As the world of cryptocurrencies advances at a swift pace, an increase in adoption and regulation is being matched by evolving legal frameworks.
In a recent development, a federal judge in the United States has ruled that members of a decentralized autonomous organization (DAO) may be held liable for the actions of fellow participants under California’s partnership regulations.
Judge Vince Chabria, who serves in the Northern District of California, determined that the operating entity for Lido DAO qualifies as a general partnership according to California law.
This ruling carries significant ramifications for the decentralized finance (DeFi) landscape, as it could render DAO members legally accountable for the activities of their organizations.
Explore the legal consequences for Lido DAO and its affiliates
According to reports, investor Andrew Samuels filed a lawsuit claiming financial losses relating to tokens issued by Lido DAO. He argued that the organization did not register these tokens as securities with the U.S. Securities and Exchange Commission (SEC).
Samuels invoked Section 12(a)(1) of the Securities Act, which allows purchasers to take legal action against sellers for offering or selling a non-exempt security without proper registration, and sought to hold both Lido DAO and its identifiable partners liable.
In his ruling, Judge Chabria concluded that Samuels had adequately established that Lido DAO and its identifiable partners could not evade liability.
The court’s decision confirmed that Lido DAO meets California’s criteria for a general partnership, implicating its partners in the organization’s actions.
This interpretation may set a significant precedent for how crypto DAOs operate under established partnership laws in the absence of centralized control.
Samuels named four key institutional investors—Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures—as alleged partners within Lido DAO.
He claimed these entities are actively involved in the governance and operations of Lido DAO, thus bearing partnership obligations that could expose them to liability for the organization’s actions. In turn, all four firms sought to have the lawsuit dismissed.
However, the court granted only Robot Ventures’ request for dismissal, citing insufficient evidence to classify them as a general partner.
Simultaneously, the motions to dismiss from Paradigm, Andreessen Horowitz, and Dragonfly were denied on the grounds that their participation in Lido DAO’s governance was substantial enough to designate them as general partners under state law.
Community Reactions in the Cryptocurrency Sphere
This ruling has ignited a significant debate within the cryptocurrency and DeFi communities. Legal analysts warn that this new precedent might create “increased liability” for DAO members and disrupt the principles of decentralized governance.
For instance, Miles Jennings, General Counsel and Head of Decentralization at a16z Crypto, shared insights on the potential outcomes of the court’s ruling.
Jennings highlighted that even a minor activity, such as posting on a DAO forum, could make a member liable under California’s partnership law. He stressed that this scenario poses a significant challenge for decentralized governance and underscores the need for legal clarity.
Today, a California judge dealt a major blow to decentralized governance.
According to this ruling, participation in a DAO (even posting on a forum) may be sufficient to hold a DAO member liable for the actions of other members under general partnership law.
It’s duna time. pic.twitter.com/aKNBY7pfc9
— Miles Jennings (@milesjennings) November 19, 2024
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