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

A federal court judge ruled 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 is not a legal entity, classifying it as a general partnership and setting a precedent for how for-profit DAOs are treated.

It was also ruled that identifiable participants managed the DAO’s activities and therefore could not avoid liability through its decentralized structure, the report said. 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 space to protect themselves from liability by creating new legal schemes to profit from exotic financial instruments,” Judge Vince Chhabria wrote in his ruling.

Paradigm Operations, Andreessen Horowitzand Dragonfly Digital Management were brought in as general partners based on their perceived active involvement in the management and operations of the Lido.

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 on X on Monday.

“Under the ruling, any DAO participation (even posting on a forum) could be sufficient to hold DAO members liable for the actions of other members under general partnership law,” he said.

What happened

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

In December of that year, Samuels submitted a class action lawsuit after he suffered losses from purchasing the platform’s original LDO tokens, claiming they were sold to him as unregistered securities, and found Lido DAO liable for the decline in their value.

On Monday, the court agreed with Samuels’ claim, ruling that Lido’s structure — where token holders control the decisions and earn through wagering rewards — constitutes a general partnership under California law. It also found that Lido DAO’s lack of direct token sales did not exempt the company from liability.

“The courts have interpreted the statutory phrase ‘offers or sells’ broadly to include someone who ‘solicits’ the purchase of securities. Samuels has adequately asserted that Lido did indeed request 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 co-owners a business for profit and to form a corporation, regardless of whether the persons intend to form a corporation ”, the court ruled, citing the state law.

Edited by Sebastian Sinclair