In 2019, LGH Investments, LLC loaned $100,000 to Social Life Network, Inc., a software licensing company, in exchange for a convertible note, common stock, and stock warrant for 412,500 shares at a strike price of $0.20. The loan included a $10,000 “original issue discount” plus a 7% interest rate over the 7-month period of the loan. The warrant contained an anti-dilution clause that would enable the strike price to reduce and share number to increase proportionally if the borrower issued stock to other parties for less than $0.20. In 2020, LGH exercised the warrant, purchasing hundreds of millions of shares at a strike price of $0.0001. The borrower sued under federal and state law, seeking damages and to have the transaction declared void. The district court initially dismissed all claims, holding that the borrower was categorically exempt from California’s usury law. The Ninth Circuit affirmed in part and remanded to the district court to determine whether the borrower had stated a claim that the loan was usurious.
The court first determined that the original issue discount qualified as an alternate form of compensation paid to LGH and, thus, constitutes interest. The interest rate plus the original issue discount together resulted in an annualized interest rate of 29.54%. Under California usury laws, the statutory maximum interest rate that can be charged is 10%. LGH argued that because the note was convertible and LGH faced additional risk, it could charge a rate greater than 10%. The court disagreed, finding that the convertible nature of the note did not increase risk and, in fact, only increased the value of consideration LGH received because, if the stock were to rise above the strike price, LGH could receive an even greater value. The court further noted that while loaning money to “small, thinly traded companies is presumably risky,” LGH failed to support its premise that lending to a publicly traded business justified a rate of at least 29.54%. The court concluded that the convertible note alone was sufficient to support a claim for usury.
The case is Social Life Network, Inc. v. LGH Investments, LLC, No. 3:21-cv-767 (S.D. Cal. Nov. 29, 2023). The plaintiffs are represented by the Basile Law Firm, P.C., Law Offices of Robert J. Young, and Leo Law Office, APLC. The defendants are represented by Gibson, Dunn & Crutcher LLP and Mintz Levin Cohn Ferris Glovsky and Popeo PC. The opinion is available here.
