Lido DAO members liable for their actions, California judge rules

A judge has ruled that members of a decentralized autonomous organization (DAO) can be held liable for their actions under California’s laws.

Judge Vince Chhabria of the Northern District of California ruled this week that venture capital (VC) firm Andreessen Horowitz (a16z) and two others are liable for the actions of Lido DAO, the decentralized governing body behind the liquid staking protocol Lido.

The legal battle started when Andrew Samuels, an investor who purchased 132 Lido (LDO) tokens in May 2023, sued Lido for violating United States securities regulations. He alleged that the DAO had failed to register with the Securities and Exchange Commission (SEC) despite issuing securities tokens. Additionally, he sued a16z and three other VCs—Dragonfly, Robot, and Paradigm—alleging that as members of the Lido DAO general partnership, they were liable for its misconduct.

The VCs fought back, filing a motion to dismiss the case. However, Judge Chhabria has given the green light for the lawsuit to continue with three of the VCs, exempting Robot for lack of evidence.

Lido was established in 2020 by three entrepreneurs: one lives in Cyprus, one in the Cocos Islands in Australia, and the whereabouts of the third remain unknown. However, being a DAO, the holders of the governance token took over the decision-making. The three VCs holding the largest stashes of the LDO token have since taken an active role in managing the DAO.

While parties defending the three VCs are now claiming that they can’t be sued as the DAO is “just autonomous software that runs without human management,” the VCs have previously touted how intimately they were involved.

When a16z purchased LDO tokens worth $70 million in 2022, it claimed that it would “contribute as both a staker and governance participant.” Paradigm boasted about how it was “uniquely positioned to lend its expertise to LidoDAO governance and serve as a liaison to other DeFi project teams.”

Judge Chhabria saw through the antics, ruling that the VCs could be held liable for Lido DAO’s actions and that Samuels could proceed with the lawsuit against them.

The ruling sparked outrage among Crypto Bros, who portrayed it as an onslaught against DAOs. Miles Jennings, the general counsel for a16z crypto, disingenuously described the ruling as a “huge blow to decentralized finance.” He added that “even posting in a forum” could land DAO members in trouble.

What Jennings conveniently left out is that the judge made the distinction that not every DAO member is liable as they haven’t “automatically joined the partnership because they don’t all necessarily have the ability to meaningfully participate in DAO governance and thus haven’t all necessarily begun to jointly carry on the DAO’s business.” Most LDO token holders invested for speculative purposes and didn’t actively engage in the governance of the protocol, and Samuels hasn’t sued them.

It’s yet another demonstration that criminals can’t hide behind the guise of a DAO to scam investors and skirt regulations. Last year, another California judge ruled in favor of the Commodity Futures Trading Commission (CFTC) in its lawsuit against Ooki DAO, forcing it to shut down and pay a $643,000 fine. The agency had sued Ooki for illegally offering commodity transactions and failing to comply with the Bank Secrecy Act.

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