LDO token named as security in US investors’ lawsuit against Lido DAO

What’s new? A group of Lido (LDO) liquid staking protocol native token holders from the United States has filed a class action lawsuit against the decentralized autonomous organization (DAO) governing the project. The plaintiffs allege that LDO is an unregistered security and the Lido DAO organization is liable for their losses from the decline in token price.

Statement of claim

What else is known? The lawsuit is filed on behalf of California investor Andrew Samuels in San Francisco District Court, and the defendants, in addition to Lido DAO, are backed venture capital firms Paradigm, AH Capital Management, Dragonfly Digital Management, and Robert Ventures.

According to Samuels, the majority of the LDO offering (64%) is distributed among the founders and venture investors, preventing ordinary investors, including the plaintiffs, from having significant influence over the governance of the project through votes using these coins.

The plaintiffs allege that Lido DAO was initially launched by institutional investors as a general partnership, but to allow for future exits, it was decided to sell LDO to the general public through a listing on centralized crypto exchanges (CEXs).

Following the listing, Samuels and “thousands of other investors” bought LDO, the price of which subsequently fell and caused losses to the owners, for which the venture capital firms are responsible.

In defining LDO as a security, Samuels quoted Gary Gensler, the US Securities and Exchange Commission’s (SEC) Chairman, in the lawsuit. Thus, he noted that intermediaries in the form of venture capital firms exist between tokens and investors, and the public expects profits based on their activities.

This definition is likely part of the so-called Howey Test, which the SEC uses to determine whether a crypto asset is an investment contract. The test includes four criteria: investment, common enterprise, reasonable expectation of return, and the efforts of others. In other words, such a test reveals whether investors in the asset expect to receive returns from the work of third parties.

Lido liquid staking protocol allows users to transfer their ETH to validators and receive rewards for participating in the network’s operation. In exchange for locked coins, they receive derivative tokens stETH (staked Ether) that can be used in other decentralized financial applications. The protocol is governed by LDO owners within the DAO.

According to platform DeFiLlama, Lido is the largest protocol of its kind, with the total value locked (TVL) of the project exceeding $20,7 billion as of December 19.

LDO is in 43rd place in the overall cryptocurrency ranking with a capitalization of over $1,889 billion and is trading at $2,12, having added 4,4% overnight.