Blockchain technology makes possible the concept of a “Decentralized Autonomous Organization” (“DAO”)—a business entity that is managed not just by its human members, but by smart contracts. As discussed before, the State of Wyoming has taken the lead in recognizing DAOs as business entities. Critically, Wyoming’s legislation on DAOs specifically classes them as a form of LLC, which provides its members with a shield from liability similar to that of a corporation. This was likely done to prevent DAOs from being treated like a general partnership for liability purposes (more on that below).

California, however, has no legislation classifying DAOs for liability purposes. And according to a newly-filed class action, that’s bad news for the members.

Earlier this month, a group of crypto owners filed a class action lawsuit concerning a DAO called “bZx,” which allegedly was a “DeFi platform describing itself as ‘a protocol for tokenized margin trading and lending’.” According to the complaint’s allegations, the plaintiffs deposited their crypto with the platform, but said crypto was stolen by a hack that the platform negligently allowed to happen. What’s notable about the suit is its legal contention that because DAOs “lack[] any legal formalities or recognition,” the members are personally liable for the organization’s debts as though it were a “general partnership.”

In California, “general partnership” is the default form of business organization for two or more persons. This is because it may arise without any formality—such as a filing with the secretary of state, as is done with corporations and LLCs—and even if the participants do not intend to form an organization. Indeed, California’s Corporations Code provides 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.”

Classification as a general partnership has significant consequences in California. For example, partners owe each other strict duties of loyalty and care. But more to the point of lawsuits concerning DAOs, the normal rule in California is that in a general partnership, “all partners are liable jointly and severally for all obligations of the partnership.” Accordingly, the plaintiffs in the bZx case are suing individual members of the DAO.

If the court reaches the liability issue of the DAO members, it will be a first in California. Recently, California Governor Gavin Newsom signed an Executive Order on web3 technology, stating the intent to “[c]reate a transparent and consistent business environment for companies operating in blockchain.” Perhaps at some point in the near future, California will pass legislation concerning the legal status of DAOs.