The recent denial of a motion to dismiss in the Compound DAO suit illustrates what may be an emerging trend of courts deciding that decentralized autonomous organizations (DAOs) aren’t novel enough to depart from existing corporate and securities principles in their legal analysis.
DAOs are blockchain-based organizations that allocate a pool of money or digital assets based on how the holders of the DAO’s “governance tokens” vote. In the crypto world, DAOs are a popular way to aggregate funds for a project. Sometimes, DAOs have a legal “wrapper,” or a filing for a limited liability company or nonprofit that uses governance tokens for decision making. Many do not.
Courts haven’t yet decided exactly what DAOs are when not “wrapped,” but they’re not being treated as too new for the old rules.
Compound DAO, an “unwrapped” DAO, supports a software-based protocol to lend digital currencies, and it’s controlled by those holding its COMP governance token. Holders of COMP tokens sued the DAO, its developers, and its initial investors, saying that COMP was an unregistered security and holders should get their money back.
In their motion to dismiss, the developers and investors argued that that statements inducing a person to purchase a token on a digital asset exchange couldn’t be solicitation under the securities laws.
Disagreeing with the defendants, the court applied traditional securities law tests. That COMP was purchased on Coinbase didn’t make the situation different from promoting another asset on a secondary market, the court said. Other courts deciding DAO cases have also stayed within traditional principles instead of finding new rules for DAOs.
This trend should warn those in “Web3” who are pitching decentralization as a way to circumvent legal liability that courts will, at the minimum, force an examination of the issues through summary judgment. A DAO structure alone will not protect founders or token holders.
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