Xeriant (OTC:XERI) Seeks En Banc Review of Second Circuit’s Ruling in Auctus Fund Dispute

In a very closely watched securities law case, Xeriant, Inc., a publicly traded aerospace technology company, has filed for an en banc review by the U.S. Court of Appeals for the Second Circuit following a panel decision that affirmed a lower court’s ruling in favor of Auctus Fund, LLC.

The dispute centers on a convertible promissory note agreement and whether Auctus, a hedge fund, was required to register as a securities dealer under Section 15(a) of the Securities Exchange Act of 1934, and whether the agreement violated Section 29(b) by necessitating unlawful conduct. The Second Circuit’s June 25, 2025, decision upheld the district court’s dismissal of Xeriant’s claims, prompting the company to seek a rare full-court review to challenge the ruling’s implications for securities regulation and convertible debt agreements.

Background of the Case

In 2021, Xeriant sought financing for a joint venture to acquire XTC Aircraft Company, entering into a $5.14 million convertible promissory note agreement with Auctus Fund. The agreement allowed Auctus to convert the unpaid debt into shares of Xeriant’s common stock at a discounted rate if Xeriant failed to repay the loan in cash. Additionally, the deal included a stock purchase warrant for 50.97 million shares at $0.11 per share. When Xeriant defaulted on the loan, Auctus attempted to convert the debt into stock, but Xeriant rejected the request, alleging that Auctus was acting as an unregistered securities dealer in violation of Section 15(a) of the Exchange Act. Xeriant filed a lawsuit in the U.S. District Court for the Southern District of New York, seeking to void the agreement under Section 29(b), which allows rescission of contracts that require a party to violate securities laws.

The district court dismissed Xeriant’s complaint in February 2024, ruling that the agreement did not obligate Auctus to "act as a dealer"—defined under the Exchange Act as "an entity engaged in the regular business of buying and selling securities for its own account". The court further held that enforcement of the dealer registration requirement under Section 15(a) is the exclusive purview of the Securities and Exchange Commission (SEC), not private parties like Xeriant. The Second Circuit’s three-judge panel affirmed this decision on June 25, 2025, finding that the contract itself did not require Auctus to engage in unlawful dealer activity, such as selling converted shares on the market, and thus was not voidable under Section 29(b).

Xeriant’s Argument for En Banc Review

Xeriant’s petition for en banc review argues that the panel’s decision misinterprets the scope of Sections 15(a) and 29(b) and sets a precedent that undermines protections for issuers against so-called “toxic” lenders in convertible debt arrangements. Xeriant contends that Auctus’s business model—regularly acquiring convertible notes from microcap companies and converting them into discounted shares for resale—constitutes dealer activity requiring SEC registration. By affirming the district court, Xeriant argues, the Second Circuit has effectively shielded such lenders from private enforcement actions, limiting issuers’ ability to challenge potentially predatory financing agreements.

Xeriant’s legal team, lead by national securities attorney and shareholder/public company issuer advocate, Mark R. Basile, Esq, and The Basile Law Firm, cites prior circuit court decisions, such as the Fifth Circuit’s ruling in Eastside Church of Christ v. National Plan, Inc., which found that contracts involving unregistered dealers could be voided under Section 29(b) if the prohibited transactions occurred. Xeriant asserts that the Second Circuit’s narrow interpretation—that a contract must explicitly require unlawful dealer activity to be voidable—directly contradicts the plain language of the statute and Supreme Court guidance. The company argues that this standard ignores the practical reality of how convertible note agreements are executed, where the conversion and resale of shares are often implicit in the lender’s business model.

Furthermore, Xeriant highlights the broader regulatory context, noting that the SEC has increasingly targeted convertible note lenders for unregistered dealer activity since 2017. The company argues that the panel’s ruling conflicts with this trend and the Eleventh Circuit’s approving discussion of Eastside Church in cases like Almagarby and Keener, creating a potential circuit split that warrants en banc consideration to ensure uniformity in securities law.

Auctus’s Position and the Second Circuit’s Ruling

Auctus, in response, has maintained that the agreement with Xeriant did not obligate it to act as a dealer, as it could lawfully hold the converted shares or sell them in transactions not requiring dealer registration. The Second Circuit panel agreed, emphasizing that Section 29(b) only permits rescission when the contract itself necessitates a violation of securities laws, not when a party’s subsequent conduct might be unlawful. The court cited its own precedent in NexPoint Diversified Real Estate Trust v. Acis Capital Management, L.P., stating that “performance of the contract itself” must be unlawful for rescission to apply.

The panel also reaffirmed that Section 15(a)’s dealer registration requirement is enforced solely by the SEC, not through private rights of action. This holding aligns with the SEC’s recent regulatory shifts, including its withdrawal of a proposed dealer rule and the dismissal of enforcement actions against convertible note lenders under the new administration in 2025. The Second Circuit’s decision reflects skepticism toward expanding the dealer definition, reinforcing that convertible note lenders like Auctus are not automatically deemed dealers under the Exchange Act.

Implications of the En Banc Petition

Xeriant’s request for en banc review is significant, as such reviews are rarely granted in the Second Circuit, which has seen a decline in en banc cases in recent years. In 2010, the circuit decided just 0.24% of appeals en banc, down from 0.48% in 2000, highlighting the high bar for securing a full-court rehearing. Xeriant must demonstrate that the panel’s decision involves a question of “exceptional importance” or conflicts with circuit or Supreme Court precedent under Federal Rule of Appellate Procedure 35(a).

If granted, an en banc review could reshape the legal landscape for convertible debt financing, particularly for microcap companies like Xeriant that rely on such arrangements. A ruling in Xeriant’s favor could empower issuers to challenge agreements with unregistered lenders, potentially curbing predatory practices by “toxic” funders. Conversely, affirming the panel’s decision could solidify protections for hedge funds and other liquidity providers, limiting private enforcement and leaving regulation to the SEC.

Broader Context and Industry Impact

The Xeriant-Auctus dispute is part of a broader wave of litigation and regulatory scrutiny surrounding convertible note financing. Public companies, stung by the dilutive effects of such deals, have increasingly sought to void agreements with lenders accused of acting as unregistered dealers. The SEC’s enforcement actions since 2017 have fueled this trend, though the agency’s recent rollback of its dealer rule and dismissal of related cases signal a shifting regulatory stance. Xeriant’s case, therefore, not only tests the boundaries of Sections 15(a) and 29(b) but also reflects ongoing tensions between issuers and financiers in the microcap market.

Conclusion

Xeriant’s petition for en banc review represents a critical effort to challenge the Second Circuit’s interpretation of securities laws governing convertible debt agreements. By arguing that the panel’s decision misaligns with statutory intent and other circuits’ precedents, Xeriant seeks to protect issuers and shareholders from potentially exploitative financing arrangements. The outcome of this petition—whether it leads to a full-court rehearing or upholds the panel’s ruling—will have far-reaching implications for securities regulation, private enforcement, and the balance of power between microcap companies and their financiers. As the Second Circuit considers Xeriant’s request, the case remains a focal point for legal scholars, regulators, and industry stakeholders watching the evolution of dealer registration requirements in the U.S. securities market.

Mark R. Basile, Esq. is the Senior Attorney at The Basile Law Firm P.C. Mr. Basile can be reached at mark@thebasilelawfirm.com.

For more information on the case, see Xeriant, Inc. v. Auctus Fund, LLC, No. 24-682 (2d Cir. 2025) and related filings on the U.S. Court of Appeals for the Second Circuit’s docket.