Startup investigations and settlements have moved to the center of federal and state enforcement work in the mid-2020s. The SEC, FTC, and DOJ have all pursued young, high-growth companies over misleading claims to investors and consumers, with state attorneys general opening parallel fronts on privacy and consumer protection. The results range from zero-dollar consent orders to a $4.5 billion crypto recovery, but the underlying pattern is consistent: regulators are focused on the gap between what a startup says its technology does and what it actually does.
What Regulators Are Targeting
Across agencies, the recurring theme is overstated capability. AI “washing” — marketing a product as AI-driven when the work is actually done by offshore contractors or third-party software — has driven several of the most prominent cases. Inflated revenue numbers shown to investors, unsupported product-performance claims, and deceptive marketing of “passive income” business opportunities round out the picture. Privacy failures, especially involving biometric data, health data, and genetic data, have generated the largest class action recoveries and the sharpest state-level responses.
The tools regulators use vary. The FTC has relied on Section 5 authority to stop deceptive practices, sometimes with monetary relief and sometimes with injunctive terms alone. The SEC has brought both fraud and negligence-based securities charges, occasionally imposing no penalty where a company cooperated and self-corrected. The DOJ has followed up on the most egregious SEC matters with criminal wire and securities fraud indictments. State AGs are increasingly using their own consumer-protection and privacy statutes, sometimes stepping in where they view a federal settlement as inadequate.
FTC Cases Against Startups
The Federal Trade Commission has been the most visible enforcer targeting startups making exaggerated technology claims. In September 2024 the agency launched “Operation AI Comply,” a coordinated sweep of actions against companies marketing deceptive AI-powered products and services.1Federal Trade Commission. FTC Announces Crackdown on Deceptive AI Claims and Schemes
DoNotPay
DoNotPay marketed itself as “the world’s first robot lawyer.” The FTC found the company had never tested its chatbot’s ability to produce competent legal work and had never retained attorneys to verify its output. The final order, issued January 16, 2025 on a unanimous 5-0 vote (Docket No. 232-3042), required DoNotPay to pay $193,000, notify all 2021-2023 subscribers, and stop claiming its service could substitute for a lawyer without sufficient evidence.2Federal Trade Commission. FTC Finalizes Order Against DoNotPay3Federal Trade Commission. DoNotPay Cases and Proceedings
AI-Powered E-Commerce Schemes
Several Operation AI Comply defendants allegedly promised that “AI-powered” storefronts would generate passive income. Ascend Ecom allegedly took at least $25 million from consumers; its operators agreed to a proposed ban on selling business opportunities and will surrender assets. Ecommerce Empire Builders and its owner agreed in May 2025 to a court order banning them from selling business opportunities. FBA Machine operator Bratislav Rozenfeld received a permanent ban in July 2025, with the FTC alleging his scheme cost consumers over $15 million.4Federal Trade Commission. Artificial Intelligence
Evolv Technologies
Evolv sold AI-powered weapon detection scanners to schools, stadiums, and transit systems. The FTC alleged the company falsely claimed its scanners could reliably detect weapons and outperform traditional metal detectors, and pointed to incidents where the system failed to detect weapons, including a 2022 school stabbing involving a seven-inch knife.5StateScoop. FTC AI Weapon Detection Company Evolv Deceptively Advertised to Schools The November 2024 resolution carried no financial penalty. Evolv was barred from making unsupported detection claims and required to offer certain K-12 customers who contracted between April 2022 and June 2023 a 60-day cancellation window, a group representing about 8% of its customers and roughly $3.9 million in annual recurring revenue.6Evolv Technology. Evolv Announces Resolution of FTC Inquiry
Rytr and Air AI
The FTC targeted Rytr, an AI writing tool that let users generate unlimited fake consumer reviews. An initial order was approved in December 2024, but the FTC reopened and set aside that order in December 2025. In March 2026 the agency settled with Air AI, banning the company and its owners from marketing business opportunities after alleging deceptive earnings claims.4Federal Trade Commission. Artificial Intelligence
Cerebral
Telehealth startup Cerebral shared sensitive health information from nearly 3.2 million consumers with third parties including LinkedIn, Snapchat, and TikTok through website tracking tools. Under a proposed order filed in the Southern District of Florida, Cerebral was required to pay roughly $5.1 million for consumer refunds related to deceptive cancellation practices and a $10 million civil penalty, suspended to $2 million because the company could not afford the full amount. The order permanently bans Cerebral from sharing health information with third parties for marketing purposes.7Federal Trade Commission. Proposed FTC Order Will Prohibit Telehealth Firm Cerebral From Using or Disclosing Sensitive Data
SEC Cases Against Startups
Terraform Labs
The single largest SEC recovery involving a startup came in June 2024, when Terraform Labs and founder Do Kwon agreed to pay $4.5 billion to resolve securities fraud charges arising from the collapse of the Terra/LUNA crypto ecosystem. Terraform owed roughly $3.59 billion in disgorgement, $467 million in prejudgment interest, and a $420 million civil penalty. Kwon personally owed $110 million in disgorgement and an $80 million penalty. The company filed for Chapter 11 in January 2024 and must wind down and distribute remaining assets through a court-approved liquidation.8U.S. Securities and Exchange Commission. SEC Announces Terraform Labs and Do Kwon Settlement
GrubMarket
In January 2025 the SEC settled with GrubMarket, a private e-commerce food distributor, for overstating historical revenues by approximately $550 million. The inflated figures were shown to investors during a Series D round that raised about $80 million. GrubMarket consented to findings of negligent securities fraud and paid an $8 million civil penalty.9Morrison Foerster. Top 5 SEC Enforcement Developments
Presto Automation
Also in January 2025 the SEC issued a cease-and-desist order against Presto Automation, a restaurant technology company that claimed its “Presto Voice” AI product could eliminate human order-taking. The SEC found that all deployed units during the relevant period actually relied on technology owned and operated by an unnamed third-party supplier, and that the vast majority of orders required human intervention by agents in the Philippines and India. Presto had cited “automated order completion” rates of 95% to 99%, but those figures measured only the absence of restaurant staff intervention.10U.S. Securities and Exchange Commission. In the Matter of Presto Automation Inc. The SEC imposed no civil penalty, crediting Presto’s voluntary cooperation and its November 2023 corrective disclosure acknowledging that over 70% of orders required human agent intervention.11U.S. Securities and Exchange Commission. In the Matter of Presto Automation Inc.
Nate Inc.
On April 9, 2025, the SEC and DOJ brought parallel actions against Albert Saniger, founder and former CEO of Nate Inc., a startup that marketed a shopping app supposedly powered by advanced AI, machine learning, and neural networks. In reality, purchases were processed manually by contract workers in the Philippines, and the actual automation rate was “effectively zero percent.” Saniger allegedly raised more than $42 million from venture capital investors on the strength of these claims and reportedly required engineers to process orders manually during investor demonstrations to create the illusion of automation.12U.S. Securities and Exchange Commission. SEC v. Saniger Complaint13U.S. Department of Justice. Tech CEO Charged in Artificial Intelligence Investment Fraud Scheme After a June 2022 news report challenged the AI claims, Nate failed to close a Series B round, ceased operations in January 2023, and dissolved. Saniger, who sold approximately $3 million of his own shares to a Series A investor, faces securities fraud and wire fraud charges carrying up to 20 years in prison each. He resides in Barcelona, Spain, and as of mid-2025 the SEC had been unable to serve him.14Holland & Knight. SEC and DOJ Warm Up to Enforcement Over AI Washing
DOJ Criminal Prosecutions and the Theranos Template
The Nate case shows how the DOJ is now pairing criminal charges with SEC civil actions in AI-fraud matters. The template for that approach remains Elizabeth Holmes, founder of blood-testing startup Theranos. Holmes was convicted of four counts of defrauding investors after her company raised more than $700 million and reached a $10 billion valuation on technology that did not work as claimed; roughly one in ten tests produced inaccurate results.15National Center for Biotechnology Information. Theranos and Elizabeth Holmes Case Study She was sentenced to 135 months in federal prison and surrendered to FPC Bryan in Texas on May 30, 2023.16NBC News. Elizabeth Holmes Prison Release Date A federal appeals court heard oral arguments in June 2024 and upheld her conviction. Her sentence has since been reduced to nine years for good behavior, with a projected release date of December 30, 2031. As of early 2026 Holmes had requested that President Donald Trump commute her sentence.17People. Elizabeth Holmes Today
Privacy and State Attorney General Actions
Clearview AI
On March 20, 2025, U.S. District Judge Sharon Johnson Coleman in the Northern District of Illinois granted final approval to a $51.75 million settlement in In Re: Clearview AI, Inc. Consumer Privacy Litigation, an MDL consolidating 11 lawsuits alleging violations of the Illinois Biometric Information Privacy Act and other state statutes.18Justia. In Re Clearview AI Inc Consumer Privacy Litigation19Regulatory Oversight. $51.75M Settlement in Clearview AI Biometric Privacy Litigation
The settlement was not universally accepted. Twenty-two state attorneys general and the District of Columbia formally objected under the Class Action Fairness Act, arguing the equity compensation was insufficient and the injunctive relief too narrow. Clearview also settled separately with the ACLU in Illinois state court, agreeing to a permanent nationwide injunction barring it from providing its app to anyone other than federal, state, or local law enforcement acting in an official capacity. On April 25, 2025, the Vermont Attorney General re-filed a lawsuit in state court seeking civil penalties and permanent injunctions.19Regulatory Oversight. $51.75M Settlement in Clearview AI Biometric Privacy Litigation
23andMe
California Attorney General Rob Bonta filed a lawsuit against 23andMe, now operating as Chrome Holding Co. following its March 2026 Chapter 11 bankruptcy filing, alleging the company failed to protect sensitive user data in a 2023 breach that affected nearly 7 million people in the United States.20Washington Post. 23andMe Lawsuit Data Breach Genetic Testing
Loop Industries
Plastics recycling startup Loop Industries settled a securities class action in the Southern District of New York for $3.1 million after investors alleged the company had misrepresented its proprietary PET plastic depolymerization technology, which a 2020 Hindenburg Research report called “a smoke and mirrors show.” Loop paid $2.52 million in cash, with the remainder covered by insurance, and admitted no fault. Judge Nelson Stephen Roman entered final judgment on January 5, 2023. The SEC opened its own investigation in October 2020 following the Hindenburg report.21Resource Recycling. Recycling Startups Report Resolution to Legal Issues22Stanford Securities Class Action Clearinghouse. Loop Industries Inc Securities Litigation
State AG Privacy Units
State AGs have built dedicated privacy enforcement teams. Texas AG Ken Paxton launched a team in June 2024; New Hampshire announced a Data Privacy Unit in August 2024 with authority to seek civil penalties of up to $10,000 per violation. California has conducted investigative sweeps of mobile apps and streaming services, and in 2024 the AG’s automatic 30-day cure period for privacy violations was replaced with discretionary authority.23Troutman Pepper. The Rise of State Attorney General Privacy Enforcement In February 2025 the Texas AG announced an investigation into DeepSeek, the Chinese AI company, for alleged violations of the state’s Data Privacy and Security Act.24Skadden. State Attorneys General May Fill Enforcement Gaps
SPAC-Related Settlements
The 2020-2021 wave of special-purpose acquisition company mergers produced a separate surge of litigation targeting startups that went public through SPACs. In 2021 alone, investors filed 32 federal securities fraud class actions and 14 derivative actions against SPAC-related entities.25Baker McKenzie. SPAC Litigation Cover Feature Among the largest settlements are Alta Mesa ($126.3 million) and Grab Holdings ($80 million).26Stanford Securities Class Action Clearinghouse. SPAC-Related Lawsuit Settlements In Delaware’s Court of Chancery, In re MultiPlan Corp. Stockholders Litigation, which applied a heightened “entire fairness” review to a de-SPAC transaction, settled for $33.75 million; other Delaware SPAC settlements include InterPrivate ($14 million) and Trident/Lottery.com ($2.6 million).27American Bar Association. SPAC Litigation Economic Damages Theory in Delaware Courts The SEC also charged Stable Road Acquisition Corp. and its target company Momentus in 2021 for misrepresenting the target’s operational success.
Antitrust Pressure and Alternative Exits
Enforcement is also reshaping how startups exit. Research by Brian Broughman, Matthew Wansley, and Samuel Weinstein, published in the NYU Law Review as “No Exit,” documents that regulators challenged just three startup acquisitions between 2012 and 2019 but 14 between 2020 and 2023.28ProMarket. Antitrust’s Hydraulic Effects on Startups
The researchers argue this has produced “hydraulic effects,” pushing dealmaking into less transparent channels. Large technology companies have turned to “reverse acquihires,” in which they hire a startup’s key personnel and pay a licensing fee to compensate investors without formally acquiring the company. Microsoft’s 2024 deal with Inflection AI is the clearest example: Microsoft hired the founders and most of the 70-person staff, then paid $650 million ($620 million for an AI model license and $30 million as a non-compete agreement) so Inflection could pay off its investors. Similar structures have been reported involving Amazon and Adept AI, and Google and Character AI. Because these transactions are framed as hiring rather than acquisitions, they may avoid Hart-Scott-Rodino filing requirements entirely.28ProMarket. Antitrust’s Hydraulic Effects on Startups29Vanderbilt Law School. The Impact of Antitrust Enforcement on Startup Exits
A related pattern involves what the authors call “centaurs,” private companies funded primarily by public company cash flows. Microsoft’s investment of billions in OpenAI and Amazon’s and Google’s combined investments in Anthropic allow these startups to remain private indefinitely, avoiding the disclosure requirements of public markets. Sales of startup shares in private secondary markets grew from $12 billion in 2010 to $60 billion in 2021.28ProMarket. Antitrust’s Hydraulic Effects on Startups
What This Means for Startups
The consistent message across these cases: statements to investors, customers, and the public need to match what the company actually does. Overstated automation rates, undisclosed reliance on offshore human labor, inflated revenue figures, and unsupported product-performance claims are where investigations start. Cooperating early and issuing corrective disclosures has produced meaningfully lighter outcomes in at least one case (Presto’s zero-penalty resolution). Refusing to acknowledge the gap has produced criminal charges (Nate, Theranos) and record settlements (Terraform). And even a settlement that satisfies one regulator, as Clearview learned, will not necessarily satisfy the 22 state AGs standing behind it.