Court Rules Lido DAO Members Liable Under Partnership Laws

• The judge ruled DAO members liable under state partnership laws, impacting governance.
• Lido DAO faces liability as a general partnership, marking a pivotal shift in DAO governance.
• Legal risks for DAOs increase, raising concerns about stakeholder participation and liability.

A US federal judge declared on Monday that Lido DAO, the organization behind a popular liquid staking solution, will be considered a general partnership under state law. This can be considered a landmark decision in the endeavor to give legal shape to DAO.

Lawsuit and Securities Claim

The case was initiated by a suit submitted by Andrew Samuels, an investor in Lido DAO tokens. According to the lawsuit, the tokens are considered unregistered securities, and Lido DAO should have registered them with the SEC. The lawsuit stated:

Samuels contends that because Lido DAO never registered the securities, it is liable for his losses under Section 12(a)(1) of the Securities Act

The court concurred with Samuels that there was sufficient pleading of liability against Lido DAO and its members. According to Judge Chhabria, Lido DAO is a general partnership under California law. This classification ensures that members are answerable to the organization, making it a precedent for DAO governance structures.

Samuels identified four institutional investors as partners in Lido DAO. These include Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures. He stated that they fall under the state partnership laws as they fall into the governance.

Dismissal of Claims

The court made decisions on several motions. It dismissed the claims against Robot Ventures because there wasn’t enough proof to show it was a general partner. On the other hand, the court rejected motions to dismiss from Paradigm, Andreessen Horowitz, and Dragonfly.

According to legal scholars, this is a landmark ruling toward the decentralized governance model. Miles Jennings, the general counsel at a16z Crypto, described the ruling as a ‘huge blow’ to DAOs. He pointed out that even minor engagements, such as making posts in the DAO forums, could expose one to liability under general partnership laws.

This decision shows the potential for legal troubles when engaging in DAO activities. Regulating DAOs as general partnerships may dissuade potential stakeholders. This could deter them from involving themselves in decentralized organizational management. These frameworks would be essential for their long-term viability.