SEC Subpoenas Hint at Investigation Into HEX, PulseChain, and PulseX
The SEC has issued subpoenas to influencers who may have promoted HEX, PulseChain, and/or PulseX. The subpoenas demand that the influencers demanding documents and data related to these digital assets. The SEC set a November 15 deadline for sending them in.
HEX community members called it “fake news.” However, communication channels on Telegram and Discord quickly offered advice on how to anonymize or shred digital evidence.
HEX creator Richard Heart seemed aware of the situation, going by some of his tweets over the past few days:
In another tweet, he tried to make it look like things were progressing like normal for PulseChain and PulseX:
However, dealing with the SEC once it has you on its radar is no joking matter. Earlier this year, BlockFi agreed to pay $100 million in fines to settle an allegation that it conducted an unregistered securities sale. Ripple’s battle with the SEC over similar allegations has been going on for nearly two years now, with neither side showing signs of backing down.
HEX’s similarity to a security is probably the issue.
How do you define a security, anyway? The SEC uses the Howey Test, which is a reference to a case called SEC v. W.J. Howey Co., which reached the U.S. Supreme Court in 1946. W.J. Howey offered to sell orange groves to investors and then manage the orange groves for them, with the investors getting a share of the profits. The Supreme Court accepted the SEC’s argument that the sale of the orange groves amounted to an unregistered sale of securities.
One important outcome of that case was that an asset could count as a security if an investment contract exists. To count as an investment contract, it has to involve:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To be derived from the efforts of others
W.J. Howey’s sale and leasing back of orange groves counted as a security because the investors didn’t have to know a thing about agriculture. They could let other people do the work for them and reap a share of the profits.
HEX has a staking program that claims to offer an average interest rate of 38%. If that sounds awfully high, you’re probably right. A lot of investment options that offer high returns like this are incredibly risky at best. At worst, the backers could disappear with your money.
Richard Heart claims that it’s not a security because “the efforts of others” aren’t involved. There are probably developers if he’s being honest about HEX continuing to be relevant in an ever-shifting crypto industry. However, it’s not like there are HEX bankers in a back office deciding who to make loans to with staked HEX tokens. (Which kinda makes you wonder where that 38% interest rate comes from, doesn’t it?)
Instead, Heart says, stakers can earn that interest rate by interacting with HEX’s smart contract.
What does the SEC think about this? Well, it’s been pretty silent about it, but the fact that it’s started to send subpoenas may indicate that something’s up. It would be a good idea to stay tuned if you have some HEX staked or like watching a train wreck.
Who Is Richard Heart, Anyway?
Besides HEX, PulseChain, and PulseX, Richard Heart is best known for bragging that he owns the world’s largest diamond and expensive Rolex watches. He also claims to have donated millions of dollars to charity.
He had a website detailing his (claimed) activities at richardheart.com. However, the site couldn’t be reached at the time of this writing. This could easily lead to questions about whether he forgot to renew it or just got distracted by possibly shady background activities catching up with him.
The number one thing to remember is that Richard Heart is either a pseudonym or something that he changed his legal name to at some point – possibly to obscure his past. His birth name is Richard James Schueler. He doesn’t answer questions about where he lives, his net worth, or even if he controls critical HEX addresses like the “Flush” and “Origin” addresses.
The Origin address receives half of the penalties for early withdrawal of staked HEX tokens. It currently contains more than 444 million HEX tokens.
The Flush address receives “late fees” from HEX holders who staked their tokens and then delayed withdrawing their tokens past the end of the period that they agreed to lock up their tokens. If they delay too long, they could log in and find that even the initial balanced that they staked is gone. Transaction data indicates that a lot of ether was transferred out of this address in November 2020.
Richard Heart may ultimately be the one in charge of the Origin and Flush addresses. As importantly, he seemed dismissive of legitimate questions about HEX. His explanations of what’s happening with it can be overly complicated as if he’s trying to muddle it when a simple explanation would do. He implied that he could have “gangsters” target a blogger named Jonathan Sterling, who was trying to investigate rumors about HEX and asked Richard Heart some direct questions.
One big telling point was that Heart was part of a major, illegal spam ring while still going by the name of Richard James Schueler. As Schueler, he earned the moniker of “Spam King” for his part in sending out massive amounts of unlawful spam starting in 2000. He ended up getting sued by Peacefire.org, a free speech organization that alleged that Schueler and his collaborators violated Washington State’s anti-spam law.
Peacefire.org’s reward for winning was small, just $1,000 for each of its three complaints involving deceptive email practices. However, the important thing is that it won the case.
Someone who can so blatantly ignore state-level anti-spam laws might also ignore the SEC in the assumption that he can just skate around the Howey Test. Jonathan Heart thinks he can dodge it in the belief that he left out the “To be derived from the efforts of others” part.
But did he really? The SEC may think otherwise. The subpoenas it sent to influencers may indicated that HEX, PulseChain, and PulseX is now on its radar – which is rarely a positive thing for entities that might have violated its regulations.
