A California court rules Lido DAO members can be held liable under partnership laws

An unlikely outcome has resulted in a case reported by an investor against Lido DAO. The court has ruled that since Lido DAO is an association of more than two persons, it falls under partnership laws. This means that participants in DAO can be held liable for the actions of other members under state partnership laws.

The plaintiff, Andrew Samuel, reported Lido DAO after losing his investments in their tokens with an agenda of recovering them. Samuels argued that four large institutional investors in Lido, who are listed as Lido DAO partners, should be liable.

In response, Judge Vince Chhabria of the United States District Court for the Northern District of California determined that governing bodies behind Lido DAO qualify as partners under California’s general partnership laws. As a result, members may not avoid liability for the organization’s actions. 

Lido Dao lawsuit – How did we get here?

Andrew Samuels, an investor who bought crypto tokens on an exchange, is the plaintiff. He claimed that the tokens were originally issued by Lido DAO and lost money on his investment. He asserts that the tokens are “securities” within the meaning of federal law, which means that Lido DAO was required to register them with the Securities and Exchange Commission (SEC).

Samuels contended that because Lido DAO never registered the securities, it is liable for his losses under Section 12(a)(1) of the Securities Act. Everyone agrees that Lido never registered them. 

In addition, Samuel alleged that it was founded by three investors whose whereabouts are unknown and who, therefore, cannot attend court hearings in the United States. With this explanation, “DAO” has been portrayed as an organization designed, at least in part, to avoid legal liability for its activities.  

Samuel also stated that institutional investors in Lido, including Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures, are members of the general partnership. He said that if they are, they can be held liable under California law for the partnership’s activities, including Lido’s failure to register its crypto tokens as securities. 

Samuel successfully alleged that all the investors except Robot Ventures are general partners and, therefore, liable for Lido’s conduct. 

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

The court made a ruling that 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.” 

Decentralized governance in danger 

Miles Jennings, the general counsel and head of decentralization at a16z Crypto described the ruling as a huge blow to decentralized governance. He tweeted, “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.”

With Miles highlighting this, the ruling could jeopardize many investors’ optimism. The crypto entity is again getting a blow. This is calling for the entity to come up with regulations that can protect investors from minor inconveniences. 

In the case of losses, is Lido to be held accountable 

It seems clear that Lido was required to register its crypto tokens as securities. In the case of Samuel, the lawsuit states that under Section 12(a)(1), liability for losses incurred from the purchase of unregistered securities is only attached to someone who “offers or sells” those securities.

In this case, Lido did not  “sell” the tokens to Samuels. He bought them on the secondary market, on the crypto exchange Gemini. The courts have construed the statutory phrase “offers or sells” broadly, to cover someone who “solicits” the purchase of securities. Therefore, Samuels has adequately alleged that Lido indeed solicited the purchase of these tokens on crypto exchanges. 

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