SEC v. Hex Founder
Staff Alleges Richard Heart Conducted $1 Billion Unregistered Securities Offering
This article is meant as a quick overview of the recent charges filed by the Securities and Exchange Commission (SEC) against Richard J. Schueler, also known as Richard Heart (Heart), founder of Hex, along with three unincorporated entities: PulseChain, PulseX, and Hex. I have not had the chance to dig deeply into the case, but wanted to put it out here as yet another data point as we all try and keep track of the SEC’s attempt to regulate web3 by way of a series of enforcement actions. Thanks to
for the initial research.On August 8, 2023, the SEC filed a complaint against Heart for allegedly conducting unregistered securities offerings of over $1 billion. He also faces charges for allegedly using $12 million in the offerings’ proceeds to buy luxury goods, including a 555-carat black diamond known as “The Enigma.”
The allegations are as follows:
A. Securities Registration Violation
Hex Offering (2019-2020): Heart has been marketing Hex as the first high-yield “blockchain certificate of deposit” since 2018, and promising lucrative returns. The SEC alleges that Hex tokens are securities, and the offering of over $678 million should have been registered under Sections 5(a) and 5(c) of the Securities Act.
PulseChain Offering (2021): Similarly, PulseChain's over $354 million offering involving PLS tokens was allegedly unregistered.
PulseX Offering (2021-2022): The SEC alleges that PulseX's over $676 million offering, involving PLSX tokens, also should have been registered.
B. Anti-Fraud Violation
The SEC claims Heart and Pulse Chain defrauded investors by misappropriating at least $12.1 million of investor funds for luxury purchases, in violation of Section 10(b) of the Exchange Act and Sections 17(a)(1) and (3) of the Securities Act.
C. The Howey Test and Cryptocurrency
Central to this case is the application of the Howey test, used to determine when an investment contract, and in turn a security, exists. Broader questions about the classification of cryptocurrencies and other digital assets and the regulatory and legal framework surrounding them continue to swirl, and I anticipate returning to this case as soon as there is a free moment to dig into how this differs from the SEC’s other recent Howey arguments, and will follow up with an update once I do.
D. Other Highlights
Several aspects of Heart’s conduct, such as the use of a crypto mixer to conceal his misuse of PulseChain funds and the crash in the value of his tokens since launch, are highlighted.
Conclusion
The SEC’s actions signify a continued effort to regulate crypto-related activities by pursuing rapid fire enforcement actions, even as the legal boundaries remain blurred and Congress is in the process of providing regulatory clairty.
After chasing after Torres and Rakoff, I will closely watch this litigation, to see which side manages to score another point.
What kind of lawyer would I be without a disclaimer?
Everything I post here constitutes my own thoughts, should only be used for informational purposes, and does not constitute legal advice or establish a client-attorney relationship (though I am happy to discuss if there is something I can help you with). I can be reached via email at dlopezkurtz@crokefairchild.com or david@bsl.group on telegram @davidlopezkurtz on twitter @lopezkurtz and on LinkedIn here.