Prosper logoAfter shutting down last October and being slapped with a cease and desist from the SEC and a fine from state regulators, peer to peer lending company Prosper filed a new S-1 with the SEC yesterday. This is the third amendment to the S-1 it originally filed back in 2007, asking the SEC to regulate a described secondary market. Now that the SEC has mandated the regulatory structure of P2P lending through Lending Club’s registration, Prosper’s S-1 includes securitization for initial offerings of loans, not just secondary sales.

It’s unclear what happened with Prosper‘s original S-1 filing from late 2007, although it is possible that it was that filing, coupled with Lending Club’s shutdown in April 2008 that prompted the SEC to investigate the company, leading to the eventual shutdown in October 2008. In its efforts to get registered after shutting down, rather than filing a new S-1, Prosper chose to amend their original filing. Prosper’s first amendment was filed on Dec 5, 2008, and was more or less a complete re-write of their original filing, modeled closely on Lending Club’s registration documents. Prosper’s second amended S-1 followed on Jan 16, 2009, only 5 weeks after their previous amendment, so it is surprising that the third amendment has taken three months to publish.

There are a few differences between Prosper’s previous filing and this latest one. Specifically:

  • Open market loans play a much bigger role in the new filing. In fact, the description of the offering has changed from “$500 million in Borrower Payment Dependent Notes” to “$250 million in Prosper Borrower Notes” and “$250 million in Prosper Open Market Notes”. “Open market notes” is Prosper’s name for loans which have already been issued by traditional lenders, and are being securitized and re-sold on Prosper’s loan marketplace. If approved, this will be a new feature in P2P lending, although the idea of “securitization” will be a tough sell to consumers who likely associate it with the recent economic crisis.
  • A new bullet point was added to the “important terms of the notes” section on the first page of the prospectus: “A lender member’s recourse will be extremely limited in the event that borrower information is inaccurate for any reason.” This is not necessarily news to existing Prosper lenders (there have been many complaints about the borrower verification process), although it is likely that the SEC asked Prosper to add this as a high-level warning.
  • Prosper is now naming FOLIOfn as the operator of the “Folio Investing Note Trader Platform”, which is the new name for Prosper’s intended secondary market. Note sellers will pay a percentage of a note’s sale price on the secondary market, but the “trading platform administrative fee” of $0.25 mentioned in earlier filings is now absent.
  • Changes for borrowers include a raising of borrower origination fees (from 2.5% to 3%), and slight changes in the minimum credit score requirements. The minimum credit score for new borrowers has been raised to 640 (similar to Lending Club, whose minimum FICO is 660), although past and existing customers may go as low as 600.
  • Financial requirements for lenders are spelled out, with lenders in Alaska, Idaho, Kansas and Pennsylvania required to “satisfy minimum financial suitability standards and maximum investment limits” of either income of $70k and net worth of $70k or a net worth of $250k.
  • The latest filing includes 2008 financials from Prosper, showing that by the end of 2008, the company had burned through $30.2 million of its $40 million in funding, leaving it with $9.8 million in cash. The company says this will require them to raise additional funding by 2010. 

Due to the filing, Prosper is still in a quiet period. The site has not been updated, and there is no statement from the company. The Prosper blog is running a pathetic series on online dating, whose relevance to personal finance or credit escapes me.

Yesterday marked the 6 month anniversary of Prosper’s shutdown last October. It took Lending Club about six months to register with the SEC and re-launch their site. Is six months the magic number for SEC registration? Is Prosper ditching  peer-to-peer lending in favor of becoming a personals site? I guess we’ll have to wait and see.

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