IRL social app founder charged with fraud

While enterprise capitalists and other technocrats are on vacation or attending the Olympics in Paris, the U.S. Securities and Exchange Commission and its lawyers have their hands full this summer.

For the second time this week — and no less than the fourth up to now few months — the SEC has charged the founder of a venture-backed company with fraud.

The SEC said Wednesday it has charged Abraham Shafi, the founder and former CEO of a social media startup generally known as IRL, with allegedly defrauding investors. The agency alleges that Shafi made false and misleading statements concerning the company’s growth and concealed that he and his fiancée, Barbara Woortmann, made extensive use of company bank cards to pay for private expenses.

IRL was positioned as a viral social media app that gained popularity through the pandemic, but there was one small problem: Its thousands and thousands of users were fake. IRL, which began as a social calendar app and built a messaging-based social network to turn out to be the “WeChat of the West,” was shut down in June 2023 after an internal investigation by company management found that 95% of the app’s users were “automated or bot-based.”

Before IRL collapsed, Shafi had raised $200 million in enterprise capital. The startup’s last round—a $170 million Series C led by Softbank’s Vision Fund 2—made IRL a unicorn with a valuation of $1.17 billion. The problems and concerns soon followed.

The SEC said in its grievance Wednesday that Shafi portrayed IRL as a viral social media platform that organically attracted a purported 12 million users. Instead, IRL spent thousands and thousands of dollars on ads that offered incentives to download the IRL app, in response to the SEC.

The SEC alleges that Shafi hid those expenses. The grievance also alleges that Shafi didn’t speak in confidence to investors that he and Woortmann had charged a whole bunch of hundreds of dollars to the corporate’s bank cards for clothing, home furnishings and travel.

“As we alleged, Shafi exploited investors’ appetite for pre-IPO technology investments 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. “Investors in this space should remain vigilant.”

Earlier this week, the SEC charged BitClout founder Nader Al-Naji with fraud and unregistered securities offering, alleging that he used the pseudonym “DiamondHands” to avoid regulatory scrutiny while raising greater than $257 million in cryptocurrency. BitClout, a high-profile cryptocurrency startup, was backed by high-profile enterprise capitalists reminiscent of a16z, Sequoia, Chamath Palihapitiya’s Social Capital, Coinbase Ventures, and Winklevoss Capital.

In June, the SEC charged Ilit Raz, CEO and founder of now-shuttered AI recruiting startup Joonko, with defrauding investors of no less than $21 million. The agency accused Raz of creating false and misleading statements concerning the number and quality of Joonko’s customers, the variety of candidates on the platform and the startup’s revenue.

The agency has also been going after enterprise capital firms in recent months. In May, the SEC charged Robert Scott Murray and his firm Trillium Capital LLC with fraud for manipulating the stock price of Getty Images Holdings Inc. by announcing a bogus offer from Trillium to purchase Getty Images.