Famed venture capital firm is latest critic in regulator’s case against Ooki crypto collective
(Reuters) – There are three different ways to think about a new amicus brief from the famed venture capital firm Andreessen Horowitz in the U.S. Commodity Futures Trading Commission’s novel (and controversial) case against the Ooki crypto collective .On the most basic level, the VC fund’s lawyers at Latham & Watkins have highlighted what they say is a technical flaw in the regulator’s plan to serve notice of the suit on Ooki token holders via a chat box and an online discussion forum.The CFTC, as you may recall, has defined Ooki , a so-called decentralized autonomous organization, or DAO , as an unincorporated association. The agency contends that every DAO token holder who has participated in a vote on Ooki ’s governance is liable for allegedly operating an unregistered derivatives exchange without adequate anti-money laundering protocols.But because Ooki has no headquarters, leadership or even registered agent, the CFTC has asked U.S. District Judge William Orrick of San Francisco to allow it to serve Ooki token holders by posting notice and case documents at the Ooki .com website. California law, the CFTC said, permits that sort of alternative service for unincorporated associations.The new Andreessen Horowitz amicus brief contests that assertion. The VC fund — which has $35 billion in assets across a vast portfolio that has included Facebook, Robinhood and Coinbase — argues that under California law, plaintiffs cannot rely on alternative service to notify unincorporated associations about cases unless their lawsuits acknowledge that the associations serve a lawful purpose. California law developed in the context of lawsuits seeking injunctions against street gangs, the brief said, but applies to the CFTC’s case as well.So, according to the VC’s amicus brief, the CFTC cannot rely on alternative service because its complaint against the Ooki DAO alleged only illegal conduct. To proceed, Andreessen Horowitz said, the regulator must replead the case to identify the Ooki DAO ’s legitimate purpose, then distinguish the DAO ’s allegedly illegal conduct.The CFTC declined to comment on the Andreessen brief. The agency did ask Orrick for extra time to respond to the VC fund’s arguments.The purported technical deficiency is the brief’s most basic argument. But it’s notable that the VC fund also contends, more broadly, that the CFTC’s struggle to figure out a way to serve notice on the Ooki DAO reflects deeper problems with the government’s conception of the case.That second dimension of argument by Andreessen Horowitz mostly echoes previous amicus briefs by crypto groups protesting the CFTC’s contention that every DAO token holder can be liable for the collective’s allegedly illegal actions. Andreessen Horowitz and the other Ooki amici said in their briefs that the CFTC should have framed its suit to assert claims only against DAO members who did something wrong, perhaps by naming John Doe defendants and seeking discovery to figure out their identity.“Requiring the CFTC to plead a common lawful purpose of the DAO and take further steps to identify members through whom the alleged association can be served – as California law dictates – is essential to ensuring that correct defendants are properly served and that there is an opportunity for adversarial testing of the CFTC’s allegations,” the VC fund brief said. (As an aside, the Ooki DAO has not entered an appearance in the case but its amicus have shelled out for big-name law firms including, in addition to Latham, Sullivan & Cromwell, Jones Day and Brown Rudnick.)The third layer of meaning from the new amicus brief is Andreessen Horowitz’s warning that the CFTC’s assertion of diffuse liability for DAO members will stymie the innovative use of blockchains and smart contracts. By promoting community-based governance, the VC fund said, DAO s offer “the potential to transform online commerce and technological engagement.” But the CFTC’s attempt to spread blame to all DAO members , regardless of their actual conduct, will stifle that potential, the fund said.Latham declined to provide a statement about the VC fund’s brief, but I talked to Baker Botts partner Ali Dhanani — who advises clients on DAO start-ups and membership — about the impact of the CFTC’s Ooki case. Dhanani said private equity and venture capital funds were worried about their exposure as potential DAO members even before the CFTC filed its case. (It’s not a coincidence that crypto investment fund Paradigm Operations LP filed an amicus brief for Ooki nor that another web3 fund, Haun Ventures, filed a petition on Monday asking the CFTC to engage in formal rulemaking to assure that DAO liability is restricted to token holders who have engaged in illegal conduct.)Dhanani said big investment funds can’t rely on blockchain anonymity if they invest in DAO s because regulators have tools to identify them. So the CFTC’s Ooki suit, Dhanani said, has amplified their concerns that they could end up on the hook for all of a DAO ’s regulatory misconduct. That fear has dissuaded many big funds from buying DAO tokens .
“There’s a big pool of money,” Dhanani said, “that won’t go into DAO s.”
One solution for DAO s seeking capital from big funds , Dhanani said, is to register as limited liability companies or even as DAO s in the handful of states, including Wyoming and Tennessee, that specifically permit DAO s to operate as business entities.Registered DAO s have to play by formal corporate rules, Dhanani said, so they are subject to state and federal regulation. They must also identify agents who can be served with lawsuits.That requirement might discourage some DAO founders from registering with state authorities. The CFTC alleges that the Ooki DAO ’s founders, for instance, transferred control of their platform from their limited liability company to the DAO specifically to evade U.S. regulation. The founders ended up reaching a $250,000 settlement with the CFTC. But there is a chance that the DAO itself will indeed escape from liability, especially if the CFTC can’t figure out a way to serve its lawsuit.Until there’s more clarity about which DAO members can be held liable for misconduct — whether through regulation or litigation — DAO s have to decide if the cost of regulation is worth the benefit of additional capital.
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“There’s a big pool of money,” Dhanani said, “that won’t go into DAOs.”
One solution for DAOs seeking capital from big funds, Dhanani said, is to register as limited liability companies or even as DAOs in the handful of states, including Wyoming and Tennessee, that specifically permit DAOs to operate as business entities.
Registered DAOs have to play by formal corporate rules, Dhanani said, so they are subject to state and federal regulation.