SEC charges Rari Capital and co-founders with unregistered securities

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The US Securities and Exchange Commission (SEC) has settled charges against Rari Capital and its co-founders for unregistered securities offerings and misleading investors in relation to two DeFi platforms — Earn and Fuse, because reported in today’s SEC press release.

Rari Capital, co-founded by Jai Bhavnani, Jack Lipstone and David Lucid, operated two blockchain-based platforms: Earn pools and Fuse pools, which functioned similar to traditional investment funds, allowing users to deposit crypto assets and earn profit.

These investment pools offered users governance tokens (Rari Governance Tokens or RGT) and tokens that represented their interests in the pools. According to the SEC complaint, these tokens were classified as securities. However, Rari Capital failed to register the offerings with the SEC in violation of the Securities Act of 1933.

The SEC found that Rari Capital misled investors by claiming that Earn funds would automatically rebalance into the highest-returning opportunities, when manual intervention was often required but not always performed. The platform also advertised high APYs without fully disclosing the impact of fees, which caused many investors in Earn groups to lose money.

The SEC also accused Rari Capital of operating as an unregistered broker on its Fuse platform, where users could create custom pools to borrow and lend crypto assets. Like Earn pools, Fuse pool users were awarded tokens representing their interest in these pools. These activities, according to the SEC, constituted unregistered broker activity under the Securities Exchange Act of 1934.

After a significant hack in May 2022 that resulted in the loss of $80 million in crypto assets, Rari Capital Infrastructure LLC took over the operations of the Fuse platform. However, the new entity continued to engage in unregistered offerings and brokerage activities until eventual closure.

Without admitting or denying the SEC’s findings, Rari Capital and its co-founders agreed to settle. The settlement includes civil penalties, permanent injunctions and five-year officer and director bans on the co-founders. Rari Capital Infrastructure also accepted a cease and desist order. The settlements, subject to court approval, highlight the SEC’s push to hold crypto platforms accountable, even those that claim decentralization.

Commenting on the case, Monique C. Winkler, director of the SEC’s San Francisco Regional Office, emphasized: “We will not be deterred by someone labeling a product as ‘decentralized’ and ‘autonomous,’ but instead we will look beyond the labels to labels. economic realities.”

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