In a significant decision, the U.S. Court of Appeals for the Second Circuit recently affirmed the dismissal of claims alleging that a hedge fund acted as an unregistered securities dealer in violation of the Securities Exchange Act of 1934 (the “Exchange Act”) by entering into a convertible loan agreement that included a stock purchase agreement. The case, Xeriant, Inc. v. Auctus Fund LLC (No. 24-682, decided June 25, 2025), rejected the plaintiff’s efforts to rescind the convertible loan under Section 29(b) of the Exchange Act based on the lender’s alleged failure to register as a dealer.
The Second Circuit upheld the district court’s ruling, finding that Xeriant failed to plausibly allege that the contract itself required unlawful conduct. Specifically, the court concluded that the agreement did not obligate Auctus Fund to engage in unregistered “dealer” activity, i.e., it did not “require Auctus to sell converted shares on the market,”[1] and could be lawfully performed. As a result, the agreement was not voidable under Section 29(b), which only permits rescission when the contract, on its face, necessitates a violation of the securities laws.
Importantly, the court also reaffirmed that enforcement of the dealer registration provisions under Section 15(a) of the Exchange Act lies exclusively with the Securities and Exchange Commission (the “Commission”). This holding limits the ability of issuers to invoke Section 29(b) as a private enforcement mechanism to unwind financing arrangements based on alleged dealer status.
Background
Plaintiff, an aerospace technology company, sued Auctus Fund, a hedge fund adviser, for breach of contract. In 2021, Xeriant sought financing for a joint venture and secured around $5 million from Auctus in the form of a convertible promissory note, which would allow Auctus to convert the debt into shares of Xeriant’s common stock if the loan was not repaid on time and in cash. When Xeriant failed to repay the loan, Auctus requested a stock conversion..
Xeriant refused the request and filed suit seeking to rescind the stock purchase agreement for violating Section 15(a)(1) of the Exchange Act, which requires anyone engaged in a regular pattern of buying and selling securities to register with the Securities and Exchange Commission as a dealer.[2] Auctus sought dismissal of the suit, claiming that the agreement was not voidable as it did not require Auctus to act as an unregistered dealer in violation of Section 29(b). The U.S. District Court for the Southern District of New York accepted Auctus’s argument and dismissed the case, finding that Xeriant had not alleged facts that showed the agreement “obligated [Auctus] to act as a dealer” [3] and to register with the Commission. Xeriant appealed the dismissal to the Second Circuit.
The Second Circuit Decision
The United States Court of Appeals for the Second Circuit affirmed the district court’s decision. The crux of the Second Circuit’s analysis was that the agreement did not obligate Auctus to engage in unregistered dealer activity and could be lawfully performed. In other words, the plaintiff failed to alleged that “the performance of the contract itself is unlawful,” choosing instead to allege that Auctus’s conduct might have been unlawful.[4] Because the terms of the stock purchase agreement did not require Auctus to sell converted shares on the market, which is “a core tenet of ‘dealer’ activity,”[5] Auctus’s optional decision to exercise stock options did not require Auctus to register as a dealer. As “neither the terms of the contract itself nor its performance requires a prohibited transaction,” the Second Circuit held that the agreement is not an illegal contract.[6]
The Second Circuit emphasized that enforcement of these dealer registration provisions under Section 15(a) lies exclusively with the Securities and Exchange Commission, limiting the ability of debt issuers to invoke Section 29(b) for a private right of action to rescind financing arrangements based on alleged unregistered dealer status.
Takeaways
In declining to expand the definition of “dealer,” the Second Circuit also signaled judicial skepticism toward the SEC’s now-withdrawn dealer rule. As such, the ruling intersects with the broader regulatory debate over expansion of the dealer definition and registration requirements by aligning with the SEC’s own rollback. Since the new Administration took office in January 2025, the Commission has dropped its appeal defending the rule and has stayed or dismissed several enforcement actions against convertible note lenders, including Auctus.[7]
In sum, the Xeriant decision reinforces the status quo ante: convertible note lenders and other liquidity providers are not automatically deemed “dealers” under the Exchange Act. While the regulatory landscape remains fluid, the ruling provides welcome clarity for funds and other market participants engaged in structured financing transactions and underscores the judiciary’s reluctance to expand statutory definitions absent clear congressional direction.
[1] Xeriant, Inc. v. Auctus Fund LLC, 2025 WL 1748776, at *7 (2d Cir. June 25, 2025).
[2] 15 U.S.C. § 78(c), 78(o) (1934).
[3] Xeriant, Inc. v. Auctus Fund, LLC, 2024 WL 1151719, at *1 (S.D.N.Y. Feb. 9, 2024), aff’d, 2025 WL 1748776 (2d Cir. June 25, 2025).
[4] Xeriant, 2025 WL 1748776, at *7 (“[T]o 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.’”) (citing NexPoint Diversified Real Est. Tr. v. Acis Cap. Mgmt., L.P., 80 F.4th 413, 421 (2d Cir. 2023)).
[5] Id.
[6] Id.
[7] Press Release, U.S. Securities and Exchange Commission, SEC Announces Dismissal of Three Civil Enforcement Actions (June 18, 2025).
