SEC Reaches Settlement with Rari Capital Over Misleading Investors with Rari Governance Token

• The U.S. Securities and Exchange Commission (SEC) has reached a settlement with decentralized finance (DeFi) protocol Rari Capital Inc. and its founders.
• Rari Capital was accused of misleading investors and offering unregistered brokerage services. At its peak, the platform managed over $1 billion in assets.
• One significant detail involves the issuance of the “Rari Governance Token” (RGT), which the SEC deemed an unregistered security.

This article delves into the SEC’s settlement with Rari Capital, providing key insights on the allegations, the outcome, and the broader implications for the DeFi sector.

SEC’s Settlement with Rari Capital: A Closer Look

The SEC’s case against Rari Capital highlighted several key points of contention. Rari Capital offered two investment products that functioned like crypto asset funds, allowing investors to stake tokens in liquidity pools and earn returns. However, the protocol’s claim that these pools autonomously rebalanced to optimize returns was found to be misleading. Instead, manual intervention was frequently required, a fact not disclosed to investors.

Rari Governance Token (RGT) and Unregistered Securities

The SEC’s focus on the Rari Governance Token (RGT) underscored the significant regulatory risks associated with DeFi platforms. The SEC alleged that RGT, which provided investors with a share in the decision-making process of the protocol, was, in fact, an unregistered security. This classification has broad implications for the DeFi industry, particularly for other platforms that issue governance tokens without SEC registration.

Impact on Investors and Regulatory Measures

The SEC’s settlement revealed that many investors were misled about the annual percentage yield (APY) of the investment pools and subsequently lost funds. These misleading APY figures contributed to investor losses, prompting the SEC to intervene. Consequently, Rari Capital’s founders were subjected to several penalties, including civil fines, forced restitution, and bans from holding executive positions for five years. This enforcement action highlights the critical need for transparency and regulatory compliance within the DeFi space.

Conclusion

The SEC’s settlement with Rari Capital serves as a stark reminder of the importance of honesty and regulatory adherence in the DeFi sector. It underscores the necessity for DeFi platforms to fully disclose operational processes and ensure that all securities are properly registered. Moving forward, this case will likely influence how DeFi protocols operate and interact with both investors and regulatory bodies, fostering a more transparent and compliant financial ecosystem.