As crypto continues to evolve rapidly with increased adoption and regulation, the legal decisions surrounding it are also keeping pace.
Just recently, a U.S. federal judge ruled that participants in decentralized autonomous organizations (DAOs) can be held liable for the actions of other members under California’s partnership laws.
Notably, Judge Vince Chhabria of the U.S. District Court for the Northern District of California ruled that the governing body behind Lido DAO qualifies as a partnership under state law.
The move has major implications for the decentralized finance (DeFi) industry, as it could legally hold DAO members accountable for the organization’s activities.
Elaborate on the legal implications for Lido DAO and its partners
According to the report, the lawsuit filed by investor Andrew Samuels stems from his purchase of tokens issued by Lido DAO. Samuels claimed financial losses and argued that the DAO failed to register its tokens as securities with the United States Securities and Exchange Commission (SEC).
Therefore, it sought to hold Lido DAO and its identifiable partners liable under Section 12(a)(1) of the Securities Act which states that “buyers are entitled to sue sellers for offering or selling a non-exempt title without registering it.”
In his ruling, Judge Chhabria found that Samuels had “sufficiently alleged” that Lido DAO and its identifiable partners could not claim immunity from legal liability.
The court ruled that Lido DAO met the criteria for a general partnership under California law, thus holding its partners responsible for the crypto organization’s actions.
This interpretation set a new precedent for how crypto DAOs, which operate without centralized management, can be regulated by existing partnership laws.
Samuels identified four major institutional investors – Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management and Robot Ventures – as putative partners in the Lido DAO.
He asserted that these entities play an active role in the governance and operations of the Lido DAO, thereby assuming partnership responsibilities that could expose them to liability for the actions of the DAO. In response, the four companies requested that the case be dismissed.
The court, however, only approved Robot Ventures’ motion to dismiss, citing insufficient evidence to establish it as a general partner.
Meanwhile, dismissal requests from Paradigm, Andreessen Horowitz and Dragonfly were denied, with the judge finding their participation in Lido DAO’s governance sufficient to classify them as general partners under state law.
Reactions from the crypto community
The decision led to significant debate within the crypto and DeFi communities. Legal experts warn that this precedent could lead to “increased accountability” of DAO participants, potentially stifling decentralized governance.
For example, Miles Jennings, general counsel and head of decentralization at a16z Crypto, commented on the implications of the court’s decision.
Jennings pointed out that even minimal involvement, such as forum posting of a DAO, could now expose members to liability under California partnership laws. This, he warned, represents a crucial challenge for decentralized governance and calls for greater legal clarity.
Today, a California judge dealt a major blow to decentralized governance.
Under the ruling, any participation in the DAO (even posting on a forum) could be sufficient to hold DAO members liable for the actions of other members under partnership laws.
It’s time to DUNA. pic.twitter.com/aKNBY7pfc9
-miles jennings (@milesjennings) November 19, 2024
Featured image created with DALL-E, chart from TradingView
