SEC Charges Venture-Backed Founder with Fraud Amid Summer Crackdown: IRL’s Fake Users and Misleading Practices Exposed

SEC Charges Venture-Backed Founder with Fraud Amid Summer Crackdown: IRL’s Fake Users and Misleading Practices Exposed
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SEC Charges Against Abraham Shafi

This summer, while venture capitalists and the tech elite enjoy their holidays or attend the Paris Olympics, the U.S. Securities and Exchange Commission (SEC) remains busy. The SEC has charged Abraham Shafi, founder and former CEO of social media startup IRL, for allegedly defrauding investors. According to the SEC, Shafi made false and misleading statements about the company’s growth and hid personal expenses charged to company credit cards by himself and his fiancée, Barbara Woortmann.

IRL's Collapse and Fake Users

IRL, initially a social calendar app, rebranded as a viral social media platform during the pandemic. However, an internal investigation by the company’s board revealed in June 2023 that 95% of IRL’s users were fake, either automated or bots. Despite raising $200 million in venture capital, including a $170 million Series C round led by Softbank’s Vision Fund 2, the company shut down due to these fraudulent activities.

Misleading Investors and Hidden Expenses

The SEC’s complaint details how Shafi falsely portrayed IRL as having organically attracted 12 million users. In reality, IRL spent millions on ads with incentives to download the app, costs which Shafi then concealed. Additionally, Shafi and Woortmann allegedly used company credit cards for personal expenses such as clothing, home furnishings, and travel, without disclosing this to investors.

SEC's Ongoing Fraud Crackdown

This is the second time this week and at least the fourth time in recent months that the SEC has charged a venture-backed founder with fraud. Earlier this week, the SEC charged BitClout founder Nader Al-Naji with fraud and unregistered offering of securities, alleging he used the pseudonym “DiamondHands” to avoid regulatory scrutiny while raising over $257 million in cryptocurrency.

Previous Fraud Charges and Investigations

In June, the SEC charged Ilit Raz, CEO and founder of the now-defunct AI recruitment startup Joonko, with defrauding investors of at least $21 million by making false statements about the company’s customers, platform candidates, and revenue. In May, the SEC also charged Robert Scott Murray and his firm Trillium Capital LLC with a fraudulent scheme to manipulate Getty Images Holdings Inc.'s stock price by announcing a fake offer to purchase the company.

SEC's Warning to Investors

Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, emphasized the need for vigilance in the tech investment space. “As we alleged, Shafi took advantage of investors’ appetite for investments in the pre-IPO technology space and fraudulently raised approximately $170 million by lying about IRL’s business practices,” Winkler stated. “Investors in this space should continue to be vigilant.”