SEC Charges IRL Founder With Investor Fraud

US regulators have charged the founder of social network IRL with fraud, claiming he deceived investors while spending millions of their cash on personal expenses, including his own wedding.

The Securities and Exchange Commission said that Abraham Shafi, 37, who founded IRL in 2018, fraudulently raised $170 million (£132m) from backers while claiming it had organically attracted its users.

In reality the company spent nearly $6m on advertisements and incentivised downloads to boost its “perceived popularity”, something the SEC said was hidden by understating marketing expenses and routing advertising platform payments through third parties.

Shafi also failed to disclose that he and his fiancée, Barbara Woortmann, spent hundreds of thousands of dollars on company credit cards on personal expenses including furniture, clothing, travel and groceries.

‘Viral’ popularity

The platform came to prominence during the pandemic as a potential rival to Facebook, but was shut down last year by SoftBank

and other investors who claimed they had found evidence that nearly all of IRL’s 20 million users were bots.

SoftBank later sued Shafi, claiming IRL was a “sophisticated, years-long” fraud and demanding the return of its $150m investment.

In a countersuit Shafi argued SoftBank had made him a “scapegoat”, using inconclusive evidence to determine that user figures were far lower than claimed in order to recoup its remaining cash after the high-profile meltdown of another SoftBank investment, WeWork.

The SEC’s charges focus on other matters, saying Shafi claimed fraudulently that prior to its last fundraising round IRL had 12 million users “based on viral popularity and organic growth”.

The claim “misleadingly omitted the significant role that advertising played in Shafi’s growth strategy for IRL”, while in statements to investors Shafi “significantly understated” the funds spent on marketing.

“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,” said Monique C. Winkler, director of the SEC’s San Francisco regional office.

Crypto fraud

The lawsuit seeks disgorgement of the invested funds, a bar against Shafi acting as director of other companies and other measures, with Woortmann also being named as a relief defendant over the personal expenses she charged to an IRL credit card.

The lawsuit comes after the arrest last month of Nader Al-Naji, founder of cryptocurrency platform and social media site BitClout on federal wire fraud charges.

The SEC also charged Al-Naji last week with defrauding investors over his claims that BitClout and associated venture Decentralized Social or DeSo were “decentralised”, when in fact Al-Naji himeslf directed all aspects of the venture.

BitClout was backed by high-profile venture capital firms including Sequoia Capital and Andreessen Horowitz, also known as a16z, as well as investors who purchased its crypto token, raising more than $257m since 2020, the SEC said.

Al-Naji used the funds to pay rent on a six-bedroom mansion in Beverly Hills and to purchase luxury gifts worth at least $2.9m for family members including his wife and mother, according to the regulator.