SEC Accuses Hex Founder Richard Heart of Misusing Investor Funds Worth Millions from Unregistered Crypto Asset Securities Offerings that Garnered Over $1 Billion
The Securities and Exchange Commission (SEC) has recently brought charges against Richard Heart (aka Richard Schueler) and three unregistered entities under his control, namely Hex, PulseChain, and PulseX, for their involvement in unregistered crypto asset securities offerings. According to the SEC, these offerings have amassed over $1 billion in crypto assets from investors. Heart and PulseChain were additionally charged with fraud, having allegedly misappropriated at least $12 million from offering proceeds to purchase extravagant luxury items, including a 555-carat black diamond called 'The Enigma', reputed to be the largest black diamond in the world, sports cars, and watches.
The SEC's complaint accuses Heart of promoting Hex since 2018 as the first high-yield "blockchain certificate of deposit", offering and selling Hex tokens in an unregistered offering from December 2019 through November 2020. According to the SEC, this operation resulted in the collection of over 2.3 million Ethereum (ETH) and involved so-called "recycling" transactions that allegedly allowed Heart to secretly gain control of more Hex tokens. SEC claims that Hex is an unincorporated entity created by Heart and serves as his alter-ego. SEC alleges this entity is responsible for the ERC-201 token Hex, a type of fungible token that operates on the Ethereum blockchains.
The complaint continues to state that Heart conducted two additional unregistered crypto asset security offerings between July 2021 and March 2022, each raising hundreds of millions more in crypto assets. These funds were supposedly to be used to develop PulseChain, a crypto asset network, and PulseX, a crypto asset trading platform.
The SEC charges that PulseChain is another entity established by Heart, which he presented as an Ethereum fork and a layer-1 blockchain. Heart released PulseChain on May 12, 2023. Similar to Hex, the SEC alleges that PulseChain serves as an alter-ego entity for Heart. The native token for PulseChain is the Pulse (PLS) token. Heart also manages the PulseChain’s website at pulsechain.com. The SEC maintains that like Hex, offerings and sales of PulseChain and PLS tokens have not been registered with the SEC.
The SEC charges that PulseX, like the other entities, is an unincorporated entity established by Heart and is described as a decentralized protocol on the Ethereum blockchain. The SEC claims that Heart developed PulseX to serve as PulseChain’s decentralized crypto asset trading platform, forking it from the Uniswap platform. SEC maintains that PulseX differs from traditional platforms by using an automated market maker, a smart contract on the Ethereum blockchain, instead of a traditional order book and matching engine. PulseX, released on May 12, 2023, has a native token, PulseX (PLSX). According to the SEC, neither PulseX nor PLSX tokens' offerings and sales have been registered with the SEC.
The complaint further alleges Heart developed a "staking" feature for Hex tokens promising returns as high as 38 percent and attempted to dodge securities laws by inviting investors to "sacrifice" their crypto assets for PLS and PLSX tokens, instead of making an "investment". The complaint, filed in the U.S. District Court for the Eastern District of New York, is seeking injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, penalties, and other equitable relief.
The SEC complaint details Heart's development and promotion of Hex. SEC claims that Heart, the founder and creator of Hex, marketed it as the first high-yield "Blockchain Certificate of Deposit." The promotion commenced in November 2018, over a year before Hex tokens were sold. The unique selling point for Hex tokens was an additional "staking" feature which enabled investors to lock up their tokens for a specified duration to receive additional tokens in the future.
The SEC chargers that Heart promised investors that the Hex smart contract would yield investment returns in the form of additional Hex tokens. The SEC further claims that the purpose of this "staking" was to reduce the number of Hex tokens in circulation, thereby increasing their price. The SEC cites that Heart frequently stated that investors would receive an average investment return of 38% for staking their Hex tokens. The SEC charges Heart heavily promoted the staking feature of Hex to potential investors, claiming that it provided a unique opportunity to earn additional Hex tokens. The SEC alleges Heart stated that the longer and larger the stake, the higher the potential returns, a strategy designed to incentivize long-term holding of Hex tokens.
PulseChain: Development and Offering of PulseChain
According to the SEC, after the Hex Offering in November 2020, Heart began the development of PulseChain, a fork of the Ethereum network claimed to have lower gas fees and four times the speed of Ethereum. Between July 15, 2021, and August 3, 2021, Heart initiated an offering to raise funds for PulseChain's development, where investors were instructed to "sacrifice" various crypto assets to purchase PulseChain's native token, PLS. According to the SEC, Investors who deposited crypto assets were promised future PLS tokens corresponding to their investment amount. The calculation of PLS tokens was based on the amount of investment and the timing of the investment within the offering period. SEC charges Heart claimed various benefits of PulseChain, including faster transaction times and lower gas fees than Ethereum, and suggested that PLS investors would profit from transaction fees on PulseChain.
The SEC seeks a judgment that permanently enjoins Heart and PulseChain from violating Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, as well as Rule 10b-5 thereunder. The SEC also asks the court to permanently enjoin all defendants from violating Sections 5(a) and 5(c) of the Securities Act. Furthermore, the SEC seeks to permanently bar the defendants from participating in the purchase, offer, or sale of any crypto asset security or engaging in activities to induce such activities. The SEC requests that Heart, along with Hex, PulseChain, and PulseX, disgorge all ill-gotten gains plus prejudgment interest and pay civil penalties.