The Securities and Exchange Commission has charged Mountain View, California-based YouPlus and its CEO/founder with defrauding investors by making false and misleading statements about the company’s financial projections while also creating a distorted list of customers.
Shaukat Shamim, who founded YouPlus in 2013, is alleged to have drummed up interest in the company by lying about its financial condition and customer base. The SEC claims he sent different and false revenue projections to investors, which reportedly put millions of dollars into the company.
The complaint filed on July 20 alleges that in June 2018, Shamim told certain investors that YouPlus was expected to make $8 million in revenue in 2018 and more than $40 million the following year. In September 2018, he sent those same investors a spreadsheet that purported to show actual revenue during the first half of 2018 of more than $1.5 million.
However, in September 2018, Shamim also sent an email to certain investors, including one of the backers to whom he had sent the previous spreadsheet. This time he stated that YouPlus earned revenues of more $1.1 million from January through June of 2018 and projected revenues of $7.8 million for the entire year.
The SEC complaint alleges Shamim made additional inconsistent projections and revenue reports in 2018 and 2019. It also states that venture funds made their investment decisions based on the incorrect revenue reports, including one investor who put $2 million into the company during those two years.
The complaint states that by the end of October 2019, Shamim had acknowledged to an unidentified venture investor that “YouPlus had not even earned $500,000 in total revenue since the company was founded in 2013.”
Shamim could not be reached for comment.
Detailed funding information about YouPlus was not available via Crunchbase, although the online database listed the company’s seed backers as 500 Startups, DN Capital and The Smart Start Fund of India.
A PitchBook profile of YouPlus says investors also included Nimble Ventures, The CXO Fund, Elevate Innovation Partners and Freestyle Capital.
The complaint did not identify investors, other than to say they were a mix of individuals and small funds.
Venture Capital Journal attempted to reach some of the investors. 500 Startups acknowledged it had invested in the company in 2016, but declined further comment.
YouPlus was engaged in developing a machine-learning tool to interpret and deliver customer insights from online videos. The SEC complaint states that the company had raised a total of $17.5 million in several rounds of “seed funding from approximately 50 investors.”
It also claims that YouPlus raised about $11 million from investors during 2018 and 2019, when Shamin was allegedly making false claims about the company’s sales and projections.
‘False list of customers’
In addition to allegedly falsifying revenue projections while attempting to raise money in 2018 and 2019, the SEC claims that Shamim created a false list of customers.
The complaint states that he shared a spreadsheet with at least two investors that claimed the company had a “customer pipeline” with nearly $1 million in “monthly realized revenue.” The SEC alleges that the spreadsheet falsely identified more than 150 companies as YouPlus customers, including a number of well-known Fortune 500 companies.
According to the complaint, “all or nearly all of the customers identified on the spreadsheet were not paying customers of YouPlus.”
The SEC said YouPlus had only managed to obtain approximately four paying customers during the life of the company.
It is not uncommon for investors to meet with entrepreneurs who exhibit hubris and talk about the vision of their start-ups. However, Shamim reportedly told investors that the company’s Series A fundraising was going so well that he did not need to raise as
much money as he originally thought and that he could “pick the investors” he wanted.
In its complaint, the SEC claims that Shamim told one investor that YouPlus had secured a commitment from a prominent Silicon Valley firm to invest $3 million to $4 million in the Series A funding round, although no such investment would ever take place. The SEC says that after Shamim had made this claim, one investor put about $550,000 into YouPlus in around May 2019.
It is unclear where the money Shamim raised for the company was spent. The SEC complaint against YouPlus and Shamim does not specify where the money was invested.
The fraud case comes less than a month after federal prosecutors in San Francisco unsealed an indictment charging venture capitalist Michael Rothenberg with one count of wire fraud. That case has captured the attention of the investment world as Rothenberg allegedly bilked investors who thought they were backing his firm’s start-ups when in fact they were subsidizing his luxurious lifestyle of racing cars and a suite at the Golden State Warriors basketball team’s games.
The SEC claims that the alleged fraud scheme involving YouPlus began to unravel in September 2019 when Shamim approached at least one backer with a request for what he characterized as emergency funding to meet payroll expenses. The unidentified venture fund agreed to invest an additional $250,000, but it became concerned given what it was told about revenue and customer traction. Several representatives of the venture fund met with Shamim on October 18, 2019, at which time he agreed that revenue and customer numbers were exaggerated and conceded that he “got ahead of [himself].”
The SEC said it was continuing its investigation. The complaint states it is seeking disgorgement, or repayment, plus prejudgment interest in addition to Shamim and YouPlus paying civil monetary penalties.