-THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

EQUITY INVESTMENT AGREEMENT

 

Issuer: World Surveillance Group Inc., a Delaware corporation Class of Stock:
Common Stock Issue Date: January 25, 2012 Expiration Date: January 25, 2015

 

THIS EQUITY INVESTMENT AGREEMENT (“Agreement”) is being issued as of the date
hereof by and between World Surveillance Group Inc., a Delaware corporation (the
“Company”), to La Jolla Cove Investors, Inc. (“Holder”). The Company and Holder
are parties to, and this Agreement is being issued and entered into pursuant to
the terms of, that certain Securities Purchase Agreement dated January 25, 2012.
Capitalized terms used but not defined in this Agreement shall have the meanings
ascribed in the Securities Purchase Agreement.

 

ARTICLE 1
DESCRIPTION OF RIGHTS

 

1.1           Purchase Rights. The Company hereby grants to Holder the right
during the term of this Agreement to invest in the Company through the purchase
of up to $5,000,000 of the Company's Common Stock in accordance with the terms
of this Agreement.

 

1.2           Purchase Price. On each Investment Date (including the Initial
Investment Date (as such terms are hereinafter defined)), the Holder shall have
a right to purchase a number of shares of Common Stock equal to the amount
invested on such Investment Date pursuant to Section 2.1 divided by $0.21 from
Company at $0.21 per share ("Purchase Price"). The Holder shall have the right
to purchase Common Stock at the Purchase Price for a period of three (3) years
from the Issue Date hereinabove set forth. For avoidance of doubt, Holder shall
not be permitted to purchase more than 23,809,523 shares of Common Stock
pursuant to this Agreement.

 

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For purposes of this Agreement, "VWAP" means for any date, the price determined
by the first of the following clauses that applies: (a) if the Common Stock is
then listed or quoted on a Trading Market, the daily volume weighted average
price of the Common Stock for such date (or the nearest preceding date) on the
Trading Market on which the Common Stock is then listed or quoted for trading as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City
time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin Board is not a
Trading Market, the volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then quoted for trading on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the "Pink Sheets" published by
Pink Sheets, LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in good
faith by the Holder and reasonably acceptable to the Company.

 

1.3           Term. The term of this Agreement is from the Issue Date through
the Expiration Date set forth above.

 

ARTICLE 2
PURCHASE

 

2.1           Investment. Holder hereof agrees to purchase $5,000,000 of Common
Stock of the Company as follows: a minimum of $250,000 of Common Stock per month
("Minimum Monthly Purchase Amount") (a) beginning on the date that is the
earlier to occur of (i) the effectiveness of a registration statement with the
SEC covering the resale of Fifty Million (50,000,000) shares of Common Stock
(the "S-1"), but in no event prior to 91 days following the closing date, or
(ii) one hundred eighty (180) days following the Closing (the “Initial
Investment Date”), and (b) on each successive 30 day anniversary of such Initial
Investment Date (each, an “Investment Date”). The Minimum Monthly Purchase
Amount shall increase from $250,000 to $500,000 as long as the VWAP is above
$0.09 for the period of ten (10) consecutive Trading Days prior to the
Investment Date and Holder shall fund an additional $500,000 on each Investment
Date for each and every increase in the VWAP of at least $0.02 above $0.09 for
the period of ten (10) consecutive Trading Days prior to the Investment Date.

 

2.2           Method of Purchase. Holder shall purchase Common Stock pursuant to
the rights granted to Holder in Section 1.2 above by delivering a duly executed
Notice of Purchase in substantially the form attached as Appendix 1 to the
principal office of the Company. The Notice of Purchase will be accompanied by
wire transfer of immediately available funds for the aggregate Purchase Price.
The Holder shall not be required to physically surrender this Agreement to the
Company until the Holder has purchased all of the Common Stock purchasable
hereunder, in which case, the Holder shall surrender this Agreement to the
Company for cancellation. Purchases of a portion of the total amount of Common
Stock available hereunder shall have the effect of lowering the amount of Common
Stock purchasable hereunder in an amount equal to the amount purchased. The
Holder and the Company shall maintain records showing the amount of Common Stock
purchased and the date of such purchases. The Holder and any assignee, by
acceptance of this Agreement, acknowledge and agree that, by reason of the
provisions of this paragraph, following the purchase of a portion of the Common
Stock hereunder, the amount of Common Stock available for purchase hereunder at
any given time may be less than the amount stated on the face hereof.

 

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2.3           Delivery of Certificate. As promptly as practicable after the
receipt of the Notice of Purchase, but in any event not more than three
(3) Business Days after the Company’s receipt of the Notice of Purchase, the
Company shall issue the Common Stock purchased and cause to be mailed for
delivery by overnight courier to Holder, or party of Holder’s choosing, a
certificate representing the Common Stock acquired.

 

2.4           Taxes and Expenses. Issuance of certificates for Common Stock
shall be made without charge to the Holder for any issue or transfer tax or
other incidental expense in respect of the issuance of such certificate, all of
which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder.

 

2.5           Purchase Limits. The Holder shall not have the right to purchase
Common Stock under this Agreement, to the extent that after giving effect to
such issuance after exercise as set forth on the applicable Notice of Purchase,
the Holder (together with the Holder’s Affiliates, and any other Persons acting
as a group together with the Holder or any of the Holder’s Affiliates), would
beneficially own in excess of the Beneficial Ownership Limitation. For purposes
of the foregoing sentence, the number of shares of Common Stock beneficially
owned by the Holder and its Affiliates shall include the number of shares of
Common Stock being purchased under this Agreement with respect to which such
determination is being made, but shall exclude the number of shares of Common
Stock which are still subject to purchase under this Agreement or the exercise
or conversion of the unexercised or nonconverted portion of any other securities
of the Company (including, without limitation, any other Common Stock
Equivalents). Except as set forth in the preceding sentence, for purposes of
this Section 2.5, beneficial ownership shall be calculated in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder. Upon the written or oral request of a Holder, the Company shall
within two Business Days confirm orally and/or in writing to the Holder the
number of shares of Common Stock then outstanding. The “Beneficial Ownership
Limitation” shall be 4.99% of the number of shares of the Common Stock
outstanding. The Holder, upon not less than 61 days’ prior notice to the
Company, may increase or decrease the Beneficial Ownership Limitation, provided
that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number
of shares of the Common Stock outstanding.

 

2.6           Conditions Precedent. As a condition precedent to Holder's
obligations hereunder (provided that Holder may, in Holder’s sole and absolute
discretion, waive all or any of the following conditions):

 

(a)          No Event of Default has occurred under this Agreement, or any other
Transaction Document.

 

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ARTICLE 3
ADJUSTMENT TO THE SHARES

 

The number of shares of Common Stock issuable upon the investments or purchases
under this Agreement shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:

 

3.1           Reclassification. In case of any reclassification or change of
outstanding Common Stock under this Equity Investment Agreement, and in any such
case, the Holder, upon the purchase hereof at any time after the consummation of
such reclassification or change, shall be entitled to receive in lieu of each
share of Common Stock theretofore issuable upon the purchase under this
Agreement, the kind and amount of shares of stock, other securities, money
and/or property received upon such reclassification or change by a holder of one
share of Common Stock. The provisions of this Section 3.1 shall similarly apply
to successive reclassifications or changes.

 

3.2           Fundamental Transaction. Subject to Section 3.5, if, at any time
during the term of this Agreement, (i) the Company, directly or indirectly, in
one or more related transactions effects any merger or consolidation of the
Company with or into another Person, (ii) the Company, directly or indirectly,
effects any sale, lease, license, assignment, transfer, conveyance or other
disposition of all or substantially all of its assets in one or a series of
related transactions, (iii) any, direct or indirect, purchase offer, tender
offer or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to sell, tender or
exchange their shares for other securities, cash or property and has been
accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the
Company, directly or indirectly, in one or more related transactions effects any
reclassification, reorganization or recapitalization of the Common Stock or any
compulsory share exchange pursuant to which the Common Stock is effectively
converted into or exchanged for other securities, cash or property, (v) the
Company, directly or indirectly, in one or more related transactions consummates
a stock or share purchase agreement or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
or share purchase agreement or other business combination) (each a “Fundamental
Transaction”), upon any subsequent purchase under this Agreement, the Holder
shall have the right to receive, for each share of Common Stock that would have
been issuable upon such purchase immediately prior to the occurrence of such
Fundamental Transaction, at the option of the Holder, the number of shares of
Common Stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and any additional consideration (the “Alternate
Consideration”) receivable as a result of such Fundamental Transaction. For
purposes of any such exercise, the determination of the purchase price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the
purchase price among the Alternate Consideration in a reasonable manner
reflecting the relative value of any different components of the Alternate
Consideration. Subject to Section 3.5, if holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any purchase under this Agreement following such
Fundamental Transaction.

 

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3.3           Notice to Holder. If (A) the Company shall declare a dividend (or
any other distribution in whatever form) on the Common Stock, (B) the Company
shall declare a special nonrecurring cash dividend on or a redemption of the
Common Stock, (C) the Company shall authorize the granting to all holders of the
Common Stock rights or warrants to subscribe for or purchase any shares of
capital stock of any class or of any rights, (D) the approval of any
stockholders of the Company shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, or any compulsory share exchange whereby the Common Stock
is converted into other securities, cash or property, or (E) the Company shall
authorize the voluntary or involuntary dissolution, liquidation or winding up of
the affairs of the Company, then, in each case, the Company shall cause to be
mailed to the Holder, at least 20 calendar days prior to the applicable record
or effective date hereinafter specified, a notice stating (x) the date on which
a record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall
be entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange; provided that the failure to mail such notice
or any defect therein or in the mailing thereof shall not affect the validity of
the corporate action required to be specified in such notice. To the extent that
any notice provided hereunder constitutes, or contains, material, non-public
information regarding the Company or any of the Subsidiaries, the Company shall
simultaneously file such notice with the Commission pursuant to a Current Report
on Form 8-K. The Holder shall retain its right to purchase Common Stock under
this Agreement during the period commencing on the date of such notice to the
effective date of the event triggering such notice except as may otherwise be
expressly set forth herein.

 

3.4           Fractional Shares. No fractional Shares shall be issuable upon the
purchase of Common Stock under this Agreement, and the number of shares to be
issued shall be rounded down to the nearest whole share.

 

ARTICLE 4
TRANSFER

 

4.1           Compliance with Securities Laws. This Agreement may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder.

 

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4.2           Transfer Procedure. Holder shall have the right without the
consent of the Company to transfer or assign in whole or in part this Equity
Investment Agreement and the Common Stock issuable upon exercise of the rights
granted pursuant to this Equity Investment Agreement. Holder shall give written
notice to the Company (a “Transfer Notice”) of such transfer. Each Transfer
Notice shall describe the manner and circumstances of the proposed transfer in
reasonable detail and, if the Company so requests, shall be accompanied by an
opinion of legal counsel, in a form reasonably satisfactory to the Company.

 

ARTICLE 5
MISCELLANEOUS

 

5.1           No Rights of Shareholder. This Equity Investment Agreement does
not entitle Holder to any voting rights or any other rights as a shareholder of
the Company prior to the Holder’s acquisition of Common Stock as provided
herein.

 

5.2           No Impairment. Except and to the extent as waived or consented to
by the Holder, the Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Agreement, but will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of Holder as set forth in this Agreement against impairment.

 

5.3           Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall not be a Business Day, then, such action may be taken or such right
may be exercised on the next succeeding Business Day.

 

5.4           Restrictions. The Holder acknowledges that the Common Stock
acquired under this Agreement, if not registered pursuant to the Securities Act
of 1933, as amended, will have restrictions upon resale imposed by state and
federal securities laws. Under no circumstances will this Agreement or the
Common Stock issued upon the exercise of rights granted hereunder be settled on
a net cash basis.

 

5.5           Entire Agreement. This Agreement, the Securities Purchase
Agreement and the other Transaction Documents, together with the Exhibits and
Schedules thereto, contain the entire understanding of the parties with respect
to the subject matter hereof and supersede all prior agreements, understandings,
discussions and representations, oral or written, with respect to such matters,
which the parties acknowledge have been merged into such documents, exhibits and
schedules.

 

5.6           Amendments; Waivers; No Additional Consideration. No provision of
this Agreement may be waived or amended except in a written instrument signed by
the Company and the Holder. No waiver of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a
continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any
delay or omission of either party to exercise any right hereunder in any manner
impair the exercise of any such right.

 

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5.7           Construction. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party. This Agreement
shall be construed as if drafted jointly by the parties, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

 

5.8           Notices. Any and all notices or other communications or deliveries
required or permitted to be provided hereunder shall be in writing and shall be
deemed given and effective if delivered in the manner and to the address as
specified in the Securities Purchase Agreement.

 

5.9           Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
California, without regard to the principles of conflicts of law thereof. Each
party agrees that all Actions concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
Affiliates, employees or agents) shall be commenced exclusively in the
California Courts. Each party hereto hereby irrevocably submits to the exclusive
jurisdiction of the California Courts for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of the any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any Action, any claim that it is not personally subject to the jurisdiction
of any such California Court, or that such Action has been commenced in an
improper or inconvenient forum. Each party hereto hereby irrevocably waives
personal service of process and consents to process being served in any such
Action by mailing a copy thereof via registered or certified mail or overnight
delivery (with evidence of delivery) to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing contained
herein shall be deemed to limit in any way any right to serve process in any
manner permitted by law. Each party hereto hereby irrevocably waives, to the
fullest extent permitted by applicable law, any and all right to trial by jury
in any legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. If either party shall commence an Action to
enforce any provisions of a Transaction Document, then the prevailing party in
such Action shall be reimbursed by the other party for its reasonable attorneys’
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such Action.

 

5.10         Counterparts. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission or electronic mail in portable document
format or other means intended to preserve the original graphic content of a
signature, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile signature page were an original thereof.

 

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IN WITNESS WHEREOF, the parties hereto have duly caused this Equity Investment
Agreement to be executed and delivered by their duly authorized representatives
as of the date first above written.

 

WORLD SURVEILLANCE GROUP INC.   La Jolla Cove Investors, Inc.           By: /s/
Glenn D. Estrella   By: Travis W. Huff           Title:  President and CEO  
Title:  Portfolio Manager/VP

 

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APPENDIX 1

 

NOTICE OF PURCHASE

 

1.          The undersigned hereby purchases _____ shares of the Common Stock of
World Surveillance Group Inc. pursuant to the terms of the Equity Investment
Agreement issued to La Jolla Cove Investors, Inc. on January __, 2012.

 

2.          In connection with this purchase we are delivering by wire transfer
the aggregate Purchase Price of $____________ by wire transfer in immediately
available funds.

 

3.          Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:

 

La Jolla Cove Investors, Inc.

1793 Union Street

San Francisco, California 94123

 

    (Signature)           (Date)  

 

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