KEY TAKEAWAYS
- The Andrew Samuels v. Lido DAO case highlights the risk of DAO participants being held personally liable under state partnership laws.
- Unincorporated DAOs are exposed to unlimited liability and lack legal entity protections, complicating regulatory compliance.
- Incorporated DAOs usually provide legal protections and structured governance frameworks.
- ADGM and RAK DAO offer tailored solutions for DAO incorporation, supporting decentralised operations within a legal framework.
- The ruling could signal a global trend towards stricter DAO accountability, challenging their decentralised ethos.
INTRODUCTION
In a recent ruling of Andrew Samuels v. Lido DAO,1 the United States District Court for the Northern District of California (“Court“) addressed the legal complexities surrounding decentralised autonomous organisations (“DAO“). The Court declined to dismiss allegations against Lido DAO, a leading Ethereum-based staking protocol, finding that the governing body behind the DAO could potentially be classified as a general partnership under California law. While not yet conclusively resolved through the decision, this interpretation highlights the risks DAO participants may face, even in decentralised frameworks.
This decision is pivotal in the evolving relationship between decentralised governance structures and traditional legal frameworks. While the ruling underscores the risks associated with unincorporated DAOs, it raises critical questions: Does this mark the beginning of stricter accountability for DAOs? Could global jurisdictions adopt similar approaches, or will frameworks emerge to legitimise DAOs without stifling innovation?
UNDERSTANDING THE CASE
The case stemmed from a lawsuit filed by investor Andrew Samuels, who claimed to have suffered financial losses after purchasing Lido tokens during its initial coin offering. Andrew Samuels alleged that Lido DAO violated securities regulations by failing to register its tokens with the United States Securities and Exchange Commission, thus violating federal securities laws.
Lido DAO’s defence centred around its decentralised nature, arguing that this should exempt it from traditional legal obligations. However, the Court rejected this argument, ruling that Lido DAO’s members could still be liable under state partnership laws. In particular, major institutional investors—including Paradigm Operations, Andreessen Horowitz, and Dragonfly Digital Management—were specifically named as general partners due to their significant roles in Lido’s governance and decision-making processes.
The ruling highlighted a crucial point: even minimal participation in a DAO’s governance could expose its members to liability under established legal frameworks. This decision reminds us that DAOs may not be as immune from traditional legal scrutiny as they may appear in spirit.
UNINCORPORATED DAOs VS INCORPORATED DAOs: A COMPARATIVE ANALYSIS
| Aspect | Incorporated DAO | Unincorporated DAO |
|---|---|---|
| Legal Entity | Recognised as a separate legal entity, such as a limited liability company or corporation, registered under relevant jurisdictional laws. | Not recognised as a separate legal entity. Operate as decentralised networks governed by token holders using blockchain protocols, without formal registration under jurisdictional corporate laws. |
| Liability | Members or contributors generally enjoy limited liability protection, ensuring they are not personally liable for the organisation’s obligations or debts. | Members have unlimited liability, potentially risking personal assets, and may be classified as general partnerships by courts. |
| Taxation | Taxed as a separate entity, resulting in more complex tax obligations. | Taxes are typically passed through to individual members, simplifying tax processes but potentially increasing individual burdens. |
| Regulation | Subject to formal regulatory requirements, such as registration, reporting, and compliance with corporate laws. | Fewer regulatory requirements and formalities. |
| Asset Ownership | Can own assets in its own name. | Assets are typically owned collectively by members. |
| Operational Complexity | Higher due to regulatory compliance and structured governance. | Generally lower due to less formal governance and fewer regulations. |
| Contractual Capacity | Can enter into contracts independently. | Contracts must be entered into by individual members. |
UAE’S UNIQUE SOLUTIONS FOR INCORPORATED DAOs
Given the numerous issues now coming to light regarding using unincorporated DAOs for Web3 operations and needs, an incorporated DAO is the need of the hour.
The United Arab Emirates (“UAE”) has positioned itself as a leader in providing clear frameworks for DAOs. Two free zones in the UAE have formulated bespoke frameworks for DAOs, offering tailored solutions to meet their specific needs.
Abu Dhabi Global Market: In 2023, the Abu Dhabi Global Market (“ADGM“) introduced a Digital Ledger Technology (“DLT“) Foundations regime designed to provide a legal framework for DAOs. Under this regime, DAOs are registered as foundations within ADGM, allowing them to operate as separate legal entities. These entities can use, deploy, develop, facilitate, or support DLT applications and token issuance within ADGM.2
Additionally, the legal structure of an ADGM DLT Foundation enables it to hold and manage virtual assets in support of decentralised protocols. Importantly, this framework ensures that the foundation members are immune from liability, providing protection to individuals involved in DAOs. At the same time, it incorporates an organisational and governance structure that supports the decentralised decision-making model inherent to DAOs, ensuring that governance remains in line with their intended autonomy.3
Ras Al Khaimah Digital Asset Oasis: The Ras Al Khaimah Digital Asset Oasis (“RAK DAO”) introduced a DAO Association Regime, which takes the legal form of a body corporate with a separate legal personality from its members and token-holders.4 Within the RAK DAO ecosystem, designed to foster virtual asset activities, the DAO Association operates as a legal structure with various categories of members whose liability is limited by guarantee.5 The DAO Association is authorised to undertake token issuance and other business activities, provided they are not legally restricted.6
Treatment of Security Tokens: ADGM vs. RAK DAO: A key difference between the ADGM and the RAK DAO is their treatment of security tokens. Under the RAK DAO framework, issuers of security tokens are not eligible to constitute a DAO Association, as the jurisdiction of the Securities and Commodities Authority (“SCA”) would apply to such issuances.7 Therefore, permission from the SCA would be required to offer virtual assets classified as securities. In contrast, the ADGM’s regulatory framework allows for offering digital securities, subject to the relevant regulations, providing more certainty.8
CONCLUSION
The ruling in Andrew Samuels v. Lido DAO highlights the tension between the decentralised nature of DAOs and the traditional legal framework. The lack of legal recognition for unincorporated DAOs exposes their members to significant risks, while conventional legal structures struggle to accommodate the innovative aspects of decentralised governance. Tailored frameworks, such as those offered by the ADGM and RAK DAO, provide proactive options to address these challenges, ensuring that the potential of DAOs is preserved without sacrificing innovation due to legislative inertia or convenience.
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DISCLAIMER: This article is provided for informational and educational purposes only and does not constitute legal advice. Readers should not act upon this information without seeking professional legal counsel tailored to their specific circumstances. The analysis presented herein reflects the authors’ interpretation of legal developments as of the date of publication and may not reflect subsequent changes in law or regulation.
At TLP Advisors, we are a legal consulting firm specialising in tokenised finance, agentic financial systems, digital assets, and emerging technologies. With deep roots in the financial services, Web3, and broader technology sectors, we offer unparalleled expertise and tailored support to navigate the unique challenges and opportunities of these rapidly evolving industries. TLP Advisors has consistently been the firm of choice for web3, fintech and other financial services companies. We have built a reputation for guiding clients through complex regulatory landscapes while supporting the development of innovative and compliant financial platforms.
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