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On October 31, 2024, a New York courtroom became the latest arena in the battle between the Securities and Exchange Commission (SEC) and Richard Heart known as the founder of HEX, PulseChain, and PulseX. Heart faces serious charges from the SEC, alleging unregistered securities sales and fraud. Heart’s legal team has filed a motion to dismiss the case, arguing that the SEC has overstepped its regulatory boundaries, misapplied securities laws, and improperly asserted jurisdiction over Heart’s actions.
The October Motion to Dismiss hearing, presided over by Judge Carol Amon, focused on complex legal questions surrounding securities laws, jurisdiction, the structure and promotion of Heart’s offerings, and whether these digital assets should be regulated under traditional frameworks. Judge Amon posed critical questions about blockchain’s nature and scope, the flow of investor funds, and the degree to which Heart’s projects fall under U.S. regulatory purview. In this article, we explore key arguments and discussions from the hearing, including insights into Judge Amon’s inquiries, discrepancies in the timeline, promotion of offerings to U.S. investors, and implications for the SEC’s regulatory stance.
Heart’s Motion to Dismiss: The Key Legal Arguments
Heart’s defense is built on several fundamental legal arguments, each aimed at challenging the SEC’s application of securities laws to his projects. The defense contends that the SEC lacks proper jurisdiction, that HEX, PulseChain, and PulseX are not securities under U.S. law, and that the SEC’s assertions of investor harm are overblown. At the heart of these arguments is the claim that Heart’s ventures should be treated as decentralized blockchain projects rather than regulated securities offerings. Heart’s legal team argued that the offerings were community-driven and not controlled solely by Heart or any central authority, which they believe places them outside the scope of securities regulation.
The Howey Test and Definition of Securities
The SEC has grounded its case in the Howey Test, a four-pronged standard used to determine whether an offering constitutes an “investment contract,” thus falling under the securities laws. The Howey Test, established by the U.S. Supreme Court in 1946, examines if there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others.
Heart’s team argued that his offerings did not meet these criteria, claiming that HEX, PulseChain, and PulseX investors were not relying on Heart’s efforts to generate profits. According to the defense, the projects are decentralized, meaning that Heart himself plays only a limited role, and thus, the expectations of profits are not tied to his actions. In response, the SEC countered that Heart’s extensive public statements, social media promotions, and development of HEX and Pulse projects created a “common enterprise” where profits were clearly anticipated due to Heart’s involvement.
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Jurisdictional Questions and SEC Overreach
One of Heart’s strongest points in his motion to dismiss centered around jurisdiction. His legal team argued that, as a decentralized project, HEX operates independently of any single national jurisdiction, making it challenging to define it as a U.S.-based security subject to the SEC’s authority. They further asserted that HEX and other tokens were intended for international audiences, with no special focus on the U.S. market.
In response, Judge Amon probed whether the SEC could assert jurisdiction given the global nature of blockchain and cryptocurrency. One of her pointed questions was, “Where does the blockchain live?” This question underlined the difficulty of defining where decentralized transactions occur geographically, as transactions on the blockchain are not tied to any physical jurisdiction. Heart’s team suggested that this ambiguity challenges the SEC’s assumption of jurisdiction.
Judge Amon’s Questions: Tracing the Flow of Money and Control
Judge Amon also pressed Heart’s defense on the financial structure and distribution of funds raised by HEX, PulseChain, and PulseX. Specifically, she asked, “Where did the money go, and why does it matter?” This question speaks to one of the SEC’s main accusations: that Heart used investor funds to enrich himself, rather than to fund the growth of his blockchain projects. The SEC alleges that Heart diverted investor funds for personal expenses and failed to provide adequate disclosure about the use of these funds.
Heart’s defense countered that all funds raised through HEX and other tokens were either reinvested into the projects or appropriately allocated. Judge Amon was informed that Heart donated $27 millions of the raised funds to charity.
Timeline Discrepancies and Promotion to U.S. Investors
One of the focal points during the hearing was the alleged discrepancies in Heart’s timeline of promotional efforts and the actual deployment of funds. The SEC presented evidence suggesting that Heart promoted HEX and other projects to U.S. investors before fully developing the technology behind them, which could indicate that he marketed these assets as investment opportunities even though they were not yet viable.
The defense rebutted this claim by arguing that blockchain projects often operate under iterative development, with features rolled out progressively, which is typical in the technology sector. Nonetheless, Judge Amon asked Heart’s team to clarify their communication with investors about the project’s timeline, implying that these statements could influence whether investors viewed the projects as speculative investments reliant on Heart’s efforts for success.
Richard Heart’s legal team challenged the SEC’s timeline asserting that the SEC wrongly suggested that Heart’s later statements influenced investor decisions made long before regarding the Hex, PulseChain, and PulseX tokens. They highlighted that the Hex Adoption Amplifier ended in 2020, yet the SEC claimed statements made by Heart in 2022 affected earlier investors. After addressing the timeline for Hex, the Judge examined the timelines for PulseChain and PulseX, which were airdropped to those who had “sacrificed” funds in 2021 and 2022. The SEC argued that statements made by Heart during a March 2022 conference fell within the “offering period” for these tokens, relying solely on a developer’s declaration that suggested Heart may have unofficially extended this period.
Alter Egos and Centralization Concerns
Another significant point of debate during the hearing was the SEC’s claim that Heart’s various entities and projects acted as alter egos, operating under Heart’s control. The SEC argued that HEX, PulseChain, and PulseX, while marketed as decentralized, were, in effect, controlled by Heart, making him the primary driver of any profits derived from these projects. They pointed to Heart’s dominance over marketing, decision-making, and project developments as evidence of centralization that contradicts the decentralized nature of blockchain.
Judge Amon seemed particularly interested in this aspect, questioning whether the supposed decentralized nature of the projects could be undermined by Heart’s visible and extensive involvement. If HEX, PulseChain, and PulseX were proven to be controlled by Heart, it could satisfy the “efforts of others” prong of the Howey Test, bolstering the SEC’s case. The defense argued that Heart’s role was not as extensive as the SEC portrayed, asserting that the projects had a degree of autonomy and community involvement typical of blockchain initiatives.
Heart’s Promotion and U.S. Investors
The question of whether Richard Heart directly targeted U.S. investors is central to the SEC’s argument in their lawsuit against him. During the October 31 hearing, Heart’s legal team argued that the SEC failed to establish that Heart deliberately directed his crypto products—Hex, PulseChain, and PulseX—at U.S. investors, which is essential to justify U.S. jurisdiction over him. Heart’s team pointed out that Heart has resided outside of the U.S. for over two decades and launched these crypto assets from abroad, specifically in Finland. They argued that simply having a global online presence does not equate to targeting U.S. investors, which was supported by established Second Circuit case law stating that a website’s global reach alone doesn’t imply specific intent to target the U.S. market.
The SEC countered by citing Heart’s appearances at U.S.-based conferences and online platforms as evidence of intent to reach U.S. investors. They argued that Heart’s references to U.S. securities laws, like the Howey Test, showed an understanding of the U.S. regulatory environment, implying he intended to attract U.S. users. However, Heart’s attorneys argued that the legal requirement isn’t just awareness of the U.S. market; it must be shown that Heart actively directed his actions towards it. The SEC pointed to the case of SEC v. Plexcorps, in which U.S. jurisdiction was established based on more direct targeting actions, such as U.S.-specific advertisements, payment methods, and in-country business trips. However, Judge Amon noted significant differences, emphasizing that the SEC needs stronger evidence than Heart’s mere awareness of the U.S. market.
Ultimately, the court questioned whether Heart’s U.S. video appearances alone could establish a specific intent to reach U.S. investors. Judge Amon reminded the SEC that U.S. law doesn’t require Heart to restrict access to his products from U.S. users if he wasn’t specifically targeting them. For now, the issue of jurisdiction remains a critical barrier for the SEC, with the judge requiring more than global online activities and conference appearances to confirm that Heart actively directed his offerings at the U.S.
The SEC’s Focus on Investor Harm and Protections
Throughout the hearing, the SEC underscored its mission to protect investors, focusing on the alleged harm suffered by retail investors who bought into HEX, PulseChain, and PulseX. The SEC highlighted complaints from individuals who claimed they were misled by Heart’s promises of returns, many of whom were inexperienced in crypto investment.
Judge Amon’s questions in this regard probed whether Heart’s projects were marketed with sufficient transparency about risks and project viability. The SEC argued that without proper disclosures, investors were unable to make informed decisions, thus amplifying the need for regulatory intervention. Heart’s defense countered that participants in decentralized projects assume inherent risks and that cryptocurrency investments are typically understood as high-risk ventures by the investing public.
The Broader Implications of the Case for Cryptocurrency Regulation
The outcome of this case could have lasting implications for the SEC’s regulatory approach toward cryptocurrencies. If Judge Amon dismisses the case, it would signal to the crypto community that the courts are unwilling to extend the SEC’s jurisdiction over decentralized projects without clear legislative mandates. However, if the court allows the SEC to proceed, it could reinforce the commission’s authority to regulate crypto offerings under the existing securities framework, particularly in cases where individuals maintain significant control over ostensibly decentralized projects.
Awaiting the Decision: A 90-Day Countdown
Following the October 31 hearing, a written decision is expected within the next 90 days. Judge Amon’s final ruling on the motion to dismiss will play a pivotal role in shaping future regulatory actions and investor expectations in the cryptocurrency sector. This countdown period holds substantial significance for stakeholders across the crypto industry, who are awaiting clarity on the legal boundaries of decentralization, investor protections, and the extent to which traditional securities laws apply to blockchain-based assets.
A Landmark Case in the Making
The SEC v. Richard Heart case is the result of the regulatory friction between the decentralized aspirations of blockchain projects and the investor protections mandated by securities laws. Judge Amon’s pointed inquiries during the October 31 hearing revealed the complex questions at the heart of this legal battle—questions about the nature of decentralization, the SEC’s jurisdiction, and the adequacy of investor protections.
For Heart, the outcome could determine not only his personal legal fate but also the future of HEX, PulseChain, and PulseX. For crypto, this case may set a new precedent in how courts interpret the intersection of blockchain projects and securities laws. As the countdown begins to Judge Amon’s decision, the crypto community watches closely, recognizing that the implications extend far beyond this one courtroom.
