SEC Settles Charges Against DeFi Platform Rari Capital, Inc.

The U.S. Securities and Exchange Commission (SEC) settled charges against DeFi platform Rari Capital, Inc. after finding that the firm and its co-founders misled investors and were not properly registered as brokers.

Investor Misrepresentation

Rari Capital co-founders Jai Bhavnani, Jack Lipstone, and David Lucid told investors that its managed Earn pools, which allowed users to lend tokens for yield, would “automatically and autonomously rebalance” their crypto. However, this rebalancing was done manually, and the firm often failed to execute this effectively. Additionally, the SEC found they engaged in “unregistered broker activity” related to the user-generated Fuse pools.

At its peak, more than $1 billion worth of assets was locked in Rari’s pools.

SEC Statement

Monique C. Winkler, director of the SEC’s San Francisco Regional Office, stated, “We allege that Rari Capital and its co-founders misled investors about both the features and profitability of certain crypto asset investments Rari Capital offered, and acted as unregistered brokers.”

She added, “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 and hold individuals accountable when they harm investors and violate federal securities laws.”

Governance Token Allegations

Certain Earn pool investors were also offered a Rari governance token, which the SEC claims represented an unregistered securities offering.

Previous SEC Actions

The SEC has previously charged multiple crypto firms, including centralized exchanges and more recently decentralized finance (DeFi) platforms. For example, in May, Uniswap Labs received a Wells Notice alleging unregistered exchange and broker-dealer activities.

Rari Capital’s Response

Rari Capital and its co-founders did not admit or deny the SEC’s findings. The firm faced a significant exploit in 2022, where the borrowing and lending platform Fuse was hacked, resulting in an $80 million loss. Following this incident, Rari Capital halted new deposits and began winding down Fuse.

Settlement Agreement

As part of the settlement, Rari Capital Infrastructure LLC, which took over Rari Capital in 2022, agreed to cease and desist from violating securities laws in the future. The SEC noted the cooperation and remedial actions taken by Rari, including the voluntary return of performance-based fees to harmed users.

Update: Aug. 21, 8:15 p.m. UTC to include additional details.