Legal Risks for DAOs and Governance Tokenholders

Decentralized Autonomous Organizations (DAOs) are increasingly being classified by U.S. courts as general partnerships, a legal designation that strips away the assumption of corporate liability protection for participants [1]. This shift creates significant financial risk for governance tokenholders and institutional investors, as judicial rulings now treat these entities as businesses run by people rather than autonomous software [1].

The shift in legal status

The legal landscape for DAOs has hardened following a series of rulings in the Northern District of California. In the case of CFTC v. Ooki DAO, the court issued a default judgment against the organization, finding it liable for violating the Commodity Exchange Act [1]. The court determined that Ooki DAO functioned as an unincorporated association because tokenholders exercised significant control over the protocol, including the ability to update code and direct funds [1]. This ruling resulted in a $634,542 civil penalty and an order to shut down the DAO’s website [1].

Building on this, the court in Samuels v. Lido DAO recently allowed a class action lawsuit to proceed, ruling that the plaintiff provided sufficient evidence to suggest Lido DAO operates as a general partnership under California law [1]. Unlike a corporation, a general partnership does not provide liability protection, meaning participants—including venture capital firms that take an active role in governance—could be held personally responsible for the DAO’s activities [1]. The court rejected the argument that Lido was merely autonomous software, noting that the active involvement of founders and tokenholders in decision-making established it as a human-led entity [1].

Institutional exposure

The Lido DAO ruling specifically highlights the risks for institutional investors. The court denied motions to dismiss from several venture capital firms, citing their public statements and tweets expressing excitement about their management roles in the project [1]. By demonstrating an intent to influence operations, these investors may be deemed partners, exposing them to the same legal liabilities as individual tokenholders [1]. While one firm was dismissed from the case due to insufficient evidence of its involvement, the remaining defendants face ongoing litigation regarding allegations that they sold unregistered securities [1].

What to watch

• Judicial Precedent: Monitor further rulings in Samuels v. Lido DAO to see if the court maintains the general partnership classification as the case moves toward trial [1].
• Regulatory Enforcement: Observe if the CFTC or other agencies initiate new actions against decentralized entities that fail to implement customer information and anti-money laundering procedures [1].
• Governance Participation: Watch for changes in how institutional investors and individual tokenholders engage in DAO voting, as active participation is now a primary factor in determining legal liability [1].

The core tension remains whether a DAO can exist as a truly decentralized entity or if the act of governance inherently creates a legal partnership. As courts continue to prioritize the actions of human participants over the underlying software, the industry faces an open question regarding how to structure decentralized projects to avoid personal liability for their members [1].