SEC charges Rari Capital and co-founders over unregistered securities

Key Takeaways

• Rari Capital and its co-founders settle with the SEC over unregistered securities offerings.
• The SEC continues to enforce regulations in the DeFi sector, emphasizing economic realities over labels.

The US Securities and Exchange Commission (SEC) has settled charges with Rari Capital and its co-founders for unregistered securities offerings and misleading investors in connection with two DeFi platforms—Earn and Fuse, as 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 RGT) 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, violating the Securities Act of 1933.

The SEC found that Rari Capital misled investors by claiming the Earn pools would automatically rebalance into the highest-yield 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 investors in the Earn pools to lose money.

The SEC also accused Rari Capital of operating as an unregistered broker on its Fuse platform, where users could create customized pools for lending and borrowing crypto assets. Like the Earn pools, Fuse pool users received 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, resulting in the loss of $80 million worth of 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 broker activities until its eventual shutdown.

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 bars for the co-founders. Rari Capital Infrastructure also accepted a cease-and-desist order. The settlements, subject to court approval, highlight the SEC’s effort to hold crypto platforms accountable, even those claiming 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 will look beyond the labels to the economic realities.”