U.S. SEC Settles With DeFi Platform Rari Capital Over Unregistered Broker Activity

The United States Securities and Exchange Commission (SEC) announced that it settled with DeFi platform Rari Capital and its founders following allegations of misleading investors and operating without proper registration as brokers.

The SEC’s allegations focus on co-founders Jai Bhavnani, Jack Lipstone, and David Lucid, accusing them of conducting unregistered broker activities while managing two blockchain-based investment platforms. These platforms reportedly handled over $1 billion in cryptocurrency assets at their peak.

Rari Pools Sold Unregistered Securities

The financial regulator complaint highlights two investment products launched by Rari: Earn pools and Fuse pools. These pools operated as crypto investment funds, where investors deposited assets into lending pools. Rari Capital managed the Earn pools, while users created the Fuse pools to generate returns.

Investors were given tokens representing their stake and profit rights, with some Earn Pool participants also receiving Rari Governance Tokens (RGT). The SEC argues that by offering these tokens and RGT, Rari Capital engaged in unregistered securities transactions.

Moreover, the complaint claims Rari and its founders misled investors by promising automatic rebalancing of Earn pools for optimal returns when manual adjustments were often needed and sometimes neglected. They also advertised high annual percentage yields (APY) without disclosing fees, leading to losses for many investors.

The SEC further asserts that Rari and its founders engaged in unregistered broker activities by overseeing the Fuse platform. In March 2022, Rari Capital Infrastructure assumed control of Fuse and continued offering unregistered interests in the Fuse pools without proper registration as brokers.

Rari Shuts Down Operations

Rari Capital, founded in 2020, initially launched as an automated yield farming platform, aiming to maximize returns by optimizing funds across protocols like Compound Finance and dYdX. The Fuse protocol allowed users to create customizable lending and borrowing markets.

The platform gained attention due to its founding by a team of teenagers and reached over $1 billion in total value locked (TVL) by 2021, primarily through high-yielding liquidity pools.

However, Rari faced challenges, including an $11 million exploit in 2021 due to an integration issue with Alpha Finance. In 2022, a larger hack resulted in the loss of over $80 million from Fuse pools due to a reentrancy bug, which impacted other DeFi protocols and led to Rari winding down its operations.