U.S. Securities and Exchange Commission (SEC) has been busy this summer, charging venture-backed founders on allegations of fraud. One recent case involves Abraham Shafi, the founder and former CEO of social media startup IRL. The SEC has accused Shafi of defrauding investors by making false statements about the company’s growth and concealing his personal expenses.
IRL, which was positioned as a viral social media app, gained popularity during the pandemic. However, an internal investigation by the company’s board revealed that 95% of its users were automated or from bots. Despite this, Shafi managed to raise $200 million in venture capital, with Softbank’s Vision Fund 2 leading a Series C raise of $170 million that pushed IRL into unicorn status.
The SEC complaint states that Shafi misrepresented IRL as a platform with 12 million organic users, when in reality, the company spent millions on ads to incentivize app downloads. Additionally, Shafi and his fiancée allegedly charged hundreds of thousands of dollars on company credit cards for personal expenses, which were not disclosed to investors.
Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, commented on the case, stating that Shafi took advantage of investors’ appetite for investments in the pre-IPO technology space. She emphasized the importance of vigilance for investors in this sector.
This is not the first instance of the SEC cracking down on fraudulent activities in the tech industry. Earlier this week, BitClout founder Nader Al-Naji was charged with fraud and unregistered offering of securities. The SEC accused Al-Naji of using his pseudonymous online identity to raise over $257 million in cryptocurrency without proper regulatory scrutiny. BitClout, backed by high-profile venture capitalists, was at the center of the allegations.
In June, the SEC charged Ilit Raz, CEO and founder of AI recruitment startup Joonko, with defrauding investors of at least $21 million. The agency claimed that Raz made false statements about the company’s customers, platform, and revenue.
The SEC has also targeted venture firms in recent months. One notable case involved Robert Scott Murray and his firm Trillium Capital LLC, who were charged with a fraudulent scheme to manipulate the stock price of Getty Images Holdings Inc. by announcing a phony offer to purchase the company.
These cases highlight the need for increased scrutiny and due diligence in the tech investment space. Investors should be cautious and conduct thorough research before committing their funds. The SEC’s actions serve as a reminder that fraudulent practices can have severe consequences for both founders and investors, tarnishing the reputation of the industry as a whole.