It is alleged he and Barbara Woortmann spent hundreds of thousands of dollars on personal expenses, including clothing, home improvements and travel.
Monique C. Winkler, Director of the SEC’s San Francisco Regional Office, said: “As we alleged, Shafi took advantage of investors’ appetite for investments in the pre-IPO technology space and fraudulently raised approximately $170m by lying about IRL’s business practices.
“Investors in this space should continue to be vigilant.”
The SEC says it believes Mr Shafi raised about $170m by portraying IRL as the new success story in the social media world.
It alleges he told investors that IRL had attracted the vast majority its supposed 12 million users through organic growth.
In reality, it argues, IRL was spending millions of dollars on advertisements which offered incentives to prospective users to download the IRL app.
That expenditure, it is alleged, was subsequently hidden in the company’s books.
Mr Shafi has not responded to the charge, but in a post on LinkedIn a year ago, amid widespread reports that as many as 95% of IRL’s customers were actually bots, he defended his role in the company, external.
The SEC’s complaint was filed in the US district court for the northern district of California.
Among other penalties, it seeks a ban against Mr Shafi from holding directorship of companies.
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