Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—2d Cir.: Aerospace company cannot rescind financing deal, (Jun 26, 2025)

By Mark S. Nelson, J.D.

The appeals court reiterated that a corporate financing deal could not be rescinded because the underlying contract did not call for the lender to engage in an unlawful securities transaction.

The Second Circuit has held that Xeriant, Inc. must abide by the terms of a financing agreement it entered into with Auctus Fund, LLC despite Xeriant’s claim that the agreement was voidable because Auctus improperly acted as an unregistered securities dealer. The appeals court said that was a claim only the SEC could enforce and that Xeriant instead would have to rely on a different section of the Exchange Act, which nevertheless barred rescission because the financing agreement did not require Auctus to engage in unlawful activity (Xeriant, Inc. v. Auctus Fund, LLC, No. 24-682-cv (2d. Cir. June 25, 2025)).

Stock purchase agreement. Xeriant, a publicly traded aerospace company, needed cash to fund a proposed joint venture so it turned to its investment banker, Maxim Group LLC, which introduced Xeriant to Auctus, a hedge fund that was in the business of providing financing to cash-strapped companies. The loan agreement called for Auctus to loan Xeriant $5.143 million by purchasing a convertible promissory note for $6.05 million. A stock purchase option that was part of the agreement allowed Xeriant to repay the loan by providing a warrant to Auctus for more than 51 million Xeriant shares. The agreement did not require Auctus to sell any stock it received.

Xeriant had to get the loan extended several times and agreed to pay Auctus cash and to provide additional warrants in exchange for the extensions. When Xeriant ultimately failed to repay the loan (repayment would have resulted in a “real cost” to Xeriant of more than $306 million), Auctus tried to convert the warrants and Xeriant declined the request. Xeriant then sued Auctus alleging that Auctus acted as an unregistered dealer in violation of Exchange Act Section 15(a)(1) and that the agreement should be rescinded under Exchange Act Section 29(b).

The district court held that Xeriant’s complaint was timely filed but failed to state a claim. The appeals court has since upheld those conclusions. Auctus has been separately sued by the SEC in an unrelated enforcement action alleging that Auctus acted as an unregistered securities dealer in numerous other loans it made to microcap companies; that case remains unresolved.

Contract was lawful. The Second Circuit panel proceeded from the assumption (albeit without deciding) that Xeriant had plausibly alleged that Auctus was a securities dealer under Exchange Act Section 15(a)(1). The panel even considered that other district courts within the circuit had found that a violation of Exchange Act Section 15(a)(1) can be predicate to a rescission action under Exchange Act Section 29(b).

However, despite accepting these presumptions and having examined similar Investment Advisers Act enforcement cases in which the SEC was the plaintiff, the panel said it had to consider more closely whether the convertible promissory note contract itself was unlawful. The panel explained that Exchange Act Section 29(b) is a limited private claim under which rescission is possible if the contract itself is unlawful, but not if the claim is that an unlawful transaction occurred under an otherwise lawful contract.

It was the second of these possibilities that the panel was presented with in assessing Xeriant’s claim. Specifically, the contract between Xeriant and Auctus did not require Auctus to sell converted Xeriant shares on the market, nor did the contract require Auctus to even convert Xeriant debt into shares. Moreover, the panel noted that the exercise of stock options while a contract is performed would not by itself trigger the need to register as a securities dealer.

“In other words, neither the terms of the contract itself nor its performance requires ‘a prohibited transaction,’” said the panel (citation omitted).

As a result, because the contract between Xeriant and Auctus was capable of being lawfully performed, the panel affirmed that the district court correctly dismissed Xeriant’s claim.

Limitations period. Auctus had argued that Xeriant’s complaint against it was not timely filed, but the panel briefly explained why it would uphold the district court’s conclusion that the complaint was timely. The panel began its analysis by noting that the limitations period on an Exchange Act Section 29(b) claim does not necessarily run from the time the contract is formed, absent a contractual provision that commits the parties to an unlawful transaction from the beginning. “A Section 29(b) claim thus accrues when the plaintiff knew ‘or with due diligence should [have] know[n] [the] facts that... form the basis for [its] action,’” said the panel (citation omitted).

The panel reasoned that the earliest Xeriant could have become aware that Auctus may be acting as an unregistered securities dealer was when it learned of the SEC’s enforcement action against Auctus. Before then, Xeriant likely had no reason to conduct more intensive due diligence on Auctus. Thus, even though Xeriant lost its case overall, the panel held that Xeriant had timely filed its complaint.

The case is No. 24-682-cv.

Judge: Chin, D.

Attorneys: Marjorie Santelli (The Basile Law Firm, PC) for Xeriant, Inc. M. Jonathan Seibald (Gibson, Dunn & Crutcher LLP) for Auctus Fund LLC.

Companies: Xeriant, Inc.; Auctus Fund, LLC

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