Authorities charged the ex-CEO of a former unicorn, buzzy social media startup IRL (which stands for “in real life”) with fraud and obstruction after an investigation showed the executive allegedly misled investors and then trashed files by restoring his cell phone to a previously saved backup that deleted relevant records.
According to the Department of Justice, Abraham Shafi, 38, who lives in Hawaii, allegedly told venture capital investors the growth of his event-based social media app, IRL, was “organic” from people inviting their friends to download it. Shafi claimed the company only spent $50,000 a month on marketing and PR to acquire new users, court records show. In reality, IRL spent about $200,000 per month on advertisements to help inflate the number of users and hid that data from potential investors, authorities claim. In 2021, IRL raised $170 million in a Series C funding led by SoftBank Vision Fund 2, solidifying its coveted status as a unicorn with a $1.17 billion valuation and landing it among the top 10 most downloaded social media apps on Apple. Now, Shafi faces obstruction of justice, securities fraud, and wire fraud felony charges, along with civil charges from the Securities & Exchange Commission.
Authorities allege investors specifically asked Shafi during the Series C process about “user acquisition channels” on the platform. Shafi claimed that IRL was different from other social media apps.
“This is a free organic channel (users are not incentivize or paid for these invites, and must invite each friend individually with no bulk invites),” an email written by Shafi to an investor excerpted in the indictment states. “Unlike other apps that spend aggressively to acquire new users, we spend very little.”
Meanwhile, Shafi allegedly concealed IRL’s ad spending by invoicing the expenses to a third party firm, the indictment states.
“Shafi had spent millions of dollars on paid advertising in the form of incentive advertising, a type of advertising in which users are provided a reward in a third-party app if they download IRL,” the DOJ stated in an announcement. “In the lead up to Series C, Shafi asked his vendor for a ‘big burst’ of ads for ‘a few days’ to drive more installs of the IRL app.”
SoftBank has since sued Shafi for $150 million and the IRL founders, in turn, have sued their former venture capital investors and board members. In legal filings, Shafi has previously denied wrongdoing.
A Delaware Chancery Court memorandum opinion written by Vice Chancellor Lori W. Will summarized the opposing views of the VCs and the IRL founders: According to Will, Shafi and the other founders claim the VCs “panicked” after the SEC began deposing them as part of an investigation into IRL’s users and “feared reputational damage in Silicon Valley that would impair future investment prospects.” To protect themselves, the founders alleged, the VCs commissioned an outside firm that reported the platform’s users were mostly made up of bots. According to Will’s opinion, the VCs have countered that the entire platform was a “hoax because its users were almost entirely bots.” The VC-designated board members believe that Shafi was “appropriately suspended” for alleged misconduct and that shutting down the company was the only “responsible path for all investors.”
Lawyers for Shafi did not respond to a request for comment. A SoftBank spokesperson declined to comment. Shafi and the other founders have denied the bot allegations.
Authorities from DOJ and the SEC allege Shafi first began using “incentive advertising” to juice IRL’s downloads and user base back in 2019. Shafi paid the ad company through a third-party firm so that the expenses wouldn’t appear on IRL’s books, according to an indictment. Shafi hid the payments by including them on IRL’s general ledger as “consulting” fees, it states. By 2020, Shafi had increased his ad spending from $3,000 a day to $5,000 a day with an alleged goal of driving about 12,000 daily app installations on iOS devices and 6,500 on Androids. That year and into 2021, Shafi allegedly began spending hundreds of thousands a month on the ads, still paying through the third party.
All told, the SEC claims Shafi spent $5.7 million on ads between 2019 and 2021. However, in his pitch deck to investors, authorities allege Shafi touted that IRL’s growth stemmed from friends inviting other friends. When a prospective investor asked about a spike in users, Shafi claimed it was because of “seasonality around the holidays.” In his talking points with investors, Shafi allegedly listed four marketing vendors, but left out the ad company IRL was paying.
The Series C funding round closed and Shafi sold $7.5 million in his own stock options while SoftBank and others invested $170 million. Afterward, IRL hired a chief financial officer who allegedly asked Shafi about IRL’s payments to the third-party firm paying the ad company. In response, the indictment claims Shafi switched gears, allegedly directing someone affiliated with the company to create “false invoices” to make it look like the money spent on the ads was paying for Amazon Web Services, short message service (SMS), and Google Cloud costs.
Meanwhile, the SEC and the DOJ claim Shafi was using IRL to fund his personal expenses, before and after the Series C. The indictment states Shafi used IRL business credit cards to pay for “luxury hotel stays” in Hawaii for his wedding guests, thousands of dollars for “art classes,” “air purification services,” tens of thousands on a trip to Japan, and hundreds of thousands at high-end luxury clothing and furniture stores. The SEC complaint states Shafi reimbursed IRL about $2.5 million for he and his wife’s personal expenses but didn’t repay others that included “spiritual and alternative medicine” services and various “luxury resort” hotels in Hawaii. Shafi has claimed in legal filings he never hid the practice of using the same credit card for business and personal expenses, and that it dated back to when he founded the company and personally funded it.
In 2022, the SEC subpoenaed Shafi and others at IRL about user metrics and vendor payments. In response, IRL launched its own internal investigation, the indictment states.
At that point, authorities claim Shafi tried to mask his involvement with the ad spending by allegedly asking the person who created the fake invoices to say he was behind it all and Shafi had no involvement. Shafi also allegedly restored his phone to a “previously saved backup,” which deleted current data and content. Two days later, IRL imaged Shafi’s entire phone as part of its internal investigation. Later, the SEC claims Shafi “falsely denied” in sworn testimony that he wiped his phone after getting the SEC subpoena.
Will’s summary of the final months at IRL note the SEC investigation prompted lots of back and forth at the startup. The company hired outside counsel and multiple law firms and investigators to respond to the agency’s subpoenas. One outside firm reported the platform was overrun with bots and had few human users, while another found scant bot activity. In April 2023, after the SEC deposed two of the VC-appointed board members, a special board committee allegedly told Shafi to resign or he would be suspended over his use of the IRL credit cards to pay for his personal expenses. Shafi allegedly refused and the board suspended him.
After Shafi’s suspension, IRL user numbers tanked, court records show. By June, the board voted to dissolve the company and distributed $40 million in cash to investors. The lawsuits are ongoing.
