Founding father of SoftBank-backed app IRL accused of fraud by SEC

Keep knowledgeable with free updates

Merely signal as much as the Expertise sector myFT Digest — delivered on to your inbox.

The founding father of a SoftBank-backed social media app focused at Gen Z customers has been sued by US authorities for allegedly deceiving traders and burning hundreds of thousands of their {dollars} on his wedding ceremony, flights and luxurious lodges.

The Securities and Alternate Fee alleged in a lawsuit on Wednesday that 37-year-old Abraham Shafi, who based a platform referred to as IRL in 2018, fraudulently satisfied backers to plough $170mn into the app whereas failing to reveal that it had “boosted its perceived recognition” by spending virtually $6mn on commercials that incentivised downloads.

IRL, which at its peak was valued at greater than $1bn, was closed down in 2023 by SoftBank and different lead traders who stated that they had discovered proof that the majority of its purported 20mn customers had been faux.

SoftBank subsequently sued Shafi, claiming that IRL was a “refined, years-long” fraud that it was hoodwinked into backing. It has demanded the return of its $150mn in addition to punitive damages.

In a competing lawsuit, Shafi alleged that he was made a “scapegoat” by SoftBank, which relied on inconclusive information to conclude that the app was riddled with bots and shut the enterprise with the intention to recoup its remaining money and keep away from additional embarrassment after the high-profile blow-up of one other funding in WeWork.

A lawyer for Shafi didn’t instantly reply to a request for remark.

In its submitting on Wednesday, the SEC stated that previous to its final fundraising spherical, Shafi had boasted that IRL had 12mn customers and a excessive rank on the Apple App Retailer, “based mostly on viral recognition and natural progress”.

The company alleged this description “misleadingly omitted the numerous function that promoting performed in Shafi’s progress technique for IRL”. In statements to traders, he “considerably understated” the amount of cash spent on advertising and marketing, the lawsuit added.

The lawsuit cited a textual content message alternate from 2012 between Shafi and one in all IRL’s enterprise capital backers, by which the particular person remarked that one other potential investor would “love” that IRL “spent nearly zero on advertising and marketing”. In response, Shafi allegedly wrote: “That’s us! Actual social.”

The SEC stated traders had been additionally unaware that Shafi and his spouse had spent hundreds of thousands of {dollars} on private bills with IRL’s bank cards, shopping for furnishings, clothes, Hawaii resort stays and smaller objects akin to groceries.