The U.S. Securities and Exchange Commission has filed charges against the decentralized finance platform Rari Capital and its co-founders, alleging that they misled investors and operated as unregistered brokers.
According to an SEC announcement, the allegations involve two blockchain-based investment platforms that, at their zenith, managed over $1 billion in crypto assets.
Unregistered offerings and deceptive assertions
Rari Capital and its founders—Jai Bhavnani, Jack Lipstone, and David Lucid—are accused of executing unregistered securities offerings through these platforms. The SEC claims Rari Capital provided two principal investment products: the Earn pools and the Fuse pools.
Both products enabled investors to deposit cryptocurrency into lending pools and generate returns. While Rari managed the Earn pools, the Fuse pools were user-generated, as per the release.
Investors were issued tokens that represented their interests in these pools and, in certain instances, governance tokens known as Rari Governance Token (RGT), which granted them voting rights on platform decisions.
The SEC contends that Rari Capital inaccurately asserted that the Earn pools would automatically rebalance into the most lucrative crypto investments. In actuality, this process frequently necessitated manual intervention, which was sometimes overlooked, leading to investor losses.
Moreover, Rari is accused of advertising significant returns without adequately considering fees. Many investors in the Earn pools ultimately encountered losses.
Wider ramifications for DeFi regulation
The challenges faced by Rari Capital illustrate that even DeFi platforms can be subject to regulatory oversight. Although Rari portrayed itself as autonomous and decentralized, the SEC is regulating it like any other financial institution that offers investment products.
“We will not be dissuaded by someone referring to a product as ‘decentralized’ and ‘autonomous’; rather, we will look beyond the labels to the economic realities, as we did here, and hold the individuals behind crypto products and platforms accountable when they harm investors and breach federal securities laws.”
Monique C. Winkler, Director of the SEC’s San Francisco Regional Office
As part of the resolution, Rari Capital and its founders have consented to civil penalties, including prohibitions from serving as officers or directors for a period of five years.
Rari Capital Infrastructure, which took over operations from Rari in 2022, also reached a settlement with the SEC regarding similar allegations. Neither Rari nor its founders acknowledged the claims, but they agreed to the SEC’s terms.