The U.S. Securities and Exchange Commission has closed its case against DeFi platform Rari Capital, Inc. and its co-founders after finding they misled investors and were not properly registered as brokers.
Rari Capital co-founders Jai Bhavnani, Jack Lipstone, and David Lucid told investors that managed Earn pools, which allow them to lend tokens to earn returns, “automatically and autonomously rebalance the cryptocurrency,” but instead, the process was done manually, and the company sometimes failed to do so, the SEC said. The SEC also said the company engaged in “unregistered brokerage activity” related to user-created Fuse pools.
The agency claims that at its peak, $1 billion worth of assets were tied up in Lari Pool.
“The complaint alleges that Rari Capital and its co-founders misled investors about the nature and profitability of certain crypto asset investments offered by Rari Capital and acted as an unregistered broker-dealer,” Monique C. Winkler, director of the SEC’s San Francisco Regional Office, said in a statement.
“We will not be swayed by someone labeling a product as ‘decentralized’ or ‘autonomous,’” Winkler added. “Instead, we will look beyond the labels to the economic realities, as we have done here, and hold accountable the individuals behind cryptocurrency products and platforms when they harm investors and violate federal securities laws.”
Some Earn Pool investors were eligible to receive Rari governance tokens, which the agency claimed was an unregistered securities offering.
The SEC has charged several crypto companies over the years, including centralized exchanges. The agency has also recently taken a crackdown on DeFi platforms. In May, Uniswap Labs, the developer of decentralized exchange Uniswap, said it received a Wells Notice from the SEC. The agency said Uniswap Labs acted as an unregistered securities exchange and an unregistered broker-dealer, according to the company.
Lari Capital and its co-founders have neither admitted nor denied the SEC’s findings.
The company faced a serious exploit in 2022. Fuse, a lending and borrowing platform, was hacked in May 2022, with $80 million stolen. According to the SEC, Rari Capital stopped accepting new deposits and began scaling back its Fuse platform.
As part of the agreement, Rari Capital Infrastructure LLC, which acquired Rari Capital in 2022, agreed not to violate securities laws going forward.
“In deciding to accept the proposal, the Commission acknowledges the cooperation provided by Defendants to Commission staff and the Defendants’ remedial efforts to cease trading activity and scale back the Fuse platform following the May 2022 platform abuse incident, including the voluntary repayment of performance-based fees collected by Defendants to affected users,” the SEC said in its order.
UPDATE: Full details as of August 21st at 8:15 PM UTC.
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