CFTC Ordered to Serve Former Founders in Ooki DAO Case

By Andrew M. Hinkes, Clifford C. Histed, Carly E. Howard, Cheryl L. Isaac, Maxwell J. Black

Following the unprecedented Ooki DAO enforcement action by the Commodity Futures Trading Commission (“CFTC”), the district court, after entertaining argument by several amici, clarified its position on another novel legal issue in the DeFi space:  how to serve process on a DAO.  On 12 December 2022, the United States District Court for the Northern District of California ordered the CFTC, as part of its efforts to serve the OOKI Dao, to personally serve the former founders of Ooki DAO as individually identifiable token holders. 

The CFTC alleged in its complaint that the OOKI Dao is an entity comprised of Token Holders, who vote their tokens to govern the DAO. The Court originally granted the CFTC’s motion to permit service on the DAO by serving papers on the Ooki DAO website’s help chat box and dedicated forum, which the Commission had asserted was sufficient because there were no, “publicly identifiable persons associated with” the Ooki DAO.  As with other DAOs, Ooki DAO was composed solely of token holders and lacked officers, executives or employees that are typical of traditional legal entities.  Because the DAO’s tokenholders are generally unknown, the CFTC argued it could not identify an “individual authorized to accept service of process on the Ooki DAO’s behalf” making traditional service impracticable, if not impossible.

After a December 7 hearing on several amici briefs related to the CFTC’s service on this DAO, the court revisited its original position. During that hearing, the CFTC revealed that it was aware that the original co-founders of the bZx protocol, Tom Bean (“Bean”) and Kyle Kistner (“Kistner”), are or were Ooki DAO token holders.  The Court, observing that the CFTC’s admission was “new information …” ordered, “the CFTC [to] serve at least one identifiable Token Holder [sic] if that is possible.” The CFTC has until January 11, 2023 to confirm service of process on Bean and Kishner.

Despite the disclosure by the CFTC and the order to serve Bean and Kistner, the Court acknowledged that “It seems clear in this case that Ooki DAO has actual notice of the litigation”. Though its explicit reasoning for actual notice will be forthcoming, the Court’s opinion likely relies on argument of the parties and amici and statements in support of the CFTC’s motion for alternative service against Ooki DAO, which suggest that many token holders are aware of the litigation.

DeFi market participants should be keeping a close eye on the CFTC’s theories of personal liability and service of process on a DAO, and the court’s adoption or rejection of these theories.  Tokenholders, who may be viewed akin to shareholders in a traditional legal entity, may potentially be held liable for the bad acts of a DAO.  The CFTC (and potentially other enforcement authorities) have shown that they are willing to avoid identifying a legal entity who may purport to represent a DAO in order to achieve service, perhaps in hopes of obtaining a default against the DAO. Participants in DAOs, particularly those who may be legally identifiable and subject to US jursidiction, should watch this action closely, as its determinations may create precedent for how other courts view DAOs and the liability of those who participate in their governance.