Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, November 24, 2008

Prosper Marketplace Settles Charges It Offered Unregistered Securities

The SEC settled administrative proceedings against Prosper Marketplace, Inc. (Prosper). The SEC Order finds that Prosper violated the registration provisions of the Securities Act of 1933 during the period January 1, 2006 through October 14, 2008, by engaging in the unregistered offering of securities via Prosper's online lending platform. Prosper offers loans in a double-blind, auction-like process wherein multiple lenders bid to fund loans to borrowers. Since the inception of its platform in January 2006, Prosper has initiated approximately $174 million in loans.

The loans are non-recourse in nature and in amounts between $1,000 and $25,000. Lenders and borrowers register on the website and create Prosper identities. Potential lenders bid on funding all or portions of loans for specified interest rates, which are typically higher than rates available from financial institutions. Individual lenders do not actually lend money directly to the borrower; rather, the borrower receives a loan from a bank with which Prosper has contracted. The interests in a given loan are then sold and assigned through Prosper to the lenders, with each lender receiving an individual non-recourse promissory note in the amount of the lender's bid. Prosper collects an origination fee from each borrower of one to three percent of loan proceeds and collects servicing fees from each lender of one percent of loan payments. Prosper administers the collection of loan payments from the borrower and the distribution of such payments to the lenders. Prosper also initiates collection of past due loans from borrowers, assigns delinquent loan accounts to collection agencies and sells defaulted loans to debt purchasers. Lenders and borrowers are prohibited from transacting directly and from learning each others' true identities.

Based on the above, the Order orders Prosper to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and (c) of the Securities Act of 1933. Prosper consented to the issuance of the Order without admitting or denying any of the findings in the Order.

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As a borrower of Prosper Marketplace, I am more concerned about the outcome of this situation. An attorney friend of mine suggested that it could be a crime to make payments to promissory notes that were deemed to be illegal? And according to lenders, and the class action lawsuit blog that is currently in progress,, it appears that there is a very peculiar argument posted by the Admin "If you are not already pulling your free cash out of your account, what are you waiting for? You can’t make loans, you are not being paid interest on your deposit, the SEC just told them to stop selling more loans, and a class action suit has now been filed. Prosper’s future could at this point best be described as “unclear.”"

There is a very large expectation that Prosper will end up Bankrupt based upon these comments. My concerns are what will happen to the borrowers that have made their payments faithfully. Will I be forced to pay my full remaining balance if they go bankrupt? This is something I cannot do...

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Posted by: Sarah | Apr 1, 2009 3:32:12 AM

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