US court recognizes Lido DAO as a partnership in a lawsuit filed by an LDO token investor

What’s new? The Northern District Court of California has ruled that the decentralized autonomous organization (DAO) Lido DAO, which operates the leading Lido liquid staking protocol for Ethereum coins, is a general partnership under state law. The court clarified that Lido DAO involves the coming together of two or more persons to conduct a business for profit as co-owners, regardless of whether the persons intended to form a partnership.

The court’s decision

What else is known? The ruling stems from a lawsuit Lido investor Andrew Samuels filed in December 2023. According to the documents, he bought LDO native tokens on the secondary market through the US centralized crypto exchange (CEX) Gemini in April and May 2023 and suffered losses by December. Samuels alleged that Lido DAO was responsible for the decline in LDO’s value and that the tokens were sold to him as unregistered securities.

The court agreed with the plaintiff’s arguments, holding that Lido DAO’s structure, in which token holders make decisions about project development and earn staking rewards, was a general partnership, and the lack of direct sales through the organization did not relieve it of liability.

The court clarified that it had resorted to a broad interpretation of the definition of “offers or sells” to encompass those calling for the purchase of securities. Under this interpretation, the Lido DAO did call for the purchase of native LDO through third-party crypto exchanges.

It was also found that the identifiable participants — the institutional holders of LDO — managed the operations of Lido DAO and therefore could not escape liability due to the decentralized structure of the organization.

“[The lawsuit] 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,” Judge Vince Chhabria wrote in his ruling.

The divisions of venture capital firms Paradigm, Andreessen Horowitz (a16z), and Dragonfly were recognized as general partners based on their alleged active participation in the management and operations of Lido DAO. Robot Ventures, another investor in the project, was excluded from this list due to insufficient evidence of active participation.

Thus, Lido DAO’s claim that it was not a legal entity was rejected. This set a precedent for profit-oriented DAOs.

Miles Jennings, the general counsel of a16z crypto, said that the court’s decision “dealt a huge blow to decentralized governance.” He explained:

“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.”

Source: X.com

The LDO token ranks 95th in the overall cryptocurrency market capitalization ranking with a market cap of $1,061 billion and is trading at $1,18, having lost 1,4% overnight. The weekly drop was 8,3%, and the asset has fallen in price by 55% since the beginning of the year.

Lido accounts for 27,92% of staked ETH or over 9,7 million coins worth $30,2 billion at current exchange rates, according to blockchain analytics platform Dune.

In March 2023, the US court had already recognized DAO as a general partnership. The ruling was handed down by the Southern District Court of California in a $55 million bZx DAO hack case. The investor plaintiffs sought to hold DAO members liable for the organization’s obligations.