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Introduction
Decentralized autonomous organizations (DAOs) envision a future of decentralized governance and collective coordination online. As DAOs and conventional legal frameworks clash, courts are beginning to grapple with their ambiguous status. The 2024 case Samuels v. Lido DAO, et al. has raised crucial questions for the future of DAOs: Can DAOs be properly considered as a type of traditional corporate entity? If so, can DAOs remain decentralized and innovative while also operating within existing corporate structures? Samuels highlights one court’s attempt to resolve this issue by ruling that DAOs can be sued and that institutional investors, among potentially others, can be considered as partners. Meanwhile, states continue to pioneer legislation that creates more regulatory certainty for DAOs—the most recent being the Virginia Decentralized Autonomous Organization Act. These differing approaches—one attempting to apply existing law to novel circumstances and the other creating a new approach—mark distinctive turning points for DAOs as they wade through uncharted legal territory.
Overview of Decentralized Autonomous Organizations
First and foremost, a DAO is a blockchain-based organization that relies on decentralized decision-making power and smart contracts to govern within decentralized finance (DeFi). Members’ decision-making power is often proportionally based on the amount of DAO tokens that they own. To participate in DAO governance, participants can submit or vote on proposals.
DAOs, as DEF has previously argued, are “not ordinary business entities” and often do not even reach the requirements of being an “unincorporated association.” In fact, in many DAOs, “token holders often lack coordination or common objectives.” Courts have unanimously disagreed with DEF on this point, which has led to difficult legal situations such as the one presented in Samuels v. Lido DAO.
Samuels v. Lido DAO Background
Lido DAO is a pooled liquid staking protocol that enables users to participate in securing a proof-of-stake network without running their own validator node. This reduces the capital and technical barriers typically required for staking process, while also providing users with liquidity to continue trading.
Lido DAO was created in 2020, accompanied by one billion LDO, Lido DAO’s native token. In the subsequent years, four venture capital firms (VCs)—Andreessen Horowitz (a16z), Paradigm, Dragonfly Digital Management, and Robot Ventures—invested in LDO. As Lido grew, the VCs allegedly provided significant operational insight to Lido DAO and aided in its development. LDO eventually became available on cryptocurrency exchanges in February 2022.
In late 2023, Andrew Samuels filed a complaint against Lido DAO and its investors. Samuels had purchased LDO on the Gemini exchange and accrued a loss upon selling the tokens. He alleged that Lido DAO and the four VCs had “violated Section 12(a)(1) of the Securities Act of 1933 by selling LDO, an unregistered security, in interstate commerce.” Samuels also claimed the VCs “are members of the Lido DAO general partnership and thus are jointly and severally liable for its misconduct.” However, the complaint excludes “corporate officers, members of the boards of directors, and senior executives” of Lido DAO—i.e., managerial staff that the complaint alleged Lido DAO and the VCs hired to conduct oversight and maintenance of the DAO. The complaint also excludes the individual founders from the lawsuit, without reason, while still alleging that they controlled Lido DAO with the defendants.
According to Samuels’ complaint, “64 percent of the tokens [were] dedicated to the founders and early investors,” which left “ordinary investors [...] unable to exert any meaningful influence on governance issues.” Additionally, Samuels alleged that, because Lido DAO paid third-party exchanges to list LDO “with the express purpose of financially benefiting Lido [DAO] and its venture-capital controllers,” Lido DAO is thus a statutory seller of the securities, and members of the general partnership are “liable to Plaintiffs for their losses.” All of the defendants moved to dismiss the claims against them, arguing the DAO is not capable of being sued because it is not a legal entity and it is not a general partnership under California law. This raised many interesting and crucial legal questions regarding DAOs, such as:
Is Lido DAO capable of being sued? Does Lido DAO qualify as a general partnership under California law?
If Lido DAO is a general partnership, are large institutional investors members of the partnership?
Did Lido DAO and its institutional investors “offer or sell” LDO, thus making them liable for the losses Samuel incurred?
Can Lido DAO and its institutional investors be held liable for the sale of an unregistered security if that sale is not “made in a public offering?”
Samuels v. Lido Holding
And so the Court found that Lido DAO’s “actions are not those of an autonomous software program—they are the actions of an entity run by people.” It is for this reason that the Court ruled that Samuels was able to sue the alleged partnership that operates Lido DAO.
The Court also found that Samuels provided adequate reasoning that Lido DAO forms “some general partnership.” The Court claimed that the partnership might include anyone from “only the founders” to “everyone who has voted on a governance proposal or who holds any LDO,” but at this early stage in the case, the plaintiff did not need to identify every member of the partnership. The Court also held that, by “[participating] in Lido DAO governance,” Paradigm and a16z “jointly carried on the DAO's business for profit,” thus making them partners. The Court also held that because Dragonfly purchased enough LDO and announced its intention to actively participate in governance, Dragonfly “meaningfully participated in Lido DAO governance and thus carried on its business for profit,” making it a partner. Robot was the only investor that the Court claimed could not be held a partner due to insufficient “allegations to infer that Robot meaningfully participated in Lido DAO governance,” although the Court acknowledged Robot’s position as a “key ‘strategic partner.’”
Furthermore, the Court ruled that Lido DAO and the members of its partnership can be held liable for the losses incurred through the sale of an unregistered security and that Lido DAO can be held liable for the losses despite Samuels purchasing LDO on a secondary market. The Court also looked to Section 12(a)(1) of the Securities Act, which says that any person who “offers or sells a security in violation of” Section 5 of the Securities Act “shall be liable” to “the person purchasing such security from him, who may sue” to “recover the consideration paid for such security.” Samuels alleged in his complaint that “Lido DAO is a statutory seller because it solicited his and others’ purchases of LDO.” The Court’s ruling held that “the alleged security that Samuels purchased is the same one whose price he argues Lido [DAO] has a financial interest in: LDO. And he is suing LDO's issuer, not the exchange on which he purchased it.”
Implications of the Ruling
The ruling delivered by the Court carries many potential implications for DAOs. While this is just one district court’s opinion under California law, the Court has cast a large shadow over the future of legal status for DAOs. If other courts come to similar conclusions, DAO members may be implicated in potential litigation, even if they are an individual user who has simply posted on a forum or voted for a proposal—or for merely holding a token. The Court and Samuels’ complaint allege that meaningful participation in a DAO might constitute making an entity a partner, but the ruling leaves open the question of what constitutes meaningful participation in and of itself.
Legislation That Promotes Legal Innovation
Currently, most DAOs are not registered or incorporated under state law. Few states currently have legislation that would allow for legal recognition and incorporation of DAOs. In states that have created frameworks for DAO corporate recognition, many have adopted an approach that integrates some legal structures similar to Limited Liability Corporations (LLCs), such as Tennessee’s House Bill No. 2645 and Vermont’s Blockchain-Based Limited Liability Companies Statute.
While DAO-specific LLC models could offer DAOs a pathway to limited liability and legal recognition, the November court ruling in Samuels v. Lido DAO, et al. from the United States District Court for the Northern District of California raises the prospect of DAOs being treated instead as a general partnership. Under California law, a general partnership is “a business entity that is made up of two or more entities to carry on a trade or business” in which “all the partners are personally liable for the partnership debts.” The recent ruling in Samuels underscores the delicate balancing act involved in promoting innovation, decentralization, and accountability, with the court suggesting that any meaningful participation in a DAO’s governance could establish partnership liability.
Although Samuels reflects the current state of legal uncertainty for DAOs, a murky regulatory landscape need not be reality. In March of 2024, the Wyoming state legislature passed the Decentralized Unincorporated Nonprofit Association (DUNA) Act, with the law itself often referred to as DUNA. According to a16z, DUNA enables “blockchain networks to operate within the bounds of applicable laws without compromising their decentralization.” In a letter to the Wyoming State Legislature, DEF stated that DUNA helps “clarify statutory requirements based on the characteristics of DAOs.”
Instead of classifying DAOs and their members as a partnership, a DUNA is “a legal entity separate from its members for the purposes of determining and enforcing rights, duties and liabilities in contract and tort.” Specifically, as DEF says in its letter, Wyoming’s “UNA law offers a promising alternative to the existing model and, importantly, includes important protections for UNA members’ privacy.” This protects the members of a DAO from a litany of problems, including tax risks and legal liability. Registering as a DUNA also opens the door to a variety of other possibilities only afforded to legal entities, while ensuring other protections for members and organizations alike. Importantly, although DUNA requires DAOs to register as a nonprofit, this does not preclude them from conducting for-profit business models under Wyoming law.
More proposed legislation has begun to emerge, using DUNA as a template for regulation. This month, Dan Helmer and Saddam Salim introduced the Virginia Decentralized Autonomous Organization Act to the Virginia State Legislature, which would create a legal framework for DAOs. The Act provides guidance on the formation of a DAO and the relationships and rights of members; protects members of a DAO from fiduciary liabilities “except that the members shall be subject to the implied contractual covenant of good faith and fair dealing”; and overall creates a regulatory landscape with more clarity for DAOs and organizations that wish to become DAOs.
As policymakers, courts, and DAOs navigate the uncertain legal terrain facing the organizations, it is important to recognize that promising legislation is already in place in some states. The DUNA and the Virginia DAO Act are both good-faith regulatory attempts to provide paths toward legal clarity for DAOs that allows them to conduct a variety of actions widely closed off to them, legally protect members, and continue to grow without fear of frivolous litigation. There is still much work to be done in ensuring that DAOs can operate as intended while also aligning with legal frameworks. These statutes, however, demonstrate that innovation and regulation do not need to be mutually exclusive.
This piece was written by Henry Michaelson, a policy intern with the DeFi Education Fund.