DarkPulse, Inc. v. FirstFire Glob. Opportunities Fund

1

DARKPULSE, INC., Plaintiff, v. FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC, and ELI FIREMAN, Defendants.

No. 21 Civ. 11222 (ER)

United States District Court, S.D. New York

January 16, 2023

OPINION AND ORDER

Edgardo Ramos, U.S.D.J.

DarkPulse Inc. brought this action against FirstFire Global Opportunities Fund, LLC and its managing member Eli Fireman on December 31, 2021, alleging, inter alia violations of the Securities Exchange Act of 1934 and seeking rescission of the parties' convertible promissory notes under § 29(b) of the Act. Before the Court is the motion to dismiss the First Amended Complaint in its entirety and related motion for oral argument. For the reasons set forth below, Defendants' motion to dismiss is GRANTED.

I. FACTUAL BACKGROUND^[1]

The Parties

FirstFire Global Opportunities Fund (“FirstFire”) is a New York-based, Delaware-registered investment fund, which specializes in loaning money to distressed businesses with market capitalizations under $750 million. ¶¶ 19-20, 54. Between March 2015 and September 2021, public filings show that FirstFire purchased more than 107 promissory notes for approximately 89 issuers and sold more than one billion newly-issued shares of stock obtained pursuant to those notes into the public market for its own account. ¶ 66. DarkPulse, Inc. is a New York-based, Delaware-registered “microcap” company, that trades stocks in emerging companies on the “over the counter” market.^[2] ¶¶ 17-18.

The First Transaction

On September 20, 2018, FirstFire loaned DarkPulse $225,000 in exchange for a convertible promissory note (the “2018 Note”) with a principal amount of $247,500 via a securities purchase agreement (the “2018 SPA”) (together with the 2018 Note, the “First Transaction”). ¶¶ 26-27; see Doc. 29-1. The 2018 Note provided an 8% interest rate per annum, a 10% original issue discount, and a nine-month maturity date.^[3] ¶ 27. The 2018 Note further gave FirstFire the right to convert any portion of the debt for company stock in DarkPulse, at ¶ 30% discount to the market price, beginning 180 days after execution. ¶ 28. It also included a New York forum-selection clause and a Nevada choice-of-law clause.^[4] Doc. 29-1 at 16 § 4.6.

Pursuant to the conversion option, over a period of approximately one and one-half years, between June 7, 2019 and February 18, 2021, FirstFire effected 18 distinct conversions of debt into newly-issued DarkPulse common stock.^[5] ¶¶ 29-32. In all, FirstFire exchanged $247,500 worth of debt-the entirety of the principal amount of the 2018 Note-for 879,400,000 shares of stock. ¶ 33. Presently, the estimated open market value of the stock acquired by FirstFire from converting debt under the 2018 Note totals $10,738,900. ¶ 34.

In the days following each FirstFire conversion, the average daily trading volume in DarkPulse stock increased dramatically. Id. Thirty days prior to FirstFire's first conversion, for example, DarkPulse had a trading volume (i.e., the total number of shares traded during a given period) of 4,646,131. Id. Ten days following the June 7, 2019 conversion, that figure nearly doubled to 8,235,159 trades. Id. And ten days following the June 24, 2019 conversion, the figure rose to 12,059,811 trades. Id.

The Second Transaction

On April 26, 2021, FirstFire loaned DarkPulse $750,000 in exchange for a convertible promissory note (the “2021 Note”) with a principal amount of $825,000 via a securities purchase agreement (the “2021 SPA”). ¶ 37; see Doc. 29-2. The 2021 Note provided a 10% interest rate per annum and nine-month maturity date and incorporates by reference a registration rights agreement (the “RRA”) (altogether, the “Second Transaction,” and, with the First Transaction, the “Transactions”). ¶ 37; See Docs. 29-2; 32-5.^[6] The 2021 Note required DarkPulse to issue FirstFire 60,000,000 “Commitment Shares” upon execution of the agreement. Doc. 29-2 at 22 § C. On the date of execution of the Second Transaction, DarkPulse stock was trading at a price of $0.019 per share; the Commitment Shares therefore had a face value of approximately $1,140,000. ¶ 39.

The 2021 Note also included a New York choice-of-law and forum-selection clause, providing that its terms shall be governed by and construed in accordance with the laws of New York, and that any action brought by either party against the other concerning the Second Transaction must be brought only in the state or federal courts located in New York. Id. at 17 § 4.6.

Similar to the 2018 Note, the 2021 Note includes a conversion right, whereby FirstFire could forego repayment of the 2021 Note in cash and instead convert “in whole or in part” any amounts owed to shares of DarkPulse common stock on any trading day, 180 days following execution of the transaction. Doc. 29-2 at 3 §§ 1.1 and 1.4(a). In contrast to the variable conversion price of the 2018 Note, the 2021 Note specified a fixed per-share conversion price of $0.015-the “Fixed Conversion Price”-or, alternatively, a “Default Fixed Conversion Price” of $0.005, applicable if an event of default occurs. ¶ 39; Doc. 29-2 at 4 § 1.2(a).

The 2021 Note and RRA together defined “Events of Default.” Relevant here, two such Events of Default include: (1) DarkPulse failing to use commercially reasonable efforts to file a registration statement covering the resale of the shares of stock issued or issuable to FirstFire pursuant to the 2021 SPA (the “Registrable Shares”) within ninety days after execution of the Second Transaction (i.e., by July 26, 2021), see ¶ 49 n.14; Doc. 32-5 at 3 § 2(b); and (2) DarkPulse issuing common shares pursuant to an equity line of credit or otherwise in connection with a variable rate transaction entered after the date of the 2021 Note, see Doc. 29-2 at 15 § 3.16.

Purported Events of Default

DarkPulse's public filings since April 26, 2021 do not include any statements registering the shares that were the subject of the 2021 Note. Additionally, as shown by DarkPulse's Form 424B4 Prospectus (the “Prospectus”), on August 19, 2021, DarkPulse entered into a purchase agreement with non-party, GHS Investments, LLC (the “August GHS Agreement”). See Doc. 32-1.^[7] The August GHS Agreement granted DarkPulse the right to sell to GHS up to $45,000,000 worth of shares of DarkPulse common stock at variable rates from time to time at DarkPulse's discretion. See Doc. 32-1 at 21. On November 9, 2021, DarkPulse entered into a second purchase agreement with GHS (the “November GHS Agreement,” together with the August GHS Agreement, the “GHS Agreements”) granting DarkPulse the right to sell to GHS up to an additional $30,000,000 worth of shares of DarkPulse common stock at variable rates from time to time at DarkPulse's discretion. Id. 15. DarkPulse issued shares of its common stock to GHS pursuant to the August GHS Agreement on at least five occasions between August 19, 2021 and October 14, 2021. Id. at 21-22.

The Amendment

On November 4, 2021, Defendant Eli Fireman, the managing member of FirstFire, met with DarkPulse's Chief Executive Officer, Dennis O'Leary, while on a business trip in Las Vegas. ¶ 46. Fireman presented O'Leary with a one-page “Amendment No. 1 to the Convertible Promissory Note Issued on April 26, 2021” (the “Amendment”), claiming that it would enable DarkPulse to complete future acquisitions without having to notify O'Leary. Id.; see Doc. 32-6.^[8] Fireman did not mention to O'Leary that the Amendment replaced both the New York choice-of-law and forum-selection provisions of the 2021 Note with Delaware provisions. ¶ 47. The Amendment consists of the following four provisions:

1. Remove from the Securities Purchase Agreement Section 4. Subsection d ....

2. Governing Law; Venue. The Transaction Documents shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement, the Note, the Warrant, or any other agreement, certificate, instrument, or document contemplated hereby shall be brought only in the state courts of Delaware or in the federal courts located in the state of Delaware. The parties to this Agreement hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTIONS CONTEMPLATED HEREBY ....

3. The Parties have mutually agreed to the provisions set forth herein and are doing so without the exchange or any additional consideration ....

4. This Amendment shall be deemed part of, but shall take precedence over and supersede any provisions to the contrary contained in the Note. Except as specifically modified hereby, all of the provisions of the Note, which are not in conflict with the terms of this Amendment, shall remain in full force and effect.

Doc. 32-6 at 2-3. O'Leary and Fireman signed the Amendment, which is dated October 14, 2021, and purported to be effective as of April 26, 2021.^[9] Id. at 2-4.

Conversion Pursuant to the Second Transaction

On November 15, 2021, FirstFire notified DarkPulse of its intent to convert the full amount of debt under the 2021 Note (i.e., the $825,000 principal, plus $61,875 in outstanding interest) into shares of common stock, using the $0.005 Default Fixed Conversion Price. ¶¶ 4849. Two days later, with DarkPulse stock trading at $0.1334 per share, a transfer agent delivered to FirstFire 177,375,000...