In a landmark decision with far-reaching implications for the decentralized finance (DeFi) sector, U.S. District Judge Vince Chhabria of San Francisco ruled that Lido DAO, a decentralized autonomous organization (DAO), could be held liable for selling unregistered securities. This ruling also implicates prominent venture capital firms, including Paradigm and Andreessen Horowitz, as partners in the DAO, thereby subjecting them to potential legal accountability.
The legal proceedings originated from a lawsuit filed by Andrew Samuels, a former holder of Lido DAO’s native token, LDO. Samuels alleged that Lido DAO violated federal securities laws by failing to register its tokens as securities, leading to significant financial losses on his part. He contended that the DAO’s structure and operations effectively constituted a general partnership under California law, making all participants, including institutional investors, liable for its actions.
Judge Chhabria’s ruling affirmed that Lido DAO functions as a general partnership, thereby holding its members accountable for the organization’s activities. The court dismissed Lido DAO’s defense that its decentralized nature exempted it from legal liability, emphasizing that such structures do not provide immunity from compliance with existing laws.
The court further identified that major venture capital firms, specifically Paradigm, Andreessen Horowitz, and Dragonfly Digital Management, were actively involved in Lido DAO’s governance and operations. Consequently, these firms are considered general partners and are subject to potential liability for the DAO’s alleged misconduct. However, the court granted a motion to dismiss filed by Robot Ventures, citing insufficient evidence to classify it as a general partner within the DAO.
This ruling sets a significant precedent, indicating that DAOs, despite their decentralized frameworks, can be treated as general partnerships under state law. This classification implies that members who participate in governance or derive profits may be held personally liable for the organization’s actions.
The decision underscores the necessity for DAOs to reassess their legal structures and governance models to ensure compliance with securities regulations. It also serves as a cautionary note to investors and participants in DAOs, highlighting the potential legal risks associated with involvement in such entities.
The crypto community has expressed significant concern regarding the ruling. Miles Jennings, general counsel and head of decentralization at a16z Crypto, described the decision as a substantial setback for decentralized governance. He noted that under this ruling, even minimal participation, such as posting in forums, could expose DAO members to liability under general partnership laws.
This development occurs amid increasing regulatory scrutiny of the cryptocurrency industry. Regulators, including the Securities and Exchange Commission (SEC), have intensified efforts to enforce compliance with securities laws within the crypto sector. For instance, the SEC recently charged Consensys Software for unregistered offers and sales of securities through its MetaMask Staking service, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.
The ruling against Lido DAO and its associated venture capital firms marks a pivotal moment in the regulation of decentralized finance. It signals to DAOs and their participants that decentralization does not equate to exemption from legal responsibilities. As the crypto industry continues to evolve, entities operating within this space must prioritize compliance with existing laws to mitigate legal risks and ensure sustainable growth.