SEC charges Rari Capital for misleading investors, unregistered activity

The U.S. Securities and Exchange Commission has filed a lawsuit against decentralized finance platform Rari Capital and its co-founders, accusing them of misleading investors and operating unregistered brokerages.

The charges involve two blockchain-based investment platforms that held over $1 billion in crypto assets at their peak, according to the SEC’s statement.

Unregistered investments and misleading claims

Rari Capital and its founders—Jai Bhavnani, Jack Lipstone, and David Lucid—allegedly conducted unregistered securities offerings through these platforms. The SEC alleges that Rari Capital offered two main investment products: Earn pools and Fuse pools.

Both products allowed investors to deposit their cryptocurrencies into lending pools and earn returns. According to the announcement, Earn pools were managed by Rari, while Fuse pools were created by users.

Investors receive tokens representing their interests in these pools and, in some cases, governance tokens called Rari Governance Tokens (RGT), which give them the right to vote on platform decisions.

The SEC alleges that Rari Capital falsely claimed that Earn pools would automatically rebalance to the highest-yielding crypto investments. In reality, this process often required manual intervention, which was sometimes neglected, causing investors to lose money.

Additionally, Rari allegedly encouraged high returns without properly accounting for fees. Many investors in the Earn pools eventually faced losses.

Broader implications for DeFi regulation

Rari Capital’s troubles show that even DeFi platforms can be subject to regulatory scrutiny. While Rari presents itself as autonomous and decentralized, the SEC treats it like any other financial institution offering investment products.

“Just as we will not be deterred by someone labeling a product as ‘decentralized’ and ‘autonomous,’ we will instead look beyond the labels to the economic realities, just as we did here, and hold those behind crypto products and platforms accountable when they harm investors and violate federal securities laws.”

Monique C. Winkler, Director of the SEC’s San Francisco Regional Office

As part of the settlement, Rari Capital and its founders agreed to various penalties, including a ban from serving as a director or executive for five years.

Rari Capital Infrastructure, which took over operations from Rari in 2022, also settled with the SEC over similar allegations. Neither Rari nor its founders admitted to the allegations, but they did agree to the SEC’s terms.