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The US Securities and Exchange Commission (SEC) has once again made a move into the decentralized sector with an announcement that Rari Capital, a decentralized finance protocol, and its co-founders, Jai Bhavnani, Jack Lipstone, and David Lucid, have been charged with misleading investors and engaging in unregistered broker activity. 

Rari Capital offered two investment products, which allowed investors interested in the pools to receive tokens, or Rari’s governance tokens. The tokens received also give the investors the right to earn profits from the pools.

According to the SEC's complaint, Rari Capital’s actions of “selling interests in these pools” and governance tokens constitute a violation of conducting unregistered offers and sales of securities.

Additionally, Rari Capital and its co-founders “falsely” informed investors that Earn pools would automatically rebalance their crypto assets into the highest yield-generating opportunities available.

However, in truth, Rari Capital’s rebalancing mechanism often required manual input, which the decentralized protocol “sometimes failed to initiate.” 

The decentralized finance protocol also allegedly promised investors to earn a high annual percentage yield but fails to mention the various fees. This resulted in investors in the Earn pool losing money on their investments. 

Commenting on the SEC's latest action against Rari Capital, Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, said:

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

After the charges were made, Rari Capital had made a settlement with the SEC consenting to “various forms of relief” such as injunctions, conduct-based injunctions, civil penalties, disgorgement with prejudgment interest, and equitable officer-and-director bars against the co-founders for a period of five years.

The settlement agreements are still yet to get court approval.