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SoftBank's $150M claim against IRL for creating fake users

August 5, 2023
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SoftBank is suing the defunct social app IRL, which it previously invested in, for alleged fraud and $150 million in damages. IRL was seen as a promising event organizing alternative for Gen Z but was discovered to have largely fake user numbers after an internal investigation. SoftBank's legal complaint claims that IRL's fraudulent practices were designed to hide the truth during due diligence. IRL is also under investigation by the Securities and Exchange Commission (SEC) for potentially misleading investors.

Investment and Lawsuit:
  • SoftBank previously invested in IRL, which is now defunct, at a $1.1 billion valuation.
  • The investment firm is now suing IRL for alleged fraud, seeking $150 million in damages.

  • IRL's Deception:
  • IRL was seen as an alternative to Facebook for event organizing for the Gen Z demographic.
  • An internal investigation by IRL's board of directors revealed that 95% of the app's users were fake.

  • SoftBank's Complaint:
  • SoftBank was motivated to invest due to the app's reported high user numbers.
  • However, the user figures provided by IRL were found to be inaccurate.
  • SoftBank alleges that IRL's business was structured in such a way to conceal the fraud during due diligence.

  • Alleged Malpractices:
  • According to SoftBank, IRL spent large sums on proxy services to inflate user data with bots.
  • IRL is also accused of paying a secret firm, operated by its head of Growth, to hide this scheme.

  • Role of IRL Executives:
  • IRL's value for an outside investor like SoftBank was dependent on its active user metrics as a potential future income source.
  • SoftBank relied on the accuracy of the information provided by IRL's executives about the quality and quantity of its users.
  • IRL CEO Abraham Shafi and several of his family members, who are named defendants in the lawsuit, allegedly sold common stock to SoftBank as part of the fraudulent scheme.

  • Third-Party Report and SEC Investigation:
  • A third-party report showed discrepancies between IRL's claimed user numbers and actual downloads.
  • In addition to the lawsuit, the Securities and Exchange Commission (SEC) is investigating whether IRL violated security laws by misleading investors.
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