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Teaching the World About Peer to Peer Lending

Recent SEC Report on Blockchain ICOs Helps to Provide Some Clarity but Questions Remain

We look at how regulators are beginning to send a signal to the blockchain market and what questions still remain for this new capital raising method.

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Last week the Securities and Exchange Commission (“SEC”) released a report on the Initial Coin Offering (“ICO”) of the Decentralized Autonomous Organization (the “DAO”), which raised almost $150mn from investors using this new capital raising method (before returning the money). The report explained that the SEC views this ICO as a sale of securities and that the DAO was in violation of securities laws, though no enforcement action was taken.

There has been an industry wide debate on whether or not Initial Coin Offerings constitute the sale of securities. An ICO is a means by which a company in the blockchain space can raise capital from investors using cryptocurrencies and investors receive compensation in return, whether that is a reward, membership, delivery of a product or service, or financial compensation tied to the underlying profits generated by the business.

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SEC Committee Discusses Changes to Accredited Investor Definition

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SEC Accredited Investor Change

Yesterday the Investor Advisory Committee of the Securities and Exchange Commission (SEC) met to discuss, among other things, updating the definition of an accredited investor. To be an accredited investor today a person must have an annual income of $200,000 or more for each of the past two years or a net worth (excluding a primary residence) in excess of $1 million.

The issue is that this definition was created several decades ago and has never been adjusted for inflation. So, some people believe it should be updated. If this happens, it could have a profound affect on this industry. Pretty much every investment option outside of Lending Club and Prosper is limited to accredited investors only. Any change to this definition that reduces the available pool of investors could be very damaging to some of the platforms and funds in our industry.

I reached out to several industry leaders to get their take on this new development. I wanted to see if everyone agreed with me that this could become a big problem. Here is what Jilliene Helman, CEO of Realty Mogul, a real estate marketplace for accredited investors, had to say:

It would be a shame to see the definition of an accredited investor become even more onerous.  The JOBS act was meant to open up the private markets for investors, and adjusting the income or net worth requirements for accredited investors upward would serve the opposite purpose.

It’s incredibly important that investors are protected – and a core focus of ours at Realty Mogul, but what we’ve found is that the majority of our investors are highly sophisticated.  I’d hate to see those investors lose out on the opportunity to invest in private markets if income requirements are increased by the SEC.

David Klein is the CEO of CommonBond, a student loan platform connecting borrowers with accredited investors and he had a slightly different take: [Read more…]

Former Loanio Founder Back With a New P2P Lender

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New p2p lender focusing on institutional investors

Long time followers of the p2p lending space will remember Loanio.com. They were the victims of unfortunate timing when they launched in October 2008. Not only did they launch in the midst of the biggest financial crisis in decades it quickly became clear that the SEC required an S-1 registration to operate as a p2p lender, something Loanio did not have.

Fast-forward more than four years and Loanio founder Michael Solomon is back with a new venture. This time around Solomon can lean on his own experience with Loanio as well as those of his new partners who have a solid background in online financial services.

CircleBack Lending is the name of this new p2p lender but they are not looking to compete head to head with Lending Club and Prosper. Their focus is going to be on accredited and institutional investors only thereby skirting the expensive and onerous SEC registration process.

Judging from the size of the potential p2p lending market and the demand from these kinds of investors there is clearly room for more players. Whether or not CircleBack Lending can succeed will be dependent on whether they have a compelling enough offer to convince investors their platform is better than Lending Club and Prosper.

The planned launch for CircleBack Lending is in the third quarter this year but that will be dependent on how successful they are with their initial round of fundraising. When I spoke with Michael Solomon and co-founder Todd Walters last week they said they have been self-funded to date and their technology platform is around 75% complete. They are looking to raise angel capital soon that will help take them to launch and beyond.

The U.S. p2p lending industry needs more than two players. With Lending Club’s success in the past 12 months it is clear that the concept has legs. CircleBack is looking to piggyback on that success. But as the current number three p2p lender, Peerform, has shown it is not easy to get traction in this space. It will be interesting to see how CircleBack Lending does – I will be following their progress closely in the coming months.

You can read the full press release on the CircleBank Lending announcement here.

 

Some People Think P2P Lending is a Ponzi Scheme

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P2P Lending is not a Ponzi SchemeIn the past couple of weeks I have had two emails and one conversation on Twitter about Ponzi schemes. Some people have the idea that with the returns claimed by Prosper and Lending Club p2p lending must be a Ponzi scheme.

Really?

It seems that in the era of Bernie Madoff and Allen Stanford people are more suspicious. In this low interest rate environment anyone claiming fixed interest returns of 8% or more must be viewed with skepticism. And 10%, well, there is no other explanation other than some kind of fraud must be at work.

No. No. No.

According to the SEC’s website a Ponzi scheme is “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” For p2p lending to be a Ponzi scheme new investors, not borrowers would be providing the returns for existing investors. This would imply that all or most of the loan applications that are on the platform every day are fictitious.

Lending Club and Prosper Have Transparent Audit Trails

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You Can’t Find Lending Club on the SEC Website

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As you may know every loan on both Lending Club and Prosper is a security that is registered with the SEC. Not only that but the quarterly and annual financial reports for both companies are also filed with the SEC.

The SEC has the Electronic Data-Gathering, Analysis, and Retrieval system, known as EDGAR, that allows anyone to query their entire database of filings for information on any registered company. Which means you can search the filings for Lending Club and Prosper.

If you type Prosper into the company search form on EDGAR you can easily find the official filings of Prosper Marketplace Inc (the official name of Prosper) as well as their new entity Prosper Funding LLC which is still in the approval process. But type in “Lending Club” and you receive the message: No matching companies. What gives? [Read more…]

A Look Back at the Lending Club and Prosper Quiet Periods

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Talk Shows On Mute
Creative Commons License photo credit: Katie Tegtmeyer

This is a question I get regularly: what does this “Quiet Period” thing mean? When discussing the history of Lending Club and Prosper I have often mentioned this mysteriously named Quiet Period but I have never fully explained what this meant. So today we will take a look back and explain what happened as I understand it.

When both companies launched, their interpretations of the financial laws were that they were functioning in a similar way to a banking intermediary. Therefore they should be regulated in a similar way to a bank. But the government thought differently. They thought the investor notes should be treated as securities and therefore they should be regulated by the Securities and Exchange Commission (SEC).

The Lending Club Quiet Period

In early 2008 Lending Club saw the writing on the wall and decided to shut down voluntarily and go through the registration process with the SEC. They entered a quiet period by posting this message on their blog on April 7, 2008. Here is an excerpt:

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes. [Read more…]

U.S. House Passes Crowdfunding Bill

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I never talk politics on the blog here but I must commend the Democrats and Republicans for coming together last week. On November 3rd the Entrepreneur Access to Capital Act (known as H.R. 2930) was passed in a near unanimous vote by the House of Representatives.

I first covered this bill a few weeks ago as arguments were being discussed in a House Subcommittee. It came up for a vote in the U.S. House last week and it passed by a margin of 407-17. It has also received the backing of President Obama so if the Senate passes this bill (which, dare I say, is likely) it will soon become law.

One aspect of the bill has changed since it was introduced by Rep. Patrick McHenry. He wanted a $5 million limit on capital raising – that has been reduced to $1 million or $2 million. Here are the core tenets of this bill:

  • A $10,000 limit per investor (or 10 percent of annual income, whichever is less).
  • A cap on the amount a company can raise of $1 million per offering (and up to $2 million if audited financial statements are provided).
  • No limit on the number of accredited or unaccredited investors. [Read more…]

Possible Changes Coming to Allow More Crowdfunding

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Last week with little fanfare or media coverage a House subcommittee met to discuss crowdfunding. The purpose of the meeting was to determine whether new legislation might be needed to allow small companies to raise money in a method more in line with 21st century practices.

While there was little media coverage of this meeting I did read this article in the Wall Street Journal (subscription required) and also coverage by Reuters on Yahoo News. The subcommittee of the House Committee on Oversight and Government Reform heard from top people at the SEC on this issue. Meredith Cross, the director of corporation finance at the SEC seemed open to possible changes.

Ms. Cross said the SEC, as part of its review of capital rules, was far along in a study to examine revisions to the 500-shareholder cap for private companies. The SEC is also working on a release to solicit public comment on issues relating to the strict ban on private companies publicizing their shares.

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Long Awaited Government Report on P2P Lending Released

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I first wrote about the GAO report on p2p lending last year. The GAO have been doing an analysis of the federal regulatory environment concerning p2p lending and would make recommendations to Congress on how to regulate this growing industry going forward. The report was released yesterday, two weeks early.

The full report is 78 pages long and while I haven’t read every word yet I have skimmed the report and to tell you the truth I am a bit disappointed. The upshot of their report is that they say it is difficult to know what the best regulatory environment will be because the industry is so dynamic and growing rapidly.

However, the report did identify two options for regulating p2p lending: [Read more…]

What are the Risks of Peer to Peer Lending?

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I was chatting with a friend of mine over the weekend who has just inherited a small amount from her grandfather’s estate. She knew about my involvement in peer to peer lending and asked me if it was a good place for this money. Of course, I told her it was a great idea.

Then she asked me what the risks were and I rattled off a few of the points I mentioned below. But after our conversation I realized that I had never done a post detailing the risks of p2p lending and it is most likely one of the first questions potential investors will ask. So here it is.

The prospectuses of both Prosper and Lending Club go into great detail (over 20 pages each) about the potential risks of p2p lending. While I encourage everyone to read these prospectuses I realize that few people will take the time. So, here are the five main risks as I see them:

1. Borrower Defaults

When you invest in borrower loans these are unsecured loans, meaning there are no assets backing the loans (such as a house in a mortgage loan). So, if a borrower defaults on the loan there is little an investor can do. You just take the loss of whatever amount of principal is left unpaid. With p2p lending default rates averaging around 3% a year, most investors will encounter defaults at some point. [Read more…]

About Lend Academy

Lend Academy has been bringing you all the news and information about peer to peer lending since 2010. Founded by Peter Renton, Lend Academy not only has the most active news site, but also the largest online forum and the first and most popular podcast in the industry.

The Lend Academy team loves peer to peer lending and our staff have all invested their own personal money in one or more of the platforms. Lend Academy Media is part of Cardinal Rose Group which also owns LendIt, the leading industry conference, and has a majority interest in NSR Invest.

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