Key takeaways
- Rari Capital and Co-Founders Reach Settlement with SEC Regarding Unregistered Securities Offerings
- The SEC continues to enforce regulations in the DeFi sector, emphasizing economic realities rather than labels.
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The U.S. Securities and Exchange Commission (SEC) has settled charges against Rari Capital and its co-founders for unregistered securities offerings and misleading investors in connection with two DeFi platforms, Earn and Fuse. 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 similarly to traditional investment funds, allowing users to deposit crypto assets and earn returns.
These investment pools offered users governance tokens (Rari Governance Tokens or RGTs) and tokens representing their interests in the pools. According to the SEC’s 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 pools would automatically rebalance to higher-yielding opportunities, when manual intervention was often required but not always performed. The platform also promoted high APYs without fully disclosing the impact of fees, leading many Earn pool investors to lose money.
The SEC also accused Rari Capital of operating as an unregistered broker-dealer on its Fuse platform, where users could create custom pools to lend and borrow crypto assets. Similar to the Earn pools, Fuse pool users received tokens representing their ownership interest in these pools. These activities, according to the SEC, constituted unregistered broker-dealer activity under the Securities Exchange Act of 1934.
Following a major hack in May 2022 that resulted in the loss of $80 million in crypto assets, Rari Capital Infrastructure LLC took over operations of the Fuse platform. However, the new entity continued to engage in unregistered offerings and brokerage activities until its final closure.
Without admitting or denying the SEC’s findings, Rari Capital and its co-founders agreed to settle. The agreement includes civil penalties, permanent injunctions, and a five-year ban on the co-founders’ officers and directors. Rari Capital Infrastructure also agreed to a cease and desist order. The settlements, subject to court approval, underscore the SEC’s efforts 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, said, “We will not be discouraged by someone who calls a product ‘decentralized’ and ‘autonomous,’ but we will look beyond the labels to see the economic realities.”
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