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June 17, 2011
Peer-to-Peer Lending, Crowd-funding, and Securities Law
Stefan Padfield blogged yesterday about about peer-to-peer lending and the question of who is issuing the notes offered on peer-to-peer sites.
Peer-to-peer lending is just one part of the broader crowd-funding movement—business fundraising through small investments from a large number of investors. As I have previously noted, the SEC has promised to take a look at crowd-funding as part of its overall review of the impact of its regulations on small business fundraising.
Peer-to-peer lending, and crowd-funding in general, raise a number of issues under federal securities law. The first, and most obvious, issues relate to the registration requirements of the Securities Act. Are these sites offering securities and, if so, is there an exemption from the registration requirements of the Act? The issue in Stefan’s post falls within this general question.
But crowd-funding sites raise other potential issues as well. If the sites are offering securities , the sites themselves could be brokers, or even exchanges, within the meaning of the Securities Exchange Act. Alternatively, it is at least possible that crowd-funding sites are investment advisers subject to regulation under the Investment Advisers Act. The law on what constitutes a broker, exchange, or investment adviser is murky enough that there is no easy answer. That murkiness is partially because much of the relevant authority comes from no-action letters (See my earlier post on the problem with no-action letters.)
If the SEC wishes to facilitate peer-to-peer lending and other forms of crowd-funding, and it’s not clear to me that it really does, it’s going to take more than just an exemption from the Securities Act registration requirements. To be effective, any regulation is going to have to deal with these other issues as well. And Stefan’s post makes it clear that state blue sky law is also going to be a major issue. A federal exemption that does not preempt state law isn’t going to accomplish much.
I’m working on an article on crowd-funding that addresses all of these issues. When I have a full draft, which I hope will be within the next month, I will post the SSRN link for anyone who’s interested.
-Steve Bradford
June 17, 2011 in Securities Regulation, Steve Bradford | Permalink
Comments
I'm excited to see growing interest in P2P regulatory issues, and I'll be thrilled to see the crowd-funding paper when its ready. For now, consider looking at my forthcoming paper on the securities characterization of these platforms.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1823763
Posted by: Andrew Verstein | Jun 19, 2011 6:30:12 AM
I would also be interested to read the draft of your crowd funding paper when it is ready. The only point I disagree with in your article is when you state "a federal exemption that does not preempt state law isn’t going to accomplish much."
I would argue that peer to peer lending has accomplished a great deal already with just this exemption. Over half the states allow peer to peer lending fro investors (including California and New York) and most states (over 40) allow it for borrowers. So this new financial vehicle is available to over two-thirds of the U.S. population. More than $500 million in loans have been funded so far helping people get out of debt, start businesses, do home improvements, pay for medical procedures, etc. Investors are enjoying great returns as well.
There have been several new startups this year looking to enter the fray. I would say we have a thriving peer to peer lending industry in this country already even with current laws as they are.
Posted by: Peter Renton | Jun 21, 2011 8:24:12 AM
Peter, I'm not familiar with the state exemptions specifically directed at peer-to-peer lending. To the extent there are state exemptions, you're right that federal preemption would not be necessary. But I was focusing on crowd-funding more broadly than just peer-to-peer lending, and fitting a national offering into existing state securities exemptions would be very difficult (although see ProFounder, which attempts to use state exemptions for a very limited version of crowd-funding). My guess is that state securities regulators are not going to be too receptive to equity crowd-funding, so federal preemption would be necessary to make it work. However, my guess is that the SEC isn't going to be too receptive to equity crowd-funding either, so this is probably an academic question.
Posted by: Steve Bradford | Jun 21, 2011 3:42:08 PM
I really look forward to reading your forthcoming article, when ready.
Best,
NR
Posted by: Nicolás Ricciardi | Jun 22, 2011 9:35:54 AM
Great overview of the legal side of Crowd Funding and p2p lending platform. I now understand why most crowd funding websites prohibit the offer of equity against contribution.
However, Profounder is one crowd funding website that allows the offer of shares to contributors. It should be noted that profounder is open only to legal, incorporated businesses.
Personally, I tried IndieGoGo some times back. I just hope it works.
Posted by: Carol Laprovidence | Jun 27, 2011 1:55:04 PM
Make a budget and be sure that you can do what you need for the sum you’re setting as your goal. The most important thing when Crowdfunding is being sure that you can deliver on your promises.
Posted by: Crowdfunding | Jul 2, 2011 6:34:13 AM
