Split Authority in Federal Securities Law: Dealer Registration and Convertible Note Enforceability in Light of Xeriant, Almagarby, and Eastside Church

A growing divide among federal circuit courts is reshaping the legal terrain surrounding convertible debt, dealer registration under the Securities and Exchange Act of 1934 (“Exchange Act”), and the enforceability of securities-laden financing agreements.  With the Second Circuit’s recent decision in Xeriant, Inc. v. Auctus Fund LLC, 2025 U.S. App. LEXIS 15680 (2d Cir. June 25, 2025), standing in stark contrast to the Eleventh Circuit’s ruling in SEC v. Almagarby, 92 F.4th 1306 (11th Cir. 2024), and the Fifth Circuit’s position in Eastside Church of Christ v. National Plan, Inc., 391 F.2d 357 (5th Cir. 1968), parties involved in microcap financing must now reckon with divergent interpretations of what constitutes a “dealer” and how that status affects legal remedies.  The implications of these conflicting decisions are broad—impacting United States Securities and Exchange Commission (“SEC”) enforcement, private civil actions, and the structuring of convertible note transactions across the United States.

I. The Second Circuit’s Decision in Xeriant: Restricting the SEC’s Reach

In the recent 2025 Xeriant decision, the Second Circuit affirmed the lower court’s decision, and held that the Securities Purchase Agreement (“SPA”) in question did not require Auctus Fund LLC (“Auctus”) to engage in an unlawful transaction.  

The Second Circuit stated that it assumes Xeriant plausibly alleged that Auctus is a dealer in securities (in violation of Section 15(a) of the Exchange Act).  Specifically, the Second Circuit noted Xeriant’s allegations included the “nature, volume, regularity, and frequency” of Auctus’ transactions, and that the allegations suggest that Auctus is in the business of buying and selling securities.

However, the Second Circuit opined that the SPA can be performed legally and that the SPA did not require Auctus to engage in an unlawful transaction, i.e., quintessential dealer activity.  As a result, the Second Circuit ruled that the SPA cannot be rescinded pursuant to Section 29(b) of the Exchange Act, even though Xeriant made a plausible allegation of a violation of Section 15(a).

II. The Eleventh Circuit’s Decision in Almagarby: Embracing a Functional Approach

By contrast, the Eleventh Circuit decision in Almagarby upheld the SEC’s broad reading of who qualifies as a “dealer.”  In that case, the defendant (Almagarby) had purchased over a hundred convertible notes from microcap issuers, converted them into stock, and sold the shares for profit over a sustained period.

The Eleventh Circuit agreed with the SEC that this constituted being “in the business” of buying and selling securities, even though the transactions were conducted for the defendant’s own account.  The court emphasized the regularity and commercial nature of the activity, the volume of transactions, and the defendant’s apparent business model centered on profiting from conversion and resale.

Unlike Xeriant, the Almagarby decision gave significant weight to the policy goals of the Exchange Act: market transparency and investor protection.  It treated the defendant’s conversion business as a de facto dealer operation—even in the absence of customers or quoting activity—based on the systemic nature of the transactions and their effect on the public market.

The ruling reflects an expansive interpretation of Section 15(a) of the Exchange Act and reinforces the SEC’s authority to bring enforcement actions in convertible note contexts within the Eleventh Circuit.

III. The Fifth Circuit’s Decision in Eastside Church v. National Plan: Collateral Attack on Note Validity

In Eastside Church, the Fifth Circuit adds a complementary—though distinct—dimension to the circuit split. 

While not ruling directly on whether the financier was a statutory “dealer,” the Fifth Circuit held that failure to comply with securities laws could render a transaction void or unenforceable as against public policy.  The court signaled that violations of registration statutes—whether at the federal or state level—could provide grounds for rescission, declaratory relief, or other equitable remedies, particularly when the borrower is unsophisticated or disadvantaged.

The Eastside Church decision is notable for its posture: it arose in a private civil dispute, not an SEC enforcement action.  Nevertheless, the court opened the door to issuers challenging the enforceability of toxic convertible notes based on alleged dealer violations—even where no agency action has occurred.  This creates a powerful new litigation strategy for small-cap issuers seeking to unwind predatory financing contracts.

IV. Implications of the Circuit Split

Together, these three cases mark a watershed moment in the legal treatment of dealer registration and its impact on convertible note transactions.  The split raises several key issues:

• Dealer Status Is Circuit-Dependent: Whether a financier must register as a dealer for engaging in repeated convertible note transactions now depends heavily on geography. The same business model that may be illegal in Florida (11th Circuit) and Texas (5th Circuit), may now be permissible in New York (2nd Circuit).

• SEC Enforcement Power is Unstable: The Xeriant ruling curtails the SEC’s power to prosecute certain actors without showing traditional dealer characteristics.  This may embolden financiers to operate within the Second Circuit, while creating enforcement inconsistency across the country.

• Private Parties May Step Into the Void: Even if the SEC is unable or unwilling to act, the Eastside Church decision provides a roadmap for issuers to void convertible debt based on registration violations.  It also raises the possibility of further challenges based on usury, fraud, or Racketeer Influenced and Corrupt Organizations Act (“RICO”) theories.

• Calls for Supreme Court or Legislative Intervention: The starkly different interpretations among the circuits heighten the likelihood of Supreme Court review or Congressional clarification of the definition of “dealer” under federal law.  Until then, legal risk will remain fragmented.

V. Conclusion

The decisions in Xeriant, Almagarby, and Eastside Church illustrate a rapidly evolving—and increasingly fractured—legal landscape for convertible securities and unregistered dealers.  Whether viewed from the lens of regulatory enforcement or private litigation, the question of who qualifies as a “dealer” under the Exchange Act is no longer settled.  For issuers, investors, and regulators alike, the need for clarity has never been greater.

If you or your company has entered into a convertible note and want to explore the convertible note’s legality, including possible remedies in the event of a violation, contact Christopher M. Basile, Esq. at The Basile Law Firm P.C., at (516)-455-1500 x115 or email Christopher at chris@thebasilelawfirm.com.