Oct. 28, 2023
To Whom It May Concern, I hope this message finds you well. I am writing to request urgent clarification regarding the regulatory status of HEX, Pulsechain, and PulseX cryptocurrencies, particularly in the context of recent charges and allegations against Richard Heart and associated entities. My belief, based on publicly available information, is that these digital assets and projects should not be classified as securities under U.S. securities laws, and I would like to present a detailed argument for your consideration. The Case in Brief: Securities and Exchange Commission v. Richard J. Schueler a/k/a Richard Heart, Hex, PulseChain, and PulseX, No. 23-cv-05794 The recent complaint filed by the SEC alleges unregistered offerings of crypto asset securities by Richard Heart and his associated entities, which raised substantial funds from investors. The core issue in question revolves around whether HEX, Pulsechain, and PulseX should be categorized as securities according to existing U.S. securities laws. [HEX, Pulsechain, and PulseX as Non-Securities] Supporters of HEX, Pulsechain, and PulseX assert that these digital assets should not be considered securities for the following reasons: Decentralization: These assets operate on decentralized blockchain networks, devoid of any implication of ownership or control over traditional entities. Their operation is governed by smart contracts, ensuring transparency and decentralization. No Profit-Sharing or Dividends: In contrast to traditional securities, these assets do not offer profit-sharing or dividends. Potential gains are directly tied to user actions and the success of the underlying network, rather than deriving passive income from the efforts of others. Transparency and Open Source: HEX, Pulsechain, and PulseX are constructed on open-source code, and their operation is transparent and publicly auditable. Participants make voluntary contributions to support the development of these projects. [Blockchain as a Medium of Freedom of Speech] Blockchain technology fundamentally embodies the principles of freedom of speech by offering a decentralized, censorship-resistant platform for information exchange, analogous to the freedom of speech that allows individuals to express their thoughts and opinions without government censorship. The transparency and immutability of blockchain ensure secure and tamper-proof data, thus reflecting the principles of free speech. The government's inability to interfere with free speech extends to the protection of information contained within blockchain networks. [Private Keys as Information] Private keys, serving as cryptographic tools to access and control blockchain assets, are equivalent to safeguarding information. The secure management of private keys is pivotal for the security and integrity of digital assets on the blockchain, mirroring the importance of safeguarding information in the context of free speech. Private keys do not denote ownership but instead represent the necessary information required to unlock access to assets tied to a private key. For instance, if the possession of a private key is lost, the question arises: who truly has ownership over the private key? Consequently, blockchains and the public and private keys contained within can be characterized as information, which is safeguarded by freedom of speech principles and shielded from government interference. [Sacrifice vs. ICO] The utilization of the term "sacrifice" instead of "investment" in the acquisition of PLS and PLSX tokens highlights the voluntary nature of contributions. Diverging from initial coin offerings (ICOs), which typically imply a contractual expectation of profit, a "sacrifice" signifies an act of support rather than an investment contract. Participants in the Pulsechain Sacrifice made donations without the promise of financial gain, underscoring the crucial distinction between these mechanisms. This differentiation presents concerns of setting a potentially precarious precedent, as it permits the SEC to potentially encroach on entities that facilitate cryptocurrency donations, such as presidential candidates. [Pulsechain Network Sufficiently Decentralized] Pulsechain has been operational since May and currently boasts over 40 thousand validators and nodes worldwide, all voluntarily run by individuals and participants aiming to support the network. Their contributions are voluntary, and they do not anticipate profits, either in the form of currency or via the efforts of others. Additionally, HEX, Pulsechain, and PulseX collectively possess hundreds of thousands of holders and participants, all of whom have the autonomy to mint rewards if they choose to interact with the HEX contract or support the network on their own via validation. [HEX Launch Phase] The launch of HEX cryptocurrency featured an unconventional distribution model that deviated from a traditional securities offering. The sale and distribution of HEX were structured into three primary phases: the FreeClaim phase, the Adoption Amplifier/Lobby phase, and the Stake phase. The FreeClaim Phase allowed Bitcoin users to sign a transaction in order to get a portion of HEX based on a ratio that was set within the contract during the FreeClaim Phase that lasted a year. The Adoption Amplifier phase allowed users to exchange Ethereum (ETH) for HEX tokens based on a formula that considered their contribution relative to the total ETH sent on that day, resembling an exchange mechanism more than a conventional investment offering. Furthermore, HEX token holders did not acquire ownership or equity rights in any entity. Possession of HEX did not grant control over a central entity, with the token primarily representing an interest in the HEX network and ecosystem, as opposed to ownership or equity in a traditional enterprise. Additionally, HEX tokens did not promise profit-sharing, dividends, or revenue distributions to holders. Prospective gains were tied to user actions and the performance of the underlying network (Ethereum), rather than passive income derived from external efforts. HEX operated on the Ethereum blockchain as a decentralized smart contract, with transparent and open-source rules governing its operation. Participation in HEX was voluntary, and the network's design focused on functioning without centralized oversight or management. [The Howey Test] Under the Howey Test, three criteria must be met to classify an asset as a security: Investment of Money: The initial distribution of HEX tokens featured different phases, including the FreeClaim phase and the Adoption Amplifier phase, where users exchanged Ethereum (ETH) for HEX tokens. While ETH was involved, it did not constitute a traditional investment of money, as participants received HEX tokens in exchange for their contributions to the smart contract. This decentralized approach to acquisition raises questions about how the "investment of money" criterion applies, as participants actively and voluntarily contributed. Common Enterprise: These projects predominantly operate on decentralized, autonomous smart contracts and blockchain networks, designed to function without a central entity overseeing operations or profits. While participants engage with a shared ecosystem, the absence of a traditional centralized enterprise poses questions regarding the applicability of the "common enterprise" criterion. Expectation of Profits Primarily from the Efforts of Others: Participants in HEX, Pulsechain, and PulseX generally anticipate profits based on their own actions and decisions. The mechanisms in place motivate active participation from the individual. These mechanisms are optional; such as staking (Time locking and minting your own rewards) and validating (A form of securing the network on your own) to support the ecosystem, rather than relying on the efforts of others for passive income. Key determinants of profit often stem from the participants' own activities within the network, such as the utility of the decentralized network itself, rather than passive income generated from any efforts of any central party. This divergence from the traditional "efforts of others" model challenges the applicability of this criterion to all three assets. According to the SEC's own criteria and the Howey Test: HEX, Pulsechain, and PulseX do not meet the requirements to be classified as securities. Therefore, I am respectfully requesting your response and urgent clarification on this matter to ensure legal certainty in the evolving landscape of digital assets. Thank you for your attention to this matter, and I look forward to any guidance or clarification the SEC can provide. Jason. S.