The SEC has settled a dispute with decentralized finance protocol Rari Capital and its co-founders over allegations of misleading investors and unregistered broker activity.
SEC Allegations
According to a September 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.
Settlement and Consequences
Additionally, the SEC contends that Rari Capital and its co-founders — Jai Bhavnani, Jack Lipstone, and David Lucid, misled investors into believing the Earn pools would automatically and autonomously rebalance crypto assets for the best yield. “In reality, the rebalancing mechanism often required manual input, which Rari Capital sometimes failed to initiate,” the agency explains. Furthermore, Rari Capital and its co-founders are accused of engaging in unregistered broker activity through the Fuse platform. According to Monique Winkler, director of the SEC’s San Francisco Regional Office, “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.” The settlement includes permanent injunctions, civil penalties, disgorgement with interest, and a five-year ban on serving as officers or directors for the co-founders. Rari Capital 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 History
Rari Capital launched in 2020, offering automated yield farming. The protocol promised to optimize funds for the highest returns across multiple protocols like Compound and dYdX. The Fuse protocol also allowed users to create customizable lending and borrowing markets. Rari Capital gained attention for being founded by a team of teenagers. By 2021, the platform reached over $1 billion in total value locked (TVL) due to its high-yielding liquidity pools. However, the platform faced numerous challenges, including an $11 million exploit in 2021 and a major hack in 2022 that resulted in over $80 million being stolen. These events ultimately led to Rari Capital winding down its operations.
Rari Capital has seen both rapid growth and significant challenges, ultimately leading to its closure. The settlement with the SEC underscores the importance of transparency and regulatory compliance in the decentralized finance space.
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