In a landmark ruling on Monday, a federal court judge determined that Lido DAO, the administrative council behind the widely-used liquid staking protocol, qualifies as a general partnership pursuant to state legislation. This verdict challenges Lido’s assertion of not being a legal entity, instead classifying it as a general partnership. This decision could set a new precedent in the regulatory approach towards profit-oriented Decentralized Autonomous Organizations (DAOs).
According to documentation from the U.S. Northern District Court of California, individuals with identifiable control over the DAO’s functionality cannot shield themselves from responsibility through the decentralized nature of the entity.
Judge Vince Chhabria, in his decision, highlighted the evolving legal landscape as individuals in the cryptocurrency domain seek to mitigate liability through innovative legal constructs aimed at capitalizing on niche financial products.
The ruling implicated Paradigm Operations, Andreessen Horowitz, and Dragonfly Digital Management as general partners, attributing their alleged significant involvement in Lido’s governance and operational activities. On the contrary, Robot Ventures was exempted from the case due to a lack of evidence indicating active engagement.
Miles Jennings, General Counsel and Head of Decentralization at a16z crypto, remarked that Judge Chhabria’s decision poses significant challenges to the concept of decentralized governance. He expressed concerns that under the current ruling, mere participation in DAO activities could potentially expose members to liability under general partnership laws.
The case originated when Andrew Samuels purchased LDO tokens through the Gemini exchange in April and May 2023. By December, Samuels lodged a class-action lawsuit, attributing his financial losses to the purchase of what he alleged were unregistered securities, thus holding Lido DAO accountable for the depreciation in value.
The court validated Samuels’ argument by affirming that Lido’s operational model, which allows token holders to direct decisions and gain from staking returns, effectively forms a general partnership under California law. Additionally, it was determined that the absence of direct token sales by Lido DAO does not absolve it from legal responsibility.
Judge Chhabria’s interpretation of the term “offers or sells” in a broad sense to include solicitation brings a nuanced understanding to the legal obligations of entities in the crypto space, further broadening their scope of accountability.
This ruling offers a significant viewpoint on the legal classification of DAOs, suggesting that collaborative ventures in the profit-making domain may indeed be recognized as partnerships, regardless of the participants’ intention to form such an arrangement.