24-682-cv Xeriant, Inc. v. Auctus Fund LLC

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

August Term 2024

(Argued: October 22, 2024 Decided: June 25, 2025)

Docket No. 24-682-cv

XERIANT, INC., Plaintiff-Appellant,

- against -

AUCTUS FUND LLC, Defendant-Appellee.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

Before: WESLEY, CHIN, and KAHN, Circuit Judges.

Appeal from a decision of the United States District Court for the

Southern District of New York (Kaplan, J.), granting defendant-appellee's motion

pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss plaintiff-appellant's claim for rescission of the parties' securities purchase agreement pursuant to Section 29(b)

of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc, and its analogous state

law claims. The district court held that the parties' agreement was not void

because, although defendant-appellee failed to register as a dealer with the

Securities and Exchange Commission, the contract did not obligate the defendant-

appellee to act as a dealer. We agree that plaintiff-appellant has failed to allege a

sufficient claim for rescission under Section 29(b) and, accordingly, affirm the

decision of the district court.

AFFIRMED.

MARJORIE SANTELLI (Mark R. Basile, on the brief), The Basile Law Firm, P.C., Jericho, NY, for Plaintiff- Appellant.

M. JONATHAN SEIBALD (Marshall R. King and Brian Richman, on the brief), Gibson, Dunn & Crutcher LLP, New York, NY, and Dallas, TX, for Defendant-Appellee.

CHIN, Circuit Judge:

This case involves a claim for rescission of a securities purchase

agreement between plaintiff-appellant Xeriant, Inc. ("Xeriant") and defendant-

-2- appellee Auctus Fund, LLC ("Auctus"). In 2021, Xeriant, an aerospace company,

sought financing from investors to fund a joint venture with another company.

Xeriant eventually connected with Auctus, a hedge fund that routinely invests in

convertible debt financing agreements with microcap companies. Auctus agreed

to lend approximately $5 million to Xeriant through a convertible promissory

note, i.e., if Xeriant failed to repay the loan on a timely basis in cash, Auctus

could convert the amount due into shares of common stock at a set price.

Nothing in the parties' agreement required Auctus to then sell any converted

shares on the market.

When Xeriant failed to pay back the loan, Auctus sought to collect

by converting Xeriant's debt into common stock. Xeriant rejected the conversion

request and instead filed this lawsuit against Auctus, seeking a declaratory

judgment to void the parties' contract under the Securities Exchange Act of 1934

(the "Exchange Act"), 15 U.S.C. § 78cc. Xeriant claimed that the agreement was

void under Section 29(b) of the Exchange Act because Auctus was not a

registered securities dealer as required by Section 15(a)(1) of the Exchange Act,

and was therefore not lawfully permitted to effectuate the securities transactions

-3- set forth in the agreement. The district court (Kaplan, J.) granted Auctus's

motion to dismiss the complaint.

Although Section 15(a) indeed prohibits unregistered dealers from

buying and selling securities in interstate commerce, it is the Securities and

Exchange Commission (the "SEC"), rather than private parties, that enforces the

provision. A party bringing a private right of action under the Exchange Act is

instead limited to Section 29(b), which permits only the rescission of unlawful

contracts, not lawful contracts from which unlawful transactions are made. We

conclude here that the parties' agreement cannot not be voided under Section

29(b) because it did not obligate Auctus to act as a dealer in violation of the

Exchange Act. For the reasons set forth below, we AFFIRM the decision of the

district court.

BACKGROUND

I. The Facts

On appeal from an order granting a motion to dismiss, the facts

alleged in the complaint are accepted as true. See Salazar v. King,

, 68

n.5 (2d Cir. 2016). The following facts are drawn from Xeriant's complaint, the

-4- exhibits attached thereto, and documents incorporated by reference therein. See

In re: Nine W. Sec. Litig.,

, 140 (2d Cir. 2023).

A. The Contract

Xeriant is a publicly traded aerospace and technology company that

focuses on "acquiring, developing[,] and commercializing sustainable advanced

materials and technology related to next generation air and spacecraft." App'x at

13. In or about August 2021, Xeriant sought financing to fund a joint venture

with -- and eventual acquisition of -- another aircraft manufacturer. Xeriant

requested that its investment bank, Maxim Group LLC ("Maxim"), find an

investment source to fund the acquisition. 1 Maxim arranged a meeting between

Xeriant and Auctus, a hedge fund that provides "convertible debt financing to

public companies 'in need of cash.'" Supp. App'x at 8. Auctus provides that type

of financing by purchasing convertible promissory notes and stock purchase

warrants that it can execute in the event of nonpayment by the debtor. Auctus is

not a registered securities dealer.

1 In addition to providing financial advice to its clients, Maxim works with "many microcap publicly traded companies (i.e., 'penny stocks') on public offerings, up listings, and on the facilitation of structured debt financing." App'x at 14. -5- The parties met in New York to discuss the terms of the proposed

loan. [A15]. On October 27, 2021, Xeriant and Auctus entered into a convertible

loan agreement, which included, inter alia, a stock purchase agreement (the

"SPA"), the contract at the heart of Xeriant's Section 29(b) claim. Pursuant to the

SPA, Auctus loaned Xeriant $5,142,500 by purchasing a convertible promissory

note in the amount of $6,050,000, which Xeriant was required to pay back within

one year in either cash or stock. The stock option allowed repayment through a

stock purchase warrant for 50,968,822 shares of Xeriant stock at a price of $0.12

cents per share. 2 Nothing in the SPA required Auctus to sell any converted

shares it acquired in the event of non-payment.

In accordance with the SPA, Auctus advanced $5,142,500 to Xeriant.

When Xeriant was unable to pay the loan at the maturity date, the parties twice

amended the SPA to extend the deadline. In exchange for the extensions, Xeriant

granted Auctus stock purchase warrants to acquire 275,000,000 additional shares

of Xeriant common stock at $.09 per share, and paid $200,000 in cash to Auctus.

The due date for repayment of the loan was extended to March 15, 2023.

2 A warrant, like a stock option, grants the warrant holder the right to buy stock of the company at a certain price for a period of time. Richard A. Booth, Rights and Warrants, Financing the Corporation § 3:8. -6- Xeriant failed to pay the loan. On October 6, 2023, nearly seven

months after the second extended deadline, Auctus sought to convert the debt

into stock as permitted by the SPA. Xeriant refused to approve the request, and

instead sued Auctus, challenging the validity of the SPA.

B. The SEC Suit Against Auctus

Xeriant refused Auctus's attempt to convert the loan in part due to

pending litigation brought by the SEC against Auctus arising from other

transactions. See SEC v. Auctus Fund Mgmt., LLC, No. 23-CV-11233,

, at *1 (D. Mass. July 22, 2024). In June 2023, the SEC brought an

enforcement action against Auctus for engaging in securities transactions as an

unregistered dealer in violation of Section 15(a) of the Exchange Act.

("This

case is part of a raft of cases brought by the [SEC] alleging that individuals and

entities whose business it is to buy and sell shares of securities pursuant to

convertible loan agreements are securities 'dealers' and must be registered as

such with the Commission."). The SEC alleged that between 2013 and 2021,

Auctus entered into more than 100 contracts similar to that in the instant case,

exercising its conversion rights to obtain more than 60 billion shares of stock that

it subsequently sold in the market to reap over $100 million in profits. See

at

-7- *2, *5. The SEC submitted that Auctus's business practices -- particularly the

volume and form of its lending of funds to microcap companies -- demonstrated

that it operates as a securities dealer and is subject to the Exchange Act's

registration requirement. Id. at *4-5.

Auctus moved to dismiss the SEC action for failure to state a claim.

Id. at *1. The district court denied the motion to dismiss and held that the SEC’s

allegations were sufficient to state a claim under Section 15(a) of the Exchange

Act. Id. at *7. That litigation is ongoing.

II. Procedural History

On October 19, 2023, Xeriant filed this action against Auctus in the

Southern District of New York. Xeriant sought a declaratory judgment to rescind

the contract, alleging, inter alia, that the SPA was void under Section 29(b) of the

Exchange Act because Auctus acted as an unregistered securities dealer in

violation of Section 15(a)(1) and was not lawfully permitted to effectuate the

securities transactions outlined in the SPA. 3 Auctus moved to dismiss the

3 Xeriant alleged five claims: (1) a declaratory judgment to void the SPA under the Exchange Act; (2) a declaratory judgment to void the SPA under the Massachusetts Uniform Securities Act; (3) a declaratory judgment to void the SPA for criminal usury under Massachusetts state law; (4) a declaratory judgment to void the SPA under New York state law; and (5) breach of the implied covenant of good faith and fair dealing. -8- complaint on the grounds that (1) Xeriant' s Section 29(b) claim was time-barred

and (2) the SPA was not void under the Exchange Act because it did not require

Auctus to transact securities or otherwise act as a dealer.

On February 9, 2024, the district court granted Auctus's motion to

dismiss, pursuant to Fed. R. Civ. P. 12(b)(6), concluding that Xeriant's complaint,

although timely filed, failed to plausibly assert a claim for relief because it failed

to allege that the SPA obligated Auctus to act as a dealer. 4 This appeal

followed. 5

4 Because Xeriant failed to defend the sufficiency of its state law claims in response to Auctus's motion to dismiss, the district court dismissed Xeriant's remaining claims. 5 The district court originally filed an order and accompanying judgment dismissing the case on January 9, 2024. The district court then vacated that order on January 22, 2024, and filed a new order on February 9, 2024, but did not enter a new judgment. Hence, the district court did not enter judgment in a separate document, as required by Federal Rule of Civil Procedure 58(a). That oversight, however, "does not affect the validity of an appeal from that judgment or order." Fed R. App. P. 4(a)(7)(B). Where no separate document has been filed, we consider judgments entered after "150 days have run from the entry in the civil docket" of the order at issue. Fed. R. Civ. P. 58(c)(2)(B); see Joseph v. Leavitt,

(2d Cir. 2006). We similarly treat a notice of appeal filed by that date to be timely. See Fed. R. App. P. 4(a)(2). Moreover, "the separate document rule is deemed to have been waived and the assumption of appellate jurisdiction is proper" when (1) "an order appealed from clearly represents a final decision," and (2) "the appellee[] do[es] not object to the taking of an appeal." Do No Harm v. Pfizer Inc.,

, 113 n.1 (2d Cir. 2024) (quoting Selletti v. Carey, 173

-9- DISCUSSION

On appeal, Xeriant argues that Auctus's conversion of debt into

common stock is a securities transaction and unlawful under Section 15(a) of the

Exchange Act because Auctus was not a registered dealer. According to Xeriant,

this predicate Section 15(a) violation allows rescission of the SPA under Section

29(b). Xeriant contends, in the alternative, that the SPA is facially void because

its terms provide for the purchase of a promissory note, which Xeriant contends

is a "security" as defined under the Exchange Act.

Auctus argues principally that any purported securities transaction

is tangential to the SPA, which provides for nothing more than a convertible

loan. Auctus contends that the purchase of a convertible promissory note is not

dealer activity as contemplated by Section 15(a), and reasons that even if it were,

the SPA does not obligate Auctus to act as a dealer, thus invalidating Xeriant's

Section 29(b) claim. Auctus also argues that Section 29(b) does not permit

F.3d 104, 109-10 (2d Cir. 1999)). Here, the district court granted Auctus's motion to dismiss with prejudice on February 9, 2024, and Auctus acknowledges that this Court has jurisdiction. See Appellee's Br. at 1. We therefore exercise jurisdiction over this case pursuant to

. - 10 - Xeriant to bring a private right of action, and that Xeriant's claim is otherwise

untimely.

I. Standard of Review

We review de novo the district court's grant of Auctus's motion to

dismiss. See City of Pontiac Gen. Emps.' Ret. Sys. v. MBIA, Inc.,

(2d Cir. 2011). A complaint is properly dismissed where it does not "contain

sufficient factual matter, accepted as true, to 'state a claim to relief that is

plausible on its face.'" Ashcroft v. Iqbal,

(2009) (quoting Bell Atl.

Corp. v. Twombly,

(2007)). In making this assessment, "a court

must 'accept as true all of the factual allegations set out in plaintiff's complaint,

draw inferences from those allegations in the light most favorable to plaintiff,

and construe the complaint liberally.'" Rescuecom Corp. v. Google Inc.,

(2d Cir. 2009) (quoting Gregory v. Daly,

(2d Cir. 2001)).

II. The Merits

Section 29(b) of the Exchange Act creates a private right of action for

parties seeking to rescind a contract made in violation -- or the performance of

which involved a violation -- of the Exchange Act. Our determination of the

sufficiency of Xeriant's Section 29(b) claim, therefore, turns on whether Xeriant

- 11 - has plausibly alleged that Auctus violated Section 15(a) of the Exchange Act.

First, we consider whether Xeriant has plausibly alleged that Auctus is engaging

in quintessential "dealer" activity in violation of Section 15(a). Second, we

consider whether Xeriant has plausibly alleged that any such violation was

obligated by the SPA and is a basis for rescission under Section 29(b).

A. Section 15(a)

1. Applicable Law

Section 15(a) of the Exchange Act prohibits a broker or dealer from

"mak[ing] use of the mails or any means or instrumentality of interstate

commerce to effect any transactions in, or to induce or attempt to induce the

purchase or sale of, any security . . . unless such broker or dealer is registered."

15 U.S.C. § 78o(a)(1); see SEC v. Almagarby,

(11th Cir. 2024)

("Unregistered dealers are prohibited from buying and selling securities in

interstate commerce."). "The term 'broker' means any person engaged in the

business of effecting transactions in securities for the account of others." 15

U.S.C. § 78c(a)(4)(A). The Exchange Act defines a dealer as "any person engaged

in the business of buying and selling securities . . . for . . . [his] own account through

a broker or otherwise." 15 U.S.C. § 78c(a)(5)(A) (emphasis added).

- 12 - Recently, the SEC has brought enforcement actions under Section

15(a) against so-called "toxic lenders," i.e., convertible debt purchasers who buy

and then dump stock in small-cap companies to reap considerable returns. See,

e.g., SEC v. Keener,

(11th Cir. 2024) ("[Defendant's] lending

behavior -- converting debt to stock at a significant discount and selling the

resultant shares in high volumes -- is known as 'toxic' or 'death spiral' financing."

(quoting Almagarby,

)). These actions, including the pending SEC

lawsuit against Auctus in the District of Massachusetts discussed above, are

premised upon the SEC's theory that buying convertible debt for the purpose of

immediate conversion and resale is quintessential "dealer" activity, and lenders

"cannot engage in these transactions without being a registered dealer."

Almagarby,

. The Eleventh Circuit recently granted summary

judgment in favor of the SEC in Almagarby, holding that a lender who bought

penny-stock companies' convertible debt for immediate conversion and resale

violated the Exchange Act by failing to register as a securities dealer. See

. The court determined that "[t]he volume and regularity of [the lender's]

transactions support [our] ruling that [the lender] was 'in the business' of buying

and selling securities."

at 1317 (quoting 15 U.S.C. § 78c(a)(5)(A)). It concluded

- 13 - that profits generated from the "toxic lending activity" of purchasing convertible

debt were linked to its failure to register as a dealer and subject to disgorgement.

Id. at 1320-21.

The court in Almagarby was careful to limit its holding to the lender's

"specific conduct," reasoning "that an expansive definition might sweep in all

manner of market participants not traditionally understood as dealers, including

investment advisors, mutual funds, pension funds, and other asset managers."

Id. at 1318. Nevertheless, the court added that the lender's conduct in that case

was significantly different from that of investment advisors or asset managers,

because the latter do not "employ networks of finders to solicit microcap

debtholders," or "rely on dilution financing or the rapid resale of microcap share

issues as their sole source of income." Id.

Numerous district courts -- including the court that presided over

the SEC enforcement action against Auctus -- have found that unregistered

lenders are 'dealers' when, for instance, they acquire stock of microcap

companies for immediate resale, engage in high volume resales of those shares,

behave like underwriters when bringing new shares to the open market, and use

third parties to solicit market participants on their behalf. See, e.g., Auctus, 2024

- 14 - WL 3498593, at *5; see also SEC v. Big Apple Consulting USA, Inc.,

(11th Cir. 2015) ("While evidence of merely some profits from buying and selling

securities may alone be inconclusive proof, the defendants' entire business model

was predicated on the purchase and sale of securities."). In other words, "at least

at the pleading stage, the 'dealer' designation turns on whether the person or

entity is 'in the business of buying or selling securities.'" Auctus,

, at *3. 6 Each of the courts that has examined convertible debt lending

practices, however, has done so in the context of an SEC enforcement action, and

not, as here, in a private Section 29(b) rescission action.

2. Application

We need not decide precisely what a plaintiff (or the SEC) must

allege to state a violation of Section 15(a) because we assume without deciding

6 See, e.g., SEC v. Fierro, No. 20-CV-02104,

, at *6 (D.N.J. June 29, 2023) ("These undisputed share volumes, proceeds, and profits are strong indicators that Defendants engaged in the 'business' of buying and selling securities."); SEC v. Carebourn Cap., L.P., No. 21-CV-2114,

, at *3-4 (D. Minn. Sept. 20, 2024) (issuing a preliminary injunction for the lender's violation of Section 15(a)(1) because, inter alia, it purchased hundreds of convertible promissory notes and had transacted in the market for years). But see Nat'l Ass'n of Priv. Fund Managers v. SEC, No. 4:24-CV- 00250,

, at *8 (N.D. Tex. Nov. 21, 2024) ("Critically, the Eleventh Circuit in neither Almagarby nor Keener held that merely regularly buying and selling securities renders someone a dealer."). - 15 - that Xeriant has plausibly alleged that Auctus violated Section 15(a) of the

Exchange Act. Xeriant's complaint, however, describes the "nature, volume,

regularity, and frequency" of Auctus's alleged transactions, which at least

arguably suggest that Auctus is in the business of buying and selling securities.

Keener,

. For example, Xeriant alleged that: Auctus described its

fund philosophy as one that "invest[s] in public companies at either a significant

discount to what a stock investor would get or [to] get something of value for

free, ideally both," App'x at 20 (alteration in original); Auctus's conversion

demand would result in a real cost of $306,184,573.01 to Xeriant; Auctus has

engaged in a high volume of similarly usurious dealings with other companies;

and Auctus worked with Maxim to specifically solicit such microcap companies,

see App'x at 17-19, 21. But we need not decide the issue, as we proceed by

assuming that Xeriant has plausibly alleged that Auctus is engaging in

quintessential "dealer" activity in violation of Section 15(a).

B. Section 29(b)

Assuming, as we do here, that Xeriant has plausibly alleged that

Auctus violated Section 15(a), we next assess whether Xeriant has sufficiently

alleged a claim for rescinding the parties' contract for such a predicate violation,

- 16 - pursuant to Section 29(b). 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). In other words, because

the contract can be performed lawfully, and because the contract is silent as to if,

when, and how Auctus could sell discounted shares of Xeriant stock on the

market (assuming that is, indeed, unlawful), the contract has not been made in

violation of the Exchange Act.

1. Applicable Law

Section 29(b) of the Exchange Act creates a private right of action for

parties seeking to rescind a contract made in violation -- or the performance of

which involved a violation -- of the Exchange Act. See 15 U.S.C. § 78cc(b); see also

Transamerica Mortg. Advisors, Inc. v. Lewis,

(1979) ("§ 29(b) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78cc(b), confers a 'right to rescind' a

contract void under the criteria of the statute." (citation omitted)); Ceres Partners

v. GEL Assocs.,

, 361 (2d Cir. 1990) ("The [Exchange] Act expressly

- 17 - provides for a number of private actions i.e., under . . . [§] 29(b)." (citation

omitted)). 7 Section 29(b) of the Exchange Act provides, in relevant part:

Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract . . . heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void . . . . Provided, . . . that no contract shall be deemed to be void by reason of this subsection in any action maintained in reliance upon this subsection . . . unless such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation.

15 U.S.C. § 78cc.

7 To the extent that Auctus argues that Section 29(b) does not create a private right of action because Xeriant is not in the class for whose "especial benefit" the securities laws were enacted, its reasoning is contravened by this circuit's precedent. Appellee Br. at 31. Auctus relies on Bennett v. U.S. Tr. Co. of N.Y.,

(2d Cir. 1985), for the proposition that courts "impl[y] causes of action only for those in the class for whose 'especial benefit' the securities laws were enacted." Appellee Br. at 31. This Court in Bennett, however, relied on now overturned Supreme Court precedent and Section 7 of the Exchange Act, which does not on its face authorize a private right of action. See Bennett,

. Since Bennett, we have interpreted the plain language of Section 29(b) -- deeming violative contracts "void" if "such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation" -- as creating a private right of action. 15 U.S.C. § 78cc(b); Ceres, 918 F.2d at 361. - 18 - We have previously left open the question of whether a rescission

action under Section 29(b) may be predicated upon a Section 15(a)(1) violation,

see Boguslavsky v. Kaplan,

, 722 n.6 (2d Cir. 1998), but district courts in

this Circuit have found it may, see, e.g., EMA Fin., LLC v. Vystar Corp.,

, 80-82 (S.D.N.Y. 2020). Indeed, Section 15 is not one of the enumerated

exceptions to Section 29(b) private actions and nothing in the language of Section

29(b) indicates that a contract could not be rescinded for violating Section

15(a)(1). Accordingly, we agree that Section 15(a)(1) can serve as a predicate

statute to rescind a contract under Section 29(b).

Section 29(b) creates only a limited private right of action. Indeed,

"only unlawful contracts may be rescinded, not unlawful transactions made

pursuant to lawful contracts." NexPoint Diversified Real Est. Tr. v. Acis Cap.

Mgmt., L.P.,

(2d Cir. 2023) (quoting Zerman v. Jacobs,

(S.D.N.Y. 1981), aff'd,

(2d Cir. 1981)). This limitation

comports with "the common-law principle that a contract to perform an illegal

act is void," Vystar, 336 F.R.D. at 81, whereas rescission is not available when "the

violation complained of is collateral or tangential to the contract between the

parties," Slomiak v. Bear Stearns & Co.,

(S.D.N.Y. 1984). A

- 19 - contract can be voided only where "there could be no performance under the

contract without violating the [Exchange] Act."

(citing Eastside Church of

Christ v. Nat'l Plan, Inc.,

(5th Cir. 1968)); see also Williams v. Binance,

(2d Cir. 2024) (finding that violations of the Exchange Act under

Section 15(a)(1) "require transactions," and that "district courts in this circuit have

long recognized that to make out a violation under Section 29(b), 'plaintiffs must

show that the contract involved a prohibited transaction.'" (alteration adopted)

(citation omitted)).

In NexPoint, we held that under Section 215(b) of the Investment

Advisers Act of 1940 (the "IAA"), a securities statute nearly identical to Section

29(b), a contract is void "only if performing a contractual duty requires a party to

engage in conduct prohibited" by the underlying statute.

(emphasis added); accord Zerman,

. In reaching that

conclusion, we relied upon the reasoning in a long line of cases in our district

courts that have held that, to warrant contractual rescission under Section 29(b),

a plaintiff must show that "performance of the contract itself is unlawful, not

merely [that] the conduct of a party to the contract is unlawful." NexPoint, 80

- 20 - F.4th at 421. 8 We noted that these courts generally adopt Judge Friendly's

reasoning that "[Section] 29(b) does not provide a pat legislative formula for

solving every case in which a contract and a violation concur. Rather it was a

legislative direction to apply common-law principles of illegal bargain, enacted

at a time when it seemed much more likely than it might now that courts would

fail to do this without explicit legislative instruction."

(quoting Pearlstein v.

Scudder & German,

(2d Cir. 1970) (Friendly, J., dissenting)).

We came to the same conclusion when interpreting a similar

provision in the IAA's companion statute, the Investment Company Act of 1940

(the "ICA"). In Oxford University Bank v. Lansuppe Feeder, LLC, we held that the

"Validity of Contracts" provision in the ICA applies only to illegal contracts, not

legal contracts performed in an illegal manner.

(2d Cir. 2019). In

8 See, e.g., DarkPulse, Inc. v. FirstFire Glob. Opportunities Fund, LLC, No. 21-CV- 11222,

, at *11 (S.D.N.Y. Jan. 17, 2023), aff'd in part, vacated in part on other grounds, No. 23-78,

(2d Cir. Mar. 28, 2024) (summary order); EMA Fin. v. TPT Glob. Tech, Inc., No. 20-CV-8781,

, at *5 (S.D.N.Y. Oct. 26, 2023); Acuitas Cap., LLC v. Ideanomics, Inc., No. 23-CV-2124,

, at *1 (S.D.N.Y. June 21, 2023); EMA Fin., LLC v. AppTech Corp., No. 21-CV-6049,

, at *6- 7 (S.D.N.Y. Sept. 13, 2022); Cyber Apps World, Inc. v. EMA Fin., LLC,

, 286 (S.D.N.Y. 2022); Vystar, 336 F.R.D. at 80-83; Found. Ventures, LLC v. F2G, Ltd., No. 8- CV-10066,

, at *6-8 (S.D.N.Y. Aug. 11, 2010); Drasner v. Thomson McKinnon Secs., Inc.,

(S.D.N.Y. 1977). - 21 - concluding that the plaintiffs had failed to state a claim under the ICA, we

observed that the plaintiffs had "not identified any provision of the [contract]

whose performance would violate the ICA." Id. at 109. We have reaffirmed this

conclusion by observing that the aforementioned language in Oxford University

Bank was not mere dicta but "a commonsense interpretation of statutory

language." NexPoint,

.

2. Application

Xeriant contends that Section 29(b) provides a basis for rescinding

the SPA because it was 1) made in violation of the Act and 2) performed in

violation of the Act. According to Xeriant, the violation under either scenario

occurred due to Auctus's failure to register as a dealer. We are not persuaded. 9

The question we must ask is whether the SPA, when formed or

performed, requires Auctus to transact securities while operating as an

9 Auctus claims that Xeriant waived the argument that the contract was void at formation because it failed to raise that claim before the district court. Even if not raised precisely below, Xeriant's claim as to both formation and performance of the contract rely on the same factual premise, namely that Auctus was acting as an unregistered broker-dealer. See United States ex rel. Keshner v. Nursing Pers. Home Care,

(2d Cir. 2015) ("[W]e have exercised our discretion to entertain new arguments . . . where the argument presents a question of law and there is no need for additional fact- finding." (internal quotation marks omitted)). - 22 - unregistered securities dealer. 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. Nor

does the SPA require Auctus to convert the debt into shares, as opposed to

accepting repayment of the cash loan. Similarly, the exercise of stock options

during the performance of the contract, alone, does not require registration as a

dealer. In other words, neither the terms of the contract itself nor its

performance requires "a prohibited transaction." Vystar, 336 F.R.D. at 81. 10

Consistent with our precedent, we conclude that the SPA is not an illegal

contract and does not require Auctus to violate Section 15(a)(1). Accordingly, we

agree, as the district court held, that the parties' contract cannot be rescinded

under Section 29(b).

10 Xeriant also argues, for the first time on appeal, that a promissory note is a security, rendering the SPA -- which provides for the purchase of a convertible promissory note -- facially illegal and subject to rescission under Section 29(b). Indeed, convertible promissory notes are generally regarded as securities, see Reves v. Ernst & Young,

(1990), and must be registered or qualify for an exemption from registration under Section 4(a)(2) of the Securities Act, see generally 15 U.S.C. § 77d(a). One such statutory exemption excludes from registration transactions not involving a public offering. Id. § 77d(a)(2). Here, as the SPA explicitly provides, the purchase of the convertible promissory note falls under the Section 4(a)(2) exemption. Accordingly, Xeriant's argument is meritless. - 23 - III. Timeliness of Xeriant's Claim

We briefly address Auctus's argument that the district court erred in

holding that Xeriant's suit is not time-barred by the statute of limitations. We

conclude that the district court correctly held that Xeriant's claim was timely

filed.

In Binance, this Court held that "claims for recission under Section

29(b) expire one year after they accrue."

. In that case, we

reasoned that "because a Section 29(b) claim must be predicated on an

underlying violation of the Exchange Act," a rescission claim does not accrue

until a violative transaction has occurred.

. In other words, where a

contract does not commit the parties to making a violative transaction, the statute

of limitations does not run from its formation.

This reasoning is grounded in the language of Section 29(b), which

provides that a claim accrues "after the discovery that such sale or purchase

involves such violation." 15 U.S.C. § 78cc(b). 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." Merck & Co. v. Reynolds,

, 646

(2010) (emphasis, internal quotation marks, and citation omitted). To dismiss at

- 24 - the pleadings stage, "defendants bear a heavy burden in establishing that the

plaintiff was on [constructive] notice as a matter of law." Newman v. Warnaco

Grp.,

, 194-95 (2d Cir. 2003) (citation omitted). Constructive notice

"may be found as a matter of law only when uncontroverted evidence clearly

demonstrates when the plaintiff should have discovered the fraudulent conduct."

Staehr v. Hartford Fin. Servs. Grp.,

(2d Cir. 2008).

We agree with the district court that Auctus's statute of limitations

argument fails. Viewing the complaint in the light most favorable to Xeriant, the

facts underlying Auctus's alleged status as an unregistered securities dealer were

not appreciable to Xeriant with due diligence until the SEC filed its complaint in

the District of Massachusetts in June 2023. Although Xeriant could have

discovered that Auctus was not registered with the SEC at the time of the SPA's

signing, Xeriant had no reason to know -- or even investigate whether -- Auctus

was operating a business that engaged in convertible lending to a degree that

might render it a statutory securities dealer. Accordingly, Xeriant's claim was

timely brought. 11

11 We note that if Xeriant is indeed correct that the SPA may be rescinded because

- 25 - CONCLUSION

For the foregoing reasons, the decision of the district court is

AFFIRMED.

the mere purchase of a convertible promissory note is a violative securities transaction, then its claim would be time-barred because the limitations period would run from the formation of the contract and not from the date when the SEC filed its complaint. - 26 -