SEC charges Rari Capital and its co-founders with unregistered securities

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The U.S. Securities and Exchange Commission (SEC) has settled charges against Rari Capital and its co-founders for unregistered securities offerings and misleading investors in connection with two DeFi platforms: Earn and Fuse. 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 profits.

These investment funds offered users governance tokens (Rari Governance Tokens or RGTs) and tokens representing their interests in the funds. 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 that Earn funds would automatically rebalance to the highest-yielding opportunities, when manual intervention was often required but not always done. The platform also promoted high annualized yield (APY) rates without fully disclosing the impact of fees, leading many Earn fund investors to lose money.

The SEC also accused Rari Capital of operating as an unregistered broker on its Fuse platform, where users could create custom pools to lend and borrow crypto assets. Like Earn pools, Fuse pool users received tokens representing their participation in these pools. These activities, according to the SEC, constituted unregistered broker activity under the Securities Exchange Act of 1934.

Following a major hack in May 2022, which resulted 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 conduct unregistered offerings and brokerage activities until its final closure.

Without admitting or denying the SEC’s findings, Rari Capital and its co-founders agreed to settle. The agreement includes civil penalties, permanent injunctive relief, and five-year bans from serving as officers and directors for the co-founders. Rari Capital Infrastructure also agreed to a cease-and-desist order. The settlements, subject to court approval, highlight the SEC’s effort to hold cryptocurrency platforms accountable, even those that claim to be decentralized.

Commenting on the case, Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, emphasized: “We will not be deterred by anyone labeling a product as ‘decentralized’ and ‘autonomous,’ but will look beyond the labels and analyze the economic realities.”

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