDO tokens on the secondary market in April and May 2023 via the Gemini exchange. Samuels later filed a class-action suit in December, alleging that the tokens were sold as unregistered securities. He 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, violating securities laws. The court sided with him, ruling 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, holding its participants accountable for its operations and liabilities. 

The judge identified specific participants, including prominent venture capital (VC) firms Paradigm Operations, Andreessen Horowitz (a16z), and Dragonfly Digital Management. Per the ruling, these VCs pass 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 pivotal moment in the legal treatment of decentralized autonomous organizations (DAOs). Of note is that 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 — meets 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 across 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, particularly 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 affect other DAOs and their contributors. The ruling emphasized that a general partnership can exist even without the explicit intent to form one. It suffices, provided 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 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,” Chief Apostle of RWA commented.

The decision signals a challenging road ahead for Lido DAO and its participants as they walk the legal and regulatory pathway. 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 almost 2% on this news. As of this writing, it is trading at $1.18.