Plaintiff Argues Lido DAO is Subject to Securities Laws as Unincorporated Partnership

News | June 5, 2024 By:

On Thursday, May 23, 2024, Andrew Samuels filed an opposition to a motion to dismiss his amended class action complaint against Lido DAO and several investment firms.

Samuels, who purchased approximately 132 LDO tokens on the Gemini crypto exchange and later sold those tokens for a loss, alleges that Lido DAO, which is organized as a decentralized autonomous organization (DAO), sold unregistered securities in violation of U.S. securities laws. Lido DAO runs a staking business on the Ethereum blockchain, where it pools users’ funds in order to stake Ethereum and earn rewards. These rewards are then distributed back to users after Lido DAO takes a small cut.

To finance its operations and growth, Lido DAO created the LDO token. It and several investment firms, including a16z, Paradigm, Dragonfly, and Robot Ventures, promoted and sold over $3 billion worth of LDO tokens to retail investors without registering the tokens as securities. SEC guidelines generally consider tokens that provide ownership or governance rights, like LDO, to be securities.

While DAOs aim to operate without a traditional corporate structure using blockchain-based smart contracts and token-based governance, Samuels argues Lido DAO should still be subject to securities regulations. He states that based on previous court decisions, Lido DAO meets the definition of an unincorporated general partnership under law. As a partnership, Lido DAO and its partners would be jointly and severally liable for any debts or legal infractions of the partnership.

The defendants claim Lido DAO cannot be sued as it is a “non-juridical entity” without legal personhood. However, Samuels cites a recent case where a near-identical DAO was found to be a general partnership by a California judge. He also refutes claims that the investment firms are the only alleged partners, stating the complaint refers to other unspecified collaborators of the DAO.

If Samuels’ arguments are accepted, it could establish an important precedent regarding whether DAOs are subject to existing laws governing traditional business entities like partnerships, or if their decentralized nature exempts them. A ruling either way will provide more clarity around how regulators and courts view this new organizational model for cryptocurrency startups that is gaining popularity.

Please contact BlockTribune for access to a copy of this filing.