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DAO Liability Issues

Am I personally liable if I own DAO tokens?

In an unregistered DAO, legal precedents suggest that token holders active in governance could be treated as general partners, making them personally liable for the DAO's debts or legal judgments. Establishing a limited liability entity (Legal Wrapper) is the primary way to ensure your liability is limited only to your investment in the token.

Can developers be sued for smart contract hacks?

Yes, plaintiffs often target developers alleging negligence or breach of fiduciary duty when a hack occurs. We mitigate this risk by drafting robust Terms of Use with indemnity clauses and ensuring developers are hired by a legal entity that absorbs the liability, rather than acting as individuals.

What is the risk of voting on governance proposals?

Voting "Yes" on a proposal that violates regulations (e.g., distributing unregistered securities or interacting with sanctioned entities) can expose you to personal liability as a decision-maker. We advise on governance frameworks that include legal compliance checks before proposals are executed.

Does a disclaimer on the website protect the DAO?

A disclaimer helps, but it is not a magic shield. Courts may ignore disclaimers if they deem the DAO acted negligently or misled users. A comprehensive liability management strategy involves not just disclaimers, but a proper legal structure, insurance, and clear operational agreements.

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Member liability in DAOs is one of the most critical and misunderstood legal risks in the decentralized world. Many participants believe that because the organization is virtual, they bear no obligations. The reality is quite the opposite: if a DAO is not registered as a limited liability entity, the law often treats it as a "General Partnership." This means that any DAO member (token holder) can be personally liable for damages or debts incurred by the DAO with their entire personal assets. The liability management service aims to identify and minimize these catastrophic risks.

What Does the Liability Management Service Cover?

This service helps DAO founders, developers, and active members create a legal shield. It includes:

  • Risk Audit: Analyzing the current structure to determine if a "joint and several liability" risk exists for members.
  • Liability Limitation: Implementing legal mechanisms (e.g., "Legal Wrapper") to separate DAO obligations from members' personal assets.
  • Developer Protection: Shielding code authors and Multisig signers from personal lawsuits in case of bugs or hacks.
  • Terms of Use: Drafting liability disclaimers for the DAO interface (Frontend).
  • Insurance Alternatives: Consulting on smart contract insurance or creating legal defense funds.
  • Regulatory Risk Assessment: Determining if the DAO is conducting licensed activities (e.g., VASP, securities), which could lead to administrative or criminal liability.

Common Real-World Scenarios

Liability issues are particularly relevant when:

  • A DAO's smart contract is hacked and users lose funds — victims often sue the DAO founders and prominent members, not the "hacker."
  • A DAO invests in risky assets and loses funds, leading to accusations of breach of "Fiduciary Duty" against the managers.
  • A regulator (e.g., SEC in the US or NBG in Georgia) investigates the sale of unregistered securities.
  • Voting takes place on a proposal that violates the law — voting members may be considered accomplices.
  • Funds are lost due to a software bug, and developers are accused of negligence.

Georgian Legislation and Regulations

In Georgia, this issue is regulated by the Civil Code of Georgia. If a group of persons (DAO) conducts joint activities without registering a legal entity, it qualifies as a "Partnership" (Article 930). For the obligations of a partnership, partners are liable jointly and severally with all their property. This is the biggest threat to a DAO. Additionally, the Law on Entrepreneurs defines the "duty of care" for directors and managers, which may extend to active DAO governors (e.g., Multisig holders) if the court considers them "de facto managers." That is why it is critical to wrap the DAO (in an LLC or other form) to activate the principle of limited liability.

Service Process

Legal.ge experts offer:

  1. Diagnostics: Assessing the DAO's current status and risks (is it a partnership?).
  2. Structuring: Creating liability barriers (registering a legal entity).
  3. Documentation: Developing user terms and disclaimers.
  4. Training: Informing Core Contributors about actions that may trigger personal liability.

Why Legal.ge?

Ignoring liability risks can be devastating for DAO members. Lawyers listed on Legal.ge are familiar with global precedents (e.g., the Ooki DAO case in the US) and Georgian legislation. They will help you build protection mechanisms so that your innovative activities do not create personal financial and legal problems.

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