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In our previous posts, we discussed how DAO can be sued under current legal framework and how the U.S. Commodity Futures Trading Commission (the “CFTC”) has served and gone after Ooki DAO with its enforcement actions. Following the CFTC’s action of bringing Ooki DAO to court, the court has reached a default judgment on June 8, 2023 in favor of the CFTC and granted all three reliefs sought by the commission: (i) a permanent injunction “to enjoin Ooki DAO from continuing and further violations” of the Commodity Exchange Act, (ii) civil monetary penalties in an amount of $643,542, and (iii) the removal of Ooki DAO’s website.

The primary reason for the court to reach the default judgment is Ooki DAO’s “strategic decision” to not appear and contest the CFTC’s complaint. While the court expressly acknowledged its finding of the merits and the sufficiency of the CFTC’s allegations based on the underlying facts, it also indicated several times that “Ooki DAO has intentionally chosen to not appear, respond, or at all participate in this litigation.” Through previous motions litigated by the CFTC and numerous amici participating in this proceeding as unrelated third parties, the court has observed and concluded, as stated in the prior order, that Ooki DAO had actual notice of this proceeding because the CFTC’s service was sufficient in providing such knowledge to Ooki DAO (and its members). (For instance, the court observed that “[s]ervice via the Chat Box and Forum led to a flurry of discussion on the Forum and Ooki DAO's other public communication channels” and that “this case has been the subject of significant national media coverage.”) Additionally, the court accepted the CFTC’s pleading as to the fact that “Ooki DAO’s unlawful behavior continues to this day” and acknowledged the CFTC’s inability to “stop the unlawful acts and protect the public” without a default judgment, and thus, in consideration of other factors, rendered the default judgment in favor of the CFTC.

While the entry of a default judgment is not surprising, what remains to be determined is how the CFTC is going to enforce the reliefs granted by the court and the scope of the Ooki DAO’s “member” that will be jointly and severally subject to the judgment. As the court indicated in the order, Ooki DAO has been deemed as an “unincorporated association” under state and federal law, and such association, by its nature, would render each of Ooki DAO’s members personally liable for the liability imposed by the default judgment. Before this case went into court, there were some discussions with respect to the “mitigating factors” that might “save” a token holder of a DAO from being held jointly and severally liable in the event such DAO is deemed as an unincorporated association, and one possible approach is for a token holder to refrain from voting on a DAO’s governance token. The said approach is nevertheless challenged by the court in its previous order, in which the court expressly stated that “[n]ot voting and voting against a proposal are both voluntary choices made to further the common purpose of governing the DAO.” To put it simply, even though the court did not clearly identify the scope of the Ooki DAO’s member in this matter, it still impliedly indicated that as long as a person holds a governance token of Ooki DAO, such person, whether he/she has ever voted, is a member of the Ooki DAO that can be deemed as a general partner (or the status to that effect) of the unincorporated association. One could thus be held liable even if he/she simply is on the sideline for the whole time without being involved in any sort of governance event.

Following the foregoing rationale, how the CFTC will proceed to have the judgment enforced could become a pivotal point for subsequent enforcement actions brought by the CFTC and other regulators. While the members of Ooki DAO have purposefully not showed up in court so as to maintain their anonymity to the extent possible, the default judgment alone is already a victory for the CFTC, and the regulator could just sit back and not actively go after any individual to enforce the judgement as it has set an example of how a DAO could be brought to regulatory scrutiny and pave the road for future actions. However, the CFTC might also actively identify Ooki DAO’s members to collect the civil penalty (i.e., $643,542) granted by the court, and the particular individual targeted by the CFTC will reflect how the regulator deems the scope of a “member” of the Ooki DAO- if the CFTC only targets those members who have actively voted on Ooki DAO’s governance tokens, then it would generally suggest that the CFTC is sticking with its original (implied) determination that those actively-voting members are jointly and severally liable for the operation of Ooki DAO. On the other hand, if the CFTC goes with the court’s implied approach and targets those who hold governance token but never/seldom vote, then members of a DAO could face a more dire future following this judgement as no one would be safe by distancing himself/herself from participating in a DAO’s governance event. Regardless of the outcome, it is interesting to see the development in the CFTC’s approach and the trend with respect to the incorporation of a DAO as a legal entity in accordance with applicable statutory grounds.

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By: Chih-Hsun (Tim) Lin