The United States Securities and Exchange Commission (SEC) has settled with decentralized finance (DeFi) protocol Rari Capital and its co-founders for allegedly misleading investors and unregistered broker activity.
According to a Sept. 18 announcement, the SEC claimed that Rari Capital’s Earn and Fuse pools “functioned like crypto asset investment funds,” allowing investors to deposit crypto assets in lending pools and earn returns from their investments. The complaint alleges that Rari Capital conducted unregistered offers and sales of securities by selling interests in these pools and their tied governance tokens.
In addition, the SEC contends that Rari Capital and its co-founders — Jai Bhavnani, Jack Lipstone, and David Lucid, allegedly misled investors into believing the Earn pools would automatically and autonomously rebalance crypto assets for the best yield. According to the agency:
“[…] In reality, the rebalancing mechanism often required manual input, which Rari Capital sometimes failed to initiate.”
Furthermore, Rari Capital Infrastructure and its co-founders are accused of engaging in unregistered broker activity through the Fuse platform. “We allege that Rari Capital and its co-founders misled investors about both the features and profitability of certain of the crypto asset investments Rari Capital offered, and acted as unregistered brokers,” noted in a statement Monique Winkler, director of the SEC’s San Francisco Regional Office.
The first settlement includes various forms of relief, such as permanent injunctions, civil penalties, disgorgement with interest, and a five-year ban on the co-founders serving as officers or directors. Rari Capital Infrastructure also agreed to a cease-and-desist order without admitting or denying the SEC’s findings. The settlements are still subject to court approval.
Rari Capital’s downfall
Rari Capital was launched in 2020, offering automated yield farming. It promised to optimize funds for the highest returns across multiple protocols like Compound and dYdX. Rari’s Fuse protocol also allowed users to create customizable lending and borrowing markets.
The protocol gained attention for being founded by a young team of teenagers at the time of its launch. By 2021, the platform achieved over $1 billion in total value locked (TVL) due to its high-yielding liquidity pools.
It also faced many challenges, including an $11 million exploit in 2021 linked to an integration issue with Alpha Finance. In 2022, Rari was hit by another major hack, with over $80 million stolen from its Fuse pools due to a reentrancy bug. This hack had a domino effect on other DeFi protocols, and Rari eventually winded down its operations.
