Summary
This Second Circuit opinion addresses whether a plaintiff can rescind a convertible promissory note and stock purchase agreement under Section 29(b) of the Securities Exchange Act of 1934 by alleging the defendant acted as an unregistered securities dealer in violation of Section 15(a). Assuming without deciding that the defendant plausibly violated Section 15(a), the court holds that rescission is unavailable because the contract itself did not obligate the defendant to engage in unlawful dealer activity or perform transactions in violation of the Exchange Act. Consequently, the court affirms the district court's dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6).
Topics
Practice areas
Questions Presented
- Whether Section 15(a)(1) of the Securities Exchange Act can serve as the predicate violation for a private rescission action under Section 29(b).
- Whether the convertible loan and stock purchase agreement was void or rescindable under Section 29(b) because Auctus allegedly engaged in unregistered dealer activity.
- Whether Xeriant's Section 29(b) rescission claim was barred by the applicable statute of limitations.
Holdings
- A violation of Section 15(a)(1) of the Exchange Act may serve as the predicate statutory violation for a private action seeking rescission under Section 29(b).
- Section 29(b) permits rescission only of an unlawful contract, not of a lawful contract merely because a party may undertake an unlawful transaction in performing it.
- The stock purchase agreement was not void or rescindable under Section 29(b) because it did not require Auctus to engage in dealer activity or any other prohibited securities transaction.
- Xeriant's Section 29(b) claim was timely because, on the pleaded facts, Xeriant could not reasonably have known that Auctus's convertible-lending activities might constitute unregistered dealer activity until the SEC filed its enforcement action in June 2023.
Key quotations
“We conclude that, because the SPA did not require Auctus to engage in an unlawful transaction, i.e., quintessential dealer activity, the contract cannot be rescinded under Section 29(b).” (at 16)
“Indeed, "only unlawful contracts may be rescinded, not unlawful transactions made pursuant to lawful contracts."” (at 18)
“It clearly does not. The SPA provides only for the purchase of warrant shares. Nowhere in its terms does the SPA require Auctus to sell converted shares on the market -- a core tenet of "dealer" activity.” (at 22)
Factual background
Xeriant entered into a convertible loan agreement and stock purchase agreement with Auctus, under which Auctus advanced approximately $5.14 million and received the right to obtain Xeriant shares if the loan was not repaid. The agreement did not require Auctus to sell converted shares on the market or require conversion rather than cash repayment. After Xeriant failed to repay the loan and Auctus sought to convert the debt into stock, Xeriant sued, alleging that Auctus was an unregistered securities dealer and that the agreement was void under Section 29(b) of the Exchange Act.
Procedural history
Xeriant sued Auctus seeking rescission or invalidation of a convertible securities purchase agreement under Section 29(b) of the Securities Exchange Act and analogous state-law theories. The district court dismissed the complaint, holding that the agreement did not obligate Auctus to act as an unregistered securities dealer and therefore did not plausibly state a claim for rescission. The Second Circuit exercised appellate jurisdiction under 28 U.S.C. § 1291 and affirmed.