Department of Financial Institutions
Securities Regulators Reach Settlement With Prosper.com
FRANKFORT, Ky. – Dec. 3, 2008 – Kentucky is at the forefront of a settlement reached in principle Monday between state securities regulators and Prosper Marketplace Inc., an online peer-to-peer lending service.
Several states investigated Prosper for selling unregistered securities and omission of material facts in connection with the offer. However, the Kentucky Department of Financial Institutions (DFI) was the first state regulator to take formal action against the company. DFI issued a stop order on May 28 halting the sale of the securities in the commonwealth, which was later replaced with an agreed order on June 20.
“Kentucky was one of the first states to raise concerns about the securities sold by Prosper Marketplace. Kentucky also was instrumental in organizing the working group formed by the North American Securities Administrators Association to investigate Prosper’s activities,” said James Strode, director of DFI’s Division of Securities. “Our message is clear that companies and individuals will not be allowed to violate the registration and disclosure requirements of Kentucky’s securities law.”
Through Prosper’s Web site, which has since been shut down, lending “members” would pledge an amount to lend and how much interest they expected to receive. Borrowing “members” would submit an application, and Prosper would issue funds. In return, the lender would receive a “note” issued by Prosper.
The states consider the notes to be securities that were not registered for sale, as required by law. Regulators also were concerned that Prosper failed to disclose the true risks involved in the transactions.
Neither the lenders nor the borrowers knew each others’ identity, or had the ability to contact each other. The collection and disbursement of loan proceeds and payments was the responsibility of Prosper. Borrower credit checks were minimal, and if loan defaults occurred, Prosper had no liability for payments. Its collection responsibilities were limited to referring defaults to third-party collection agents.
There are 310 Kentucky investors holding notes that cover 10,843 loans in Kentucky with a value of $855,517. More than $500,000 of those loans remain outstanding. While Prosper may not issue more of the notes without first registering, the current notes outstanding will remain until paid off.
Under the terms of the settlement, the San Francisco-based company agreed not to offer or sell any securities in any jurisdiction until it is in compliance with that jurisdiction’s securities registration laws. Prosper also agreed to pay a fine totaling $1 million to the states. In consideration of the settlement, the states will terminate their investigation of Prosper’s activities related to the sale of securities before Nov. 24. DFI’s agreed order issued in June 2008 can be found online at www.kfi.ky.gov/legalresources/enforcementactions/securitiesea.htm.
From February 2006 until it stopped in mid-October 2008, Prosper offered and sold promissory notes with fixed annual interest rates ranging from 7 percent to 36 percent, amortized over a three-year term with equal monthly payments. As of Sept. 29, 2008, Prosper’s Web site reported that it had 810,000 members and $175 million in loans funded.
DFI is an agency in the Public Protection Cabinet. It supervises the financial services industry by examining, chartering, licensing and registering various financial institutions, securities firms and professionals operating in Kentucky and many of the products they sell. DFI’s mission is to serve the public through effective and efficient regulation that promotes consumer confidence and economic growth.