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Unreasonable Investors

Original post with images here: https://x.com/NuclearHerbs/status/1773730071481913558

Welcome back to #PulseChainLawSchool. Today’s lesson is going to be a little strange. The first part goes over some of the Coinbase ruling, and the second is a follow-the-white-rabbit, stream of consciousness type of rant. Enjoy.

COINBASE:

First: As I’ve mentioned many times, Rule 12 motions, like motions to dismiss/motions for judgment on the pleadings have a very low success rate, so Coinbase losing most of theirs should come as no surprise. It’s the way the system is set up. Judicial philosophy is that it’s preferable to decide cases on the merits, and MTDs/MJPs don’t reach the merits of claims.

Second: Judge Failla put a shitload of time into her analysis. All you can ask is for a judge to be fair to both parties and put the work in. You’re not always going to agree with them, but you can’t criticize her for not making an effort to understand what crypto is or how it works. She is, unfortunately, bound by some precedent that could easily be changed by new legislation, which again underscores the need for you to find out where your House Rep stands and vote accordingly.

Third: Because this was a MJP, the result simply means that the SEC pled its case well enough to move forward to discovery. The SEC did not “win” anything. Anyone telling you differently is misleading you. There are people out there pretending that the SEC leading lap 18 of the Daytona 500 means something. It doesn’t. There are many miles left to race before we know who takes the checkered flag. This was a minor battle in a major war.

Fourth: Even though the success rates of MTDs and MJPs are low, they are sometimes filed to learn things the parties will need in the future. In this case, we now have a pretty good idea of how she’s going to analyze crypto under Howey to determine whether a particular token is a security or not. That’s valuable information for both sides to have.

Fifth: Each case lives on its own facts. There are many, many factual differences between what SOL, CHZ, and other alleged ‘securities’ did that differ substantially from things Richard did. For example, I don’t seem to recall Pulsechain or PulseX having a whitepaper. I don’t seem to recall any investor meetings. I have no idea who the Chief Executive Officer (Hexecutive?) of Hex is, or what the board’s plan is to change an immutable code. People in charge of SOL and CHZ told “investors” what to expect from them in the future. Richard has told people over and over not to expect anything. There are literally hundreds of factual differences not only in how the tokens were created and distributed, but in what people were led to believe would happen in the future.

So that’s about all I’ll say about Coinbase. I still, and will likely always, hate them for personal reasons, but still want them to win on some of these issues because I hate the SEC slightly more. The word slightly should give you some indication of how much I actually hate Coinbase. If my hatred was scaled from 1-10,000, with 1 being cute fluffy kittens and 10,000 being the SEC, Coinbase is right around 9,999.

Moving on.

WHITE RABBIT TIME:

The rest of this post is going to be weird, and some of you may disagree with my premise. That’s fine. Some of you may not like how I characterize us or Richard. That’s fine too. It’s not meant to be insulting or attack anyone’s character. Whether you like it or not, it’s how we are being perceived by not only other crypto holders and normies, but sometimes by our own community, so it’s worth discussing.

Anyway, they’re my thoughts, and the 1st Amendment says I can barf them onto the internet if I want. So if you’re ready for this, put on some Jefferson Airplane, feed the Dormouse some magic mushrooms, make some Kool-aid, and hopefully at the end you won’t be sure whether to be insulted or in complete agreement with me. Either is cool.

REASONABLE INVESTORS

After reading some of the decisions in crypto cases, it hit me that we may have a larger problem than just an 80-year-old case about orange groves. It may be that the entire foundation of securities jurisprudence is unable to support the weight of this new and radically different industry that’s been somewhat unceremoniously dropped on top of it.

And law is specifically designed to change direction very slowly over time, like a giant cargo ship. This is why old, badly written, or just plain stupid court rulings take decades to get overruled or superseded. The SEC is taking advantage of this with the specific goal of getting a bunch of rulings against crypto projects, because they know it will take forever to get rid of them. In the meantime, the SEC can use them to destroy other projects.

That said, the entirety of SEC case law is built on the assumption that the SEC’s function is to protect “reasonable investors,” not complete dipshits. The basic premise behind SEC-required disclosures is that “reasonable investors” should have all of the material information necessary to make prudent financial decisions. So we’ll look at it from that point of view, because judges do.

I’ll give you all a few minutes to read this 41-page article from the Journal of Corporate Law called “The Reasonable Investor of Federal Securities Law”: https://jcl.law.uiowa.edu/sites/jcl.law.uiowa.edu/files/2021-08/Rose_Final_Web.pdf…

“Ain’t nobody got time for that!”

Fine then. Let’s try and summarize what a “reasonable investor” is, and then try and figure out if any of them are commonly found in crypto, at least somewhere out in the wild, untamed forests that exist outside of big, centralized exchange castles.

Case law instructs that “the reasonable investor grasps market fundamentals—for example, the time value of money, the peril of trusting assumptions, and the potential for unpredictable difficulties to derail new products.” (the citation for this is in the article you didn’t read above)

Does this definition fit the typical degen who tosses money at any ticker symbol with the word “wif” in it, hoping to turn the $18.52 they found in their couch cushions into $185K in a few days?

I mean, Coinmarketcrap says the term “ape in” became popular during 2020’s DeFi summer because of the “low IQ” strategy of FOMO-ing into projects without doing any research on them (screenshot below). Does the term “ape in” sound like anything a reasonable investor would do?

Hat tip to @yourfriendSOMMI for proving this exact point perfectly with his post on Wednesday, (screenshot below) when the most reasonable of investors aped into PlayBoyWifHat and sent it from $0 to a $100M MC in 4 hours. It’s amazing how they were able to do all of the “reasonable investor” things courts thought were important in that short amount of time!

The point is that Judges see people every day dressed in suits arguing about what reasonable people did or didn’t do. Why? Because that’s how every contract, tort claim, TradFi securities case, dog bite case, trustee action, fiduciary claim, or whatever other type of legal case in the history of this country is decided. It’s all judges know how to do. It’s the only lens they know how to view cases from.

Howey and its progeny are based on the assumption that people make, or intend to make, reasonable investment decisions based on information provided to them by the managers or promoters of those investments. That made sense when Howey was decided, and probably continued to make sense up until crypto showed up like a bunch of drunk college kids on spring break whose bus broke down in some idyllic beachfront community.

Regardless, the default position for most judges and normies (including jurors, mind you) is that people want to protect their hard-earned money. At times, people are willing to adjust their level of risk tolerance to potentially reap a higher reward, but there are exactly zero financial advisors out there who will advise that you move most or all of your investments into crypto. Why? Because doing so would be completely irrational. Yet there are people that have done exactly that. You likely know some. You might be one.

Crypto owners, when you include the large number of degens in this space, are not the same type of “reasonable” or “rational investors” that courts have seen for hundreds of years. As a general rule, our level of acceptable risk is much higher, or we wouldn’t be here in the first place. To use a relevant THoS example, I’m reasonably sure courts easily understand Ramey’s position on investing. I doubt they understand Mikey’s.

So ask yourself whether the “reasonable investor” standard is appropriate to analyze crypto cases, specifically Richard’s case?

If a judge doesn’t understand the mindset of us PLS, PLSX, and HEX holders, they won’t be able to properly understand some of the things that happened in this case. Granted, the judge may be stuck with analyzing it under a “reasonable investor” standard based on binding precedent, but it would be nice if the courts realized, or even mentioned, that we’re all slightly batshit here and tend not to always make rational decisions with our money.

I underscore this with a closer look at some things said by Judge Failla in deciding Coinbase’s motion, all of which suggests she’s viewing the case using some form of “reasonable investor” standard:

Pg 44: In so concluding, the Terraform court looked to “readouts of investor meetings, excerpts of investor materials, and screenshots of social media posts made by … Terraform executives,” and concluded from those materials that the defendants’ representations led token holders to reasonably believe that they would profit from their purchases.

Pg 46: Instead, courts evaluate whether the cryptoassets and the “full set of contracts, expectations, and understandings” surrounding its sale and distribution — frequently referred to using the shorthand “ecosystem” — amount to an investment contract.

Pg 46: Finally, in assessing the circumstances surrounding the sale of a cryptoasset, courts should look to what the offeror invites investors to reasonably understand and expect.

Pg 49: The ability of a Crypto-Asset purchaser to profit, therefore, is dependent on both the successful launch of the token and the post-launch development and expansion of the token’s ecosystem.

That last one made me LOL, simply because I wonder about the future “expansion” of “DickWifButt’s” ecosystem. I can picture the team working day and night, racking their brains to try and figure out ways to add more dick, or maybe another butt.

Crypto investing isn’t a ‘paradigm shift’ in the investing world, it’s a ‘paradigm-jump-into-a-parallel-universe.’ The SEC and the courts don’t understand this, aren’t set up to, and frankly don’t seem to want to.

As a group, we are largely irrational investors. We YOLO into dumb shit every day. And we don’t care. Everyone buying some dumbass meme coin on SOL has the mindset that either they’ll need to work until they’re 85 or they’re buying a Lambo next month, and *either* of those results is acceptable and justifies the risks they are taking.

All of which brings me to my next thought:

IS HEX A CULT & ARE RH FOLLOWERS CULTISTS?

It was posed throughout @thosdocumentary and is a legitimate question. Remember the part where Clay from Nomics admitted that Hex wasn’t a scam and Richard wasn’t a fraudster? He also wasn’t shy about noting that he thinks Hex is a cult. It’s not hard to figure out why. Do a quick search on X for posts with “Richard Heart” & “Cult” and see the results. Hell, half of those calls are coming from inside the house. The rest of them illustrate how outsiders view us.

But is that really a bad thing? Maybe in this one particular instance, being considered a cult is a positive thing. It would certainly explain a lot of the seemingly irrational decisions we’ve made to a judge who wouldn’t understand why anyone would do those things.

Not all cults are bad. Some are, for sure. Remember that Koolaid I told you to get before? Maybe you shouldn’t drink it after all. Or maybe don’t wait for aliens hiding behind that comet to pick us up. Those? Not so good cults.

But Richard, if he is to be considered a cult leader, ain’t a bad one. His message: Governments have fucked with our money for so long that it’s barely worth anything. He wants us to stop drinking, smoking, and gambling. He tells us not to get into trading crypto. Scivive is full of tips on how to improve your life. *Everyone* here had the option of sacrificing to a charity dedicated to increasing people’s lifespans instead of the PLS sacrifice address. Everyone. It was 100% our choice where to send our sacrifices.

Neither the SEC nor judges are going to be inclined to believe that people would willingly send some dude on the internet a pile of money without having expectations of profit, despite the fact that Richard said over and over that we should have no expectations of anything, much less profits. The SEC called this a “tongue-in-cheek” disavowal in the Complaint, implying that people really didn’t believe what Richard was saying, but knew that he had to say it to avoid implicating securities laws. This is a fundamental misunderstanding of what actually happened. But if you believe that we’re a cult following our cult leader, it makes perfect sense. It becomes a plausible explanation for our collective actions, doesn’t it?

The Highest of Stakes is a documentary about the people who believe in Richard and share his vision of the future, at least as far as crypto is involved in it. Intentionally or otherwise, it makes the point that the *people* in this community think differently from everyone else in normieville.

We are, as @RichardHeartWin himself refers to us in THoS, “crazy loon birds.” If the courts don’t recognize us as such, how will they ever be able to understand why we sacrificed, and that we genuinely understood the “no expectations” prong of Howey?

********* TO BE CLEAR

Nothing in this post should imply that I think the people who own and believe in Hex, PLS, or PLSX are irrational, stupid, or unreasonable. In fact, if you got that out of it, you missed the entire point. It’s about the *investing behavior* of people all over the crypto space that make it different than anything the world has ever seen before, and how it differs from what regulators and judges have come to expect.

And we all know the risks, especially in this community. Why? Because Richard told us 800 bajillion times that everything in this space can go to zero at pretty much any time. He talks about this in the @THOSdocumentary. He’s said it over and over on streams. It’s not like he’s hiding it. Does the SEC think we’re all stupid? Do judges?

Imagine if Jeff Bezos stood up at the next shareholder meeting and told everyone to expect 85% dips in Amazon’s share price all the time, and that maybe it will just go to zero. How would a “reasonable investor” react to that?

Then compare it to how we all responded to Richard’s message – *after* he told us this, we all sacrificed over $1B without knowing whether we’d see anything ever materialize. Quite the difference, isn’t it?

tl;dr:

Trying to judge a case involving people who knowingly and voluntarily make irrational investment decisions when the entire body of law regarding investments is built on the assumption that investors make reasonable decisions about their investments isn’t, by itself, reasonable or rational. That standard needs to be adjusted to comport with reality.

As Urge Overkill put it eloquently in Sister Havana, we need judges to “come around to my way of thinking.” Because we won’t get the right results in court until judges understand that people who invest in crypto don’t think the same way as the “reasonable investors” they’ve seen for their entire careers.

I could be wrong. I’m wrong a lot. But I call it as I see it, and this is how I see it.

And remember, nothing I ever say is legal advice.

Fuck, that was long. Sorry. But whatever, you have all weekend to read it.