While venture capitalists and other tech professionals are vacationing or attending the Paris Olympics, the U.S. Securities and Exchange Commission and its lawyers have been busy this summer.
This is the second time this week and at least the fourth time in the past few months that the SEC has filed fraud charges against a venture capital-backed founder.
The SEC on Wednesday announced charges against Abraham Shafi, founder and former CEO of the social media startup known as IRL, accusing him of misleading investors. The SEC said Shafi made false and misleading statements about the company's growth and concealed his frequent use of the company's credit card to pay for personal expenses with his fiancée, Barbara Waltman.
IRL positioned itself as a viral social media app that soared in popularity during the pandemic, but it had one small problem: millions of its users were fake. IRL, which began as a social calendar app and built a messaging-based social network to become the “Western WeChat,” was shut down in June 2023 after an internal investigation by the company's board of directors found that 95% of the app's users were “automated or bots.”
Before IRL's collapse, Shafi had raised $200 million in venture capital. The startup's last round was a $170 million Series C led by SoftBank's Vision Fund 2, which made IRL a unicorn at a valuation of $1.17 billion. But problems and concerns emerged soon after.
In its complaint on Wednesday, the SEC said Shafi portrayed IRL as a viral social media platform that organically attracted 12 million users. The SEC said IRL actually spent millions of dollars on advertising that offered incentives to download the IRL app.
The SEC alleges that Shafi then concealed those expenses, and the complaint also alleges that Shafi failed to disclose to investors that he and Waltman charged hundreds of thousands of dollars to a company credit card for clothing, furniture and travel.
“As we have alleged, Shafi exploited investor appetite for investing in the technology sector pre-IPO and fraudulently raised approximately $170 million by lying about IRL's business practices,” said Monique C. Winkler, Director of the SEC's San Francisco Regional Office. “Investors in this sector should remain vigilant.”
Earlier this week, the SEC charged BitClout founder Nader Al Naji with fraud and unregistered offering of securities, alleging that he used the anonymous online identity “DiamondHands” to evade regulatory scrutiny while raising more than $257 million in cryptocurrency. BitClout, a buzzy crypto startup, was backed by notable venture capital firms including a16z, Sequoia, Chamath Palihapitiya's Social Capital, Coinbase Venture Capital, and Winklevoss Capital.
In June, the SEC charged Irit Raz, CEO and founder of the now-shuttered AI recruiting startup Joonko, with defrauding investors of at least $21 million. The SEC alleged that Raz made false and misleading statements about the quantity and quality of Joonko's clients, the number of candidates on the platform, and the startup's revenue.
The SEC has also been going after venture capitalists in recent months. In May, the SEC charged Robert Scott Murray and his company, Trillium Capital LLC, with a fraudulent scheme to manipulate the stock price of Getty Images Holdings Inc. by issuing a fake proposal for Trillium to acquire Getty Images.