SoftBank seeks to sue a social app it had once invested in, IRL at a $1.1 billion valuation.
It is suing the now-defunct company for fraud, alleging $150 million in damages.
Background
IRL had the potential to become an event organizing alternative for Gen Z, who are using Facebook less and less.
It sought to materialize on this and its self-reported numbers were impressive enough to earn a $170 million Series C funding led by SoftBank in 2021.
However, earlier this summer, an internal investigation by its own board of directors found that 95% of the app’s users were fake.
False user download claims
SoftBank explains that it was encouraged to invest due to its impressive user numbers.
The app claimed it had been downloaded by 25% of U.S. teens under 28 years old and was growing at a 400% year-over-year rate.
However, the internal probe found that none of these figures were accurate.
Fraudulent activities
SoftBank claims it wouldn’t have been possible to verify IRL’s fake user numbers, since it had “prepared for SoftBank’s due diligence and structured IRL’s business so that SoftBank could not discover evidence of their fraud.”
The Japanese investment firm claims that IRL was spending tens of thousands of dollars on proxy services to deceptively inflate IRL’s user data with bots.
It also accused IRL of paying hundreds of thousands of dollars per month to a secret firm operated by its head of Growth to cover up such activities.
Accused is the sole provider of data
“Because IRL did not have any profitable revenue stream, its value to an outside investor like SoftBank depended on its active user metrics as a source of potential future income
Thus, SoftBank relied on the accuracy of representations from IRL’s executives concerning both the quantity and quality of IRL’s users”, its complaint stated.
Exaggerated numbers
Data said that by spring 2021, IRL had only been downloaded 9 million times.
IRL CEO Abraham Shafi was claiming that the app had 12 million monthly active users, and that 2 million events got planned each day on the platform.
He deflected questions over this discrepancy by saying that the number accounted neither for web sessions, nor underage users, whose data could not be shared.
More bots than humans
“In reality, the platform was a virtual ghost town, filled with bots deceptively mimicking active human users,” SoftBank wrote.
Shafi along with five of his siblings and cousins, who SoftBank alleges were part of this cover-up are the defendants in this case.
Each of these individuals sold IRL common stock to SoftBank in connection with these investments.
IRL is also facing scrutiny by the SEC to determine whether the app violated security laws by misleading investors.
