California Court Rules Lido DAO Members Can Be Held Liable Under Partnership Laws – Decrypt

A federal court judge ruled on Monday that Lido DAO, the governing body behind the popular liquid staking protocol, can be treated as a general partnership under state law. 

The court rejected Lido’s claim that it isn’t a legal entity, classifying it as a general partnership and setting a precedent for how profit-driven DAOs are treated.

It was also ruled that identifiable participants were managing the DAO’s operations and, therefore, could not evade liability through its decentralized structure, according to court documents filed in the U.S. Northern District Court of California.

“[The lawsuit] presents several new and important questions about the ability of people in the crypto world to inoculate themselves from liability by creating novel legal arrangements to profit from exotic financial instruments,” Judge Vince Chhabria wrote in his ruling.

Paradigm Operations, Andreessen Horowitz, and Dragonfly Digital Management were implicated as general partners based on their alleged active involvement in Lido governance and operations. 

However, Robot Ventures, another Lido investor, was dismissed due to insufficient allegations of active participation.

General Counsel and Head of Decentralization at a16z crypto, Miles Jennings, said Judge Chhabria’s decision had “dealt a huge blow to decentralized governance” in a statement posted to X on Monday.

“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,” he said.

What happened

According to court documents, plaintiff Andrew Samuels purchased LDO tokens on the secondary market in April and May 2023 through the Gemini exchange. 

By December of that year, Samuels filed a class-action lawsuit after incurring losses from purchasing the platform’s native LDO tokens, alleging they were sold to him as unregistered securities, and held Lido DAO liable for the decline in their value.

On Monday, the court agreed with Samuels’ contention, finding Lido’s structure—where token holders govern decisions and earn from staking rewards—constitutes a general partnership under California law. It also found Lido DAO’s lack of direct token sales did not exempt it from liability.

“The courts have construed the statutory phrase ‘offers or sells’ broadly to cover someone who ‘solicits’ the purchase of securities. Samuels has adequately alleged that Lido indeed solicited the purchase of these tokens on crypto exchanges.”

Lido DAO functions as a general partnership, as it involves “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,” the court ruled, citing state law.

Edited by Sebastian Sinclair