DAO Members Could Face Liability Under Partnership Laws

As crypto continues to evolve rapidly with increased adoption and regulation, legal decisions surrounding it are also keeping pace.

Just recently, a United States federal judge has decided that participants in decentralized autonomous organizations (DAOs) can be held liable for the actions of other members under California’s partnership laws.

Particularly, Judge Vince Chhabria of the US District Court for the Northern District of California ruled that the governing body behind Lido DAO qualifies as a general partnership under state law.

This ruling has major implications for the decentralized finance (DeFi) sector, as it could legally hold DAO members responsible for the organization’s activities.

Elaborating On The Legal Implications for Lido DAO and Its Partners

According to the report, the lawsuit, brought forth by investor Andrew Samuels, stems from his purchase of tokens issued by Lido DAO. Samuels claimed financial losses and argued that the DAO had failed to register its tokens as securities with the US Securities and Exchange Commission (SEC).

Consequently, he sought to hold Lido DAO and its identifiable partners liable under Section 12(a)(1) of the Securities Act which states that “purchasers are allowed to sue sellers for offering or selling a non-exempt security without registering it.”

In his decision, 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 meets the criteria of a general partnership under California law, thereby holding its partners accountable for the crypto organization’s actions.

This interpretation has set a new precedent for how crypto DAOs, which operate without centralized management, may be regulated under existing partnership laws.

Samuels identified four major institutional investors—Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures—as alleged partners within the Lido DAO.

He claimed that these entities played active roles in the governance and operations of Lido DAO, thereby assuming partnership responsibilities that could expose them to liability for the DAO’s actions. In response, all four firms sought to have the case dismissed.

The court, however, only approved Robot Ventures’ motion to dismiss, citing insufficient evidence to establish it as a general partner.

Meanwhile, Paradigm, Andreessen Horowitz, and Dragonfly’s dismissal requests were rejected, as the judge found their participation in Lido DAO’s governance sufficient to categorize them as general partners under state law.

Reactions From The Crypto Community

The ruling has led to significant debate within the crypto and DeFi communities. Legal experts warn that this precedent could lead to “increased liability” for DAO participants, potentially stifling decentralized governance.

For instance, Miles Jennings, general counsel and head of decentralization at a16z Crypto, commented on the implications of the court’s decision.

Jennings emphasized that even minimal involvement, such as posting in a DAO’s forum, could now expose members to liability under California’s partnership laws. This, he warned, represents a critical challenge for decentralized governance and calls for greater legal clarity.

Today, a California judge dealt a huge blow to 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.

It’s time to DUNA. pic.twitter.com/aKNBY7pfc9

— miles jennings (@milesjennings) November 19, 2024