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Following the collapse of FTX and the landmark Commodity Futures Trading Commission case concerning Ooki DAO, corporate law questions around decentralized autonomous organizations are crystalizing through court cases and regulatory enforcement actions. Meanwhile, prices for cryptoassets have begun to rebound.

If and when the crypto winter fades into spring, it could bring along renewed interest in participating in DAOs. For users and investors to safely do so, much still depends on closely watched current court cases that test the parameters of open legal questions around DAOs.

DAOs are an emerging type of corporate structure designed to fit the decentralized culture behind blockchain technology. Unlike traditional corporate structures such as limited liability corporations, which centralize decision-making, the DAO structure exists to decentralize control, vesting decision-making power in the tokenholders themselves.

This formation challenges the definition of what legal personhood is intended to do, prompting potential investors, the CFTC, and the Securities and Exchange Commission to ask questions such as: who bears the burden of accountability, who owes a fiduciary duty to investors, how does a DAO take action and who can effectuate that action on its behalf, who are the equity holders, and how do you know with whom you have co-invested in a DAO?

Several recent and ongoing cases working their way through the courts have begun to shed light on possible answers to these questions. Below are a select few that investors, regulators and industry lawyers are watching closely:

The CFTCs enforcement action found that the DAO is a general partnership or unincorporated association, as a matter of state law, and that a DAO was a legal person subject to suit. It also found that tokenholders who actively participate in governance are general partners and thus liable for the activities of the DAO, and therefore they can be liable for the debts and regulatory violations of the DAO.

The DAO founders thought they couldnt be sued because they formed a DAO. This enforcement action shows that the reach of the government extends to activities committed in the blockchain space, whether through DAOs, on decentralized exchanges, or otherwise.

Multiple coordinated enforcement actions filed over the past month by the SEC, Department of Justice, and CFTC accuse trader Avraham Eisenberg of violating federal law by fraudulently manipulating the price of Mango DAOs MNGO token to unlawfully obtain over $110 million in digital assets.

Eisenberg publicly defended his conduct on Twitter after he stole from the Mango protocol, saying that because the flawed computer code of the protocol let him do it, he was allowed to do it.

Through its enforcement actions, the government has countered with a different interpretation: Code is code, but law is law. Simply taking actions within the parameters of a code will not shield token holders from legal liability if such actions otherwise violate the law.

This first-of-its-kind private class action alleges that bZx DAO, its co-founders, and members failed to adequately secure their funds, resulting in the theft of $55 million. This suit is seeking class action certification for damages caused by these alleged actions.

A March 27 ruling denied the motion to dismiss filed by members of the DAO who held governance tokens, finding that: the DAO is plausibly alleged to be a general partnership, the US founders attempted to avoid US law by changing the corporate form from an LLC to a DAO, and the members holding governance tokens may have a duty of care to the other token holders, and corresponding liability for failure to secure the DAOs sensitive information.

The biggest concern here for DAOs is that even losses which are too small for any one investor to economically sue over can be aggregated together into a class action suit, leaving the DAO staring down the barrel of private recoupment of losses.

This private class action filed by a software engineer alleges that PoolTogether, a blockchain-based app that encourages users to save their cryptocurrencies by offering awards, is essentially a lottery and therefore prohibited under New York Law. The plaintiffs attorneys are increasingly trying to apply broader laws and tactics to go after DAOs and their token holders.

As DAOs increase in total assets, they will become bigger and easier targets for these types of claims. It is more critical now for DAOs to retain good legal counsel and work within the parameters of their advice to mitigate their potential losses.

So where does all this leave current or potential DAOs? DAOs are not immune from federal law or lawsuits. Therefore investors and participants in DAOs must act with an appropriate level of skepticism and cautionand in coordination with good legal counsel.

We also have more clarity on the question of liability. The Ooki DAO case demonstrates that courts appear to be leaning toward finding that DAOs are unincorporated associations with general partners. If that interpretation holds, tokenholders who actively participate in governance may be personally liable under general partnership liability doctrines.

But the dissenting opinion in the Ooki case lays out several alternate theories of liability that the CFTC or SEC could rely onsuch as control person or aiding and abetting, which go beyond this current updatethat one could argue better apply to tokenholders. We will have to wait for more decisions to learn whether the general partnership theory will be applied instead of these potential theories of liability.

And simply because the government attempts one theory of liability does not mean that private plaintiffs cant attempt to recover losses under alternative theories.

Another conclusion we might draw from these rulings is that the risk level for tokenholders may depend on their level of participation. If there is a direct vote on an action that results in liabilitytokenholders approve a self-dealing transactionit seems more likely that a court would find a higher level of culpability.

On the other hand, when management takes action on its own, tokenholders who were not part of that action could be at a lower risk. But the specific level of participation where increased risk of personal liability kicks in for tokenholders has not yet been settled.

Finally, the moderate clarity we now have on liability can guide a decentralized finance entity in deciding how to structure. A DAO may make a philosophical compromise on absolute decentralization by forming within an LLC wrapper and thereby trading some centralization of organizational decision-making authority in exchange for greater liability protections/limitations.

In addition to limiting personal liability, the wrapper may address issues around how DAOs can take actions, enabling DAOs to sign contracts, hire employees, pay taxes, and take other practical steps. Finally, an LLC wrapper may also provide some level of protection against future regulation in the decentralized finance space, which is very much a moving target.

For now, these structures will operate in the shadow of significant legal uncertainty. Approaching DAOs with caution and limiting personal liability through more traditional structures, and active close engagement with legal counsel, are the most prudent steps until courts provide additional guidance.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Andrew Gilbert, partner at Croke Fairchild Duarte & Beres, focuses his practice on private M&A transactions, venture capital, and business counseling.

Michael Frisch, partner at Croke Fairchild Duarte & Beres, counsels clients on regulatory compliance, investigations, and enforcement matters involving digital assets

Rob Isham, partner at Croke Fairchild Duarte & Beres, represents major financial institutions and borrowers in a range of credit facilities.

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How DAOs Factor Into Litigation, Enforcement, and Restructuring - Bloomberg Law