California Court Rules DAO Members Can Face Legal Liability as Business Partners
A federal court in California has ruled that members of Lido DAO, a cryptocurrency governance organization, can be held legally liable as general partners, marking a significant shift in how decentralized autonomous organizations (DAOs) may be treated under state law.
Judge Vince Chhabria of the U.S. Northern District Court of California rejected Lido's argument that it isn't a legal entity, instead classifying it as a general partnership under state law. The ruling came in response to a class-action lawsuit filed by Andrew Samuels, who purchased LDO tokens through the Gemini exchange in April and May 2023.
Major cryptocurrency investors including Paradigm Operations, Andreessen Horowitz, and Dragonfly Digital Management were named as general partners due to their active involvement in Lido's governance and operations. The court dismissed Robot Ventures from the case, citing insufficient evidence of active participation in the DAO's activities.
The court's decision centered on California's partnership law, which states that "the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership." Judge Chhabria emphasized that Lido's structure, where token holders participate in governance decisions and receive staking rewards, fits this definition.
Miles Jennings, General Counsel and Head of Decentralization at a16z crypto, expressed concern about the ruling's implications, stating on social media platform X that the decision had "dealt a huge blow to decentralized governance." He warned that under this ruling, even basic participation in a DAO, such as posting in a forum, could expose members to liability for other members' actions.
The case will now proceed to the discovery phase, allowing both parties to gather and exchange evidence to further clarify the roles of DAO participants and investors. The ruling sets a precedent for how profit-driven DAOs might be treated under existing partnership laws, potentially affecting similar organizations in the cryptocurrency industry.
