The “DAO Jungle” Chronicles: DAO can be Sued as a General Partnership; Token Holders Face Liability
A prior DAO Jungle Chronicles post here covered a 2023 federal District Court opinion from California’s Southern District holding that a complaint adequately alleged a DAO (in that case, bZx DAO) could be sued as a general partnership under California law.
Recently another federal District Court opinion — Samuels v. Lido DAO — from California’s Northern District issued a similar ruling in a case involving a well known DAO (Lido DAO, used for liquid staking on the Ethereum blockchain) and institutional investor token holders (Andreessen Horowitz, Paradigm Operations, Dragonfly Digital Management, and Robot Ventures).
Facts: Samuels buys Lido DAO tokens (LDO); loses money
Lido DAO provides liquid staking services on the Ethereum blockchain — Lido pools Ether tokens, stakes them (puts them up as collateral for validators), and receives a payout upon validated transactions. Lido was created in 2020 by Vasily Shapovalov, Konstantin Lomashuk, and Jordan Fish — none of whom reside in the United States. As a DAO (a Decentralized Autonomous Organization), Lido has no formal corporate structure or centralized leadership. Instead, owners of Lido’s token (LDO) have voting power and make governance decisions. Although the payouts to Lido are currently held in the DAO, the funds could in the future be distributed to LDO token holders as profit.
Lido DAO had some notable institutional investors, including Andreessen Horowitz, Paradigm Operations, Dragonfly Digital Management, and Robot Ventures, all of whom received LDO tokens in exchange for their investments. The court noted that all of them — with the possible exception of Robot Ventures — “took an active role” in the DAO’s management through exercising voting rights in proportion to their LDO token ownership, including guiding development and contributing as a “governance participant.”
LDO was added to several major cryptocurrency exchanges, making it easier for the public to purchase the tokens. Lido DAO promoted the new listings in public posts on Discord, Lido’s official Twitter (now X) account, and on Lido’s website.
Andrew Samuels bought Lido DAO tokens on a cryptocurrency exchange in April and May 2023, and sold them for a loss in June 2023. He filed a lawsuit several months later.
The Complaint: plaintiff alleges Lido DAO is a general partnership under California law and its institutional investors are jointly and severally liable
Samuels sued Lido DAO and the institutional investors alleging violations of securities laws due to LDO being an unregistered security. (The securities law aspect of the case is beyond the scope of this post.) The complaint alleged that Lido DAO constituted a general partnership under California law, and that the institutional investors were members of the Lido DAO general partnership and therefore jointly and severally liable for its misconduct.
Lido DAO did not respond to the complaint, but an affiliated entity Dolphin CL, LLC appeared and filed a motion to dismiss the complaint on Lido’s behalf. The institutional investor defendants also filed a motion to dismiss. As the court described the motions: “Dolphin argues that Lido is not a legal entity, and that therefore it can’t be sued at all. … Dolphin argues that Lido is just autonomous software that runs without human management.” “The investor defendants argue that whatever Lido is, it is not a general partnership, which means that the investors can’t be liable as general partners for Lido’s conduct.”
The Court’s Ruling: motions to dismiss denied; general partnership principles apply to the DAO
The court denied both motions to dismiss, except as to Robot Ventures.
Lido DAO’s capacity to be sued as a “general partnership”
On the first issue of Lido DAO’s capacity to be sued, the court stated: “Lido’s alleged actions are not those of an autonomous software program — they are the actions of an entity run by people. According to the complaint, Lido makes decisions through tokenholder votes, maintains a treasury where it keeps its retained percentage of staking rewards, and has hired over 70 employees.”
The court cited California law (including Corporations Code section 16202(a)) holding that “the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Here, the complaint adequately alleged that “Lido DAO’s founders formed it to run an Ethereum staking service that keeps a percentage of the staking rewards and that they plan to ultimately distribute this revenue to themselves and other tokenholders — in other words, to carry on, as co-owners, a business for profit.”
The court noted that at the pleading stage of the case it was not clear “who exactly might be a member of the partnership” and that the complaint alleged that “only those entities with the capacity for meaningful participation in management of the DAO were admitted as partners….” The court stated that after additional facts emerged through discovery “it may become clear that the Lido DAO general partnership is narrower (for instance, including only the founders) or broader (for instance, including everyone who has voted on a governance proposal or who holds any LDO).”
The defendants argued that Lido DAO could not be considered a general partnership because “its structure and operations are inconsistent with various aspects of partnerships” under California’s statutory framework governing general partnerships (including how partnership interests are acquired and what happens to those interests upon “dissociation”). But the court pointed out that that the statutes “are only default rules that can be displaced by a partnership agreement” and that such an agreement “can be oral or implied.” Ultimately, the court held that “the exact contours of the Lido general partnership are better determined on a full evidentiary record at summary judgment or trial.”
Liability of investors as “general partners”
As the court noted, under California law (Corporations Code section 16306(a)) general partners “are liable jointly and severally for all obligations of the partnership unless otherwise agreed.”
As to Paradigm and Andreessen Horowitz, the court held that Samuels’ complaint “easily” alleged they were partners. It alleged Paradigm helped influence and guide the development and governance of Lido, and Andreessen Horowitz held itself out as a “governance participant.”
The allegations against Dragonfly were also sufficient although it was a “closer call.” Dragonfly purchased substantial amounts of the LDO token, stated it intended to be “active in governance,” and had participated in voting.
As to Robot Ventures, however, the court held the complaint’s allegations fell short and did not indicate that “Robot meaningfully participated in Lido DAO governance.” The complaint “doesn’t actually allege that Robot did or said anything other than purchase some unknown quantity of LDO.” As such, dismissal was granted to Robot Ventures.
Takeaway
Under the holding of the Samuels v. Lido DAO case, a DAO can be sued as a general partnership under California law, and investors who buy tokens and actively participate in DAO governance might face joint and several liability for the partnership’s obligations.