While venture capitalists and tech leaders are enjoying summer breaks or attending the Paris Olympics, the U.S. Securities and Exchange Commission (SEC) is busy with legal action.
In a notable development, the SEC has charged Abraham Shafi, the former CEO of the social media startup IRL, with allegations of defrauding investors. The SEC claims Shafi made false statements regarding the company’s growth and failed to disclose that he and his fiancée, Barbara Woortmann, used company credit cards for personal expenses.
IRL, initially launched as a viral social media app during the pandemic, faced a major setback when an internal investigation revealed that 95% of its reported users were either automated accounts or bots. The app, which aimed to become the “WeChat of the West,” was shut down in June 2023 after a board investigation.
Before IRL’s closure, Shafi successfully raised $200 million in venture capital. A Series C funding round led by Softbank’s Vision Fund 2 had valued the startup at $1.17 billion, marking it as a unicorn. However, concerns arose shortly after the funding.
According to the SEC’s complaint, Shafi misrepresented IRL as a platform that had naturally attracted its alleged 12 million users. In reality, the company spent millions on ads incentivizing users to download the app, concealing these expenses from investors. Additionally, Shafi and Woortmann reportedly charged hundreds of thousands of dollars for personal purchases on the company’s credit cards.
“As alleged, Shafi exploited investors’ interest in pre-IPO technology ventures, fraudulently raising about $170 million by misrepresenting IRL’s operations,” stated Monique C. Winkler, Director of the SEC’s San Francisco Regional Office. “Investors must remain vigilant.”
This case follows a series of fraud charges from the SEC against other tech founders. Recently, Nader Al-Naji, founder of BitClout, was charged for fraud and unregistered securities offerings, raising over $257 million while using a pseudonym to evade scrutiny. In another instance, Ilit Raz, CEO of the now-defunct AI recruitment startup Joonko, was charged with defrauding investors of at least $21 million.
The SEC has also targeted venture firms, such as Trillium Capital LLC, for manipulating stock prices through fraudulent activities.