California Rules Governance Participants Are Liable For Lido DAO's Actions

In a blow to decentralization, a Californian court ruling suggests that any DAO member participating in governance is liable for the entity’s actions.

On Nov. 18, Judge Vince Chhabria of the Northern District of California denied motions to dismiss a class-action lawsuit brought by Andrew Samuels, an investor, alleging that Lido’s governance token (LDO) comprises an unregistered security under U.S. law.

Samuels said he suffered losses after buying LDO tokens on a secondary market. The plaintiff seeks to hold both the Lido DAO and its institutional backers accountable under the U.S. Securities Act of 1933.

Judge Chhabria rejected Lido’s defense, which claimed the project comprises an autonomous software protocol.

“Lido’s alleged actions are not those of an autonomous software program — they are the actions of an entity run by people,” the judge said, pointing out that the DAO manages a treasury, employs over 70 staff, and makes governance decisions through tokenized voting.

Crucially, the venture capital firms Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures, were found to have acted as general partners in Lido by participating in token-based governance.

“Because the complaint alleges that Paradigm and Andreessen Horowitz participated in Lido DAO governance, it plausibly alleges that they (possibly alongside others) jointly carried on the DAO’s business for profit,” Chhabria wrote.

The judge also determined that Lido DAO could be treated as a general partnership under California law, exposing its members to liability and paving the way for other DAOs to face legal action in California in the future.

“‘The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership,’” the judge said.

The ruling stirred outrage from the web3 community, with DAOs long seen as a critical vehicle for decentralized organization.

“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,” said Miles Jennings, general counsel at a16z Crypto.

Samuels filed the lawsuit in December 2023.

Soliciting securities sales

The judge also found that Lido was liable for soliciting the purchase of unregistered securities, despite Samuels purchasing LDO on Gemini, a secondary exchange.

The court also dismissed Lido's representation’s claim that the Securities Act's registration requirements apply only to initial public offerings (IPOs).

“As a textual matter, the phrase ‘prospectus or otherwise’ seems designed to ensure that the sale of any unregistered security is covered,” Chhabria noted, affirming that secondary market transactions fall under the statute.

The ruling notably contradicted the July 2023 determination of Judge Analisa Torres — the judge overseeing the case between the U.S. Securities and Exchange Commission and Ripple Labs — who found that XRP and other cryptocurrencies do not inherently comprise securities, regardless of whether their primary distribution took the form of a securities investment contract.

The Samuels V Lido DAO case will next proceed to discovery, during which evidence will be gathered to clarify the roles and responsibilities of the defendants. A case management conference is scheduled for Dec. 6, to outline the case timeline.

Judge Chhabria emphasized the broader implications of the case moving forward.

“It 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,” Chhabria said.

The price of LDO is down 0.7% over the past 24 hours, according to The Defiant's crypto price feeds.

Are DUNAs the answer?

Jennings advocated for DAOs to shift their structure to that of a Decentralized Unincorporated Nonprofit Association (DUNA), a legal framework recognized in the state of Wyoming since July 1.

Wyoming’s DUNA law grants legal entity status to DAOs, enabling them to enter contracts and pay taxes while shielding individual members from personal liability through limited liability protections.

“A DUNA can be thought of as the Web3 equivalent to a town council,” Jennings and David Kerr, principal consultant at Cowrie LLC, wrote in a March 8 blog post advocating for the structure.

“The council’s purpose is to protect the township’s standards and operations by enforcing the codes and covenants of the community,” read the blog post. “Similarly, the purpose of a DUNA is to protect and support the underlying blockchain network, but like a town council, it is not itself a business.”