The Aragon Association found itself at the center of a controversy this week when it took control of $200 million from its own four-month-old Aragon DAO. The Association, a Swiss nonprofit dedicated to facilitating the creation of DAOs, aimed to safeguard the funds from a group of activist investors led by asset management firm Arca. Arca had been urging the Association to initiate a buyback of tokens issued in a 2017 crowdfunding event, as a means to return money to investors.

Activists in the decentralization sphere quickly decried this move. In response, Aragon issued a statement on Thursday, pledging to return the funds via a “gradual transfer approach” and engage in discussions with Arca and other activist investors.

This incident has brought DAOs’ token-based governance into question. DAOs, some managing billions in user deposits, are coming under increased regulatory scrutiny as they grapple with balancing capital raising needs with their founding principles.

Decentralized autonomy under scrutiny

Arca co-founder and CIO Jeff Droman stated, “If you issue a token, you now become a fiduciary to those token holders.” DAOs have become an attractive target for activist investors who amass a significant stake, in the form of tokens with voting rights, to influence the organization’s operations.

Activist investors could potentially profit by acquiring enough tokens to secure a majority vote, then vote to distribute the organization’s treasury among token holders. This strategy is a “pure arbitrage play,” according to Zach Rosenberg, an attorney and principal at Degen Legal.

According to DefiLlama data, the company possesses $186 million in assets. However, the market capitalization of its ANT token is just over $124 million. This disparity indicates “untapped potential and value,” says Dorman, adding that it suggests the market’s dissatisfaction with the project’s stewardship of its assets.

Aragon DAO’s struggle amid activist pressure

The association found itself on the defensive on May 2 when it began to suspect a possible coordinated attack from activist investors, including Arca. They cited suspicious activities, including a surge in messages from new members on Aragon forums and increased accumulation of ANT tokens, which provide voting rights in the Aragon DAO.

In response, the Association proposed to “repurpose” the Aragon DAO by running a grants program to fund other nascent DAOs. Rather than moving the entire $186 million treasury to the Aragon DAO, the Association intended to transfer the funds in batches as required.

However, Dorman termed the Association’s response as a “complete overreaction,” asserting that they merely wished to be active participants in the DAO’s governance. This move by the Aragon Association faced backlash on social media, with critics accusing the Association of putting on a show of “decentralisation theatre.”

Following the outcry, the Aragon Association apologized and reassured that it will eventually move the entire treasury to the DAO in a secure and gradual manner. In an interesting twist, the organisation’s co-founder Luis Cuende, despite not being involved in the Association’s daily operations, has supported Arca’s call for an ANT buyback. The Aragon Association has not dismissed the possibility, stating that buybacks might be permitted if they benefit the project’s purpose.