DAOs and Legal Risk: How Courts May Classify Token-Holders as General Partners
March 11, 2025
Written by: Charles Dresser
DAO Background
Decentralized Autonomous Organizations (DAOs) are organizations managed by decentralized computer programs and governed according to votes by governance token-holders using decentralized ledgers (e.g., Blockchain). DAO members contribute cryptocurrency (e.g., Bitcoin) and stablecoins (e.g., Tether) in exchange for DAO-specific governance tokens. Some DAOs have been organized to seek profits, for instance, by investing member contributions in early-stage businesses (as venture capital firms do) or crypto staking (i.e., earning passive income by locking principal cryptocurrency to a blockchain network).
DAOs offer a new way to organize, using cryptocurrency and Web3.0. But, if a DAO is profit-seeking, it is likely to be considered the oldest, and most risky, form of a business organization, under the law.
General Partnership
Unlike more common and modern business forms (e.g., corporation, limited liability company, or limited partnership) a general partnership does not need to be registered with a state. A general partnership is the default business organization form, meaning a general partnership automatically forms when two or more persons associate in business together with the intention to share the profits of the business. See Revised Uniform Partnership Act (RUPA), §202.
Also, unlike common and modern business forms, in a general partnership every owner of the business is personally liable for the actions of the business. This is normally not the case for limited partners, members of limited liability companies, or corporate shareholders whose liability is limited to the amount invested in the venture.
In most cases, DAOs are not registered with a state.[i] As most DAOs are unregistered, those that seek profits are likely to be general partnerships under the law, with large token-holders potentially liable for legally-redressable harms committed by the DAO. A recent Federal District Court decision, denying a motion to dismiss, supports this position.
Samuels v. DAO
In Samuels v. Dao, an investor in a Lido DAO sued other investors in the DAO for his losses, alleging that the other investors were liable as general partners of the DAO. Order re Motion to Dismiss, No. 23-cv-06492 (N.D. Cal. Nov. 18, 2024). Lido DAO engages in Ethereum staking , which the court estimated earns the DAO ~$50 Million per year. The profits of the staking may be distributed to Lido DAO token holders, and the token holders vote on Lido DAO’s governance proportionately with their token holdings. The token-holding defendants include institutional investors Paradigm Operations, Andreessen Horowitz, Dragonfly Digital Management, and Robot Ventures.
The Northern District of California Court, applied California general partnership law, which states that “the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Cal. Corp. Code § 16202(a) (emphasis added.). The court reasoned that:
Lido DAO 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 token-holders—in other words, to carry on, as co-owners, a business for profit.
The court concluded the plaintiff asserted adequate facts to allege that (1) Lido DAO is a general partnership; and (2) large holders of Lido DAO’s tokens may be considered general partners, personally liable for the Lido DAO’s harms.
Conclusion
DAO is likely to be considered a general partnership by courts, and token-holders can potentially risk personal legal liability as a result.
[i] Although, American CryptoFed DAO LLC registered with the State of Wyoming pioneering as, likely, the first DAO to be a state-registered business.