It seemed like a win-win for fans of the online “brain training” memory game Lumosity – as fun as Candy Crush (almost) but actually good for you: a mind gym to sharpen mental performance and, for older consumers, ward off senility.

Forget that. The shine has come off Lumosity with an announcement by federal investigators that the makers must pay $2m to settle a charge that it made fraudulent claims and “preyed on consumers’ fears”.

The company has also been handed a $50m penalty for harming consumers – but the fine is suspended because the company cannot afford to pay it, according to the Federal Trade Commission (FTC).

The FTC also issued a more general warning on Wednesday that it is on the lookout for companies cashing in on the popularity of mobile phone applications by developing dietary or medical apps with dubious claims of health benefits.

“We are seeing a trend in health-related mobile apps, such as those targeting ageing consumers with dietary supplements, cognitive training or services claiming to diagnose illnesses,” Michelle Rusk, an attorney with the FTC’s bureau of consumer protection, said Wednesday.

“Some are more fraudulent than others but we are watching very carefully and making a bigger effort to crack down on those who make claims but do not have the science to back them up,” she added.

Lumosity is the biggest name so far in a series of federal actions in the past year against companies that make apps claiming to bring users significant health benefits.

On Tuesday, the FTC announced: “The creators and marketers of the Lumosity ‘brain training’ program have agreed to settle FTC charges alleging that they deceived consumers with unfounded claims that Lumosity games can help users perform better at work and in school and reduce or delay cognitive impairment associated with age.”

The San Francisco-based company behind the game, Lumos Labs, agreed to the settlement rather than fight its case in a civil fraud trial in federal court in California.

“Lumosity preyed on consumers’ fears about age-related cognitive decline, suggesting their games could stave off memory loss, dementia and even Alzheimer’s disease. But Lumosity simply did not have the science to back up its ads,” Jessica Rich, director of the FTC’s bureau of consumer protection, said in a statement on Tuesday.

In a statement, Lumos Labs said: “Neither the action nor the settlement pertains to the rigor of our research or the quality of the products – it is a reflection of marketing language that has been discontinued. Our focus as a company has not and will not change: We remain committed to moving the science of cognitive training forward and contributing meaningfully to the field’s community and body of research.”

Investigators pointed out that the company advertised extensively on television and radio while also marketing the brand via emails, blogposts, social media and their website.

The company also drove traffic to its website by buying rights to strategic keywords linking their material to Google searches that included words related to memory, cognition, dementia and Alzheimer’s, according to the commission.

Lumosity’s website boasts that its games have reached 70 million users worldwide, who can access the online games via computer or mobile phone application.

But the real number of users is believed to be closer to 1 million, with most of them in the US, the Guardian understands from its own inquiries.

Lumosity brags that it was listed as one of America’s “most promising” companies by Forbes and that one of its cofounders, Kunal Sarkar, was on Goldman Sachs’s 2014 list of “100 most intriguing entrepreneurs”.

“Enjoy brain training created by scientists and game designers ... enjoy daily work-outs that challenge five core cognitive abilities,” the website says of games with names such as Memory Matrix and Train of Thought.

But the government found that Lumos Labs could produce no evidence to suggest that Lumosity has any health powers or is anything other than an ordinary game.

Investigators found that the company claimed that “training” by playing Lumosity games could also reduce cognitive impairment associated with serious conditions including stroke, post-traumatic stress disorder, attention deficit hyperactivity disorder and even the side effects of chemotherapy.

As part of the court settlement, the company and individual defendants in the action, Lumos Labs co-founders Kunal Sarkar and Michael Scanlon, are ordered to have “competent and reliable scientific evidence” before making any future claims of Lumosity having any benefits for “real-world performance”.

The FTC has reported that Lumosity has ceased making its prior claims in advertising. Its website has also been amended. It now includes this sentence: “Lumosity is not intended to diagnose, treat, cure or prevent any disease.”

The $2m settlement agreed by Lumos Labs will be used to reimburse consumers, particularly those with paid subscriptions to Lumosity.

In 2015, the FTC took action to stop companies from marketing apps that wrongly claimed to offer health benefits including improving eyesight, improving cognitive abilities in children, diagnosing cancer, and aiding memory, mood, and other brain functions with a dietary supplement.