Prosper Funding LLC Approved by the SEC

[Peter]

There was some good news from Prosper this week - their S-1 filing for Prosper Funding LLC was finally approved. This means that all investor notes will now be protected in the event of a Prosper bankruptcy. This is what some of the big investors have been waiting for so let's see if they start investing again.

You can read the details here on the SEC website:
http://www.sec.gov/cgi-bin/browse-edgar?company=prosper+funding&match=&CIK=&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany" class="bbc_link" target="_blank">http://www.sec.gov/cgi-bin/browse-edgar?company=prosper+funding&match=&CIK=&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany

If you don't know what Prosper Funding LLC is all about then read this post from a few months ago:
http://www.lendacademy.com/prosper-announces-the-creation-of-bankruptcy-remote-entity/" class="bbc_link" target="_blank">http://www.lendacademy.com/prosper-announces-the-creation-of-bankruptcy-remote-entity/

I will have more about this on the blog next week but wanted to let you all know here first.

[investforfreedom]

Thanks for keeping us posted on this, Peter.  This is a significant development.  It will also put some pressure on LC to implement similar measures to protect the smaller investors, not just those with deep pockets.

[priuspilot]

Nice! I'm gonna go transfer some money there to celebrate

[TravelingPennies]

I'm no lawyer but I think the interesting stuff is here...




Security interest—ranking
    
The Notes will not be contractually senior or contractually subordinated to other indebtedness, if any, that Prosper Funding incurs.  All Notes will be special, limited obligations of Prosper Funding.  Prosper Funding was formed by PMI so that, in the event of PMI's bankruptcy, the borrower loans that Prosper Funding owns should be shielded from claims by PMI's creditors, thereby protecting the interests of Note holders in those borrower loans and the proceeds thereof.  This is achieved by placing certain restrictions on Prosper Funding's activities, including restrictions in Prosper Funding's organizational documents on its ability to incur additional indebtedness, and by implementing certain formalities designed to expressly reinforce its status as a distinct corporate entity from PMI. Nevertheless, the Notes themselves do not restrict Prosper Funding's incurrence of other indebtedness or the grant or imposition of liens or security interests on Prosper Funding's assets, and holders of the Notes do not themselves have a direct security interest in the corresponding borrower loan or the proceeds of that loan.  Accordingly, in the event of a bankruptcy or similar proceeding of Prosper Funding, the relative rights of a holder of a Note may be uncertain. To further limit the risk of Prosper Funding's insolvency, Prosper Funding has therefore granted the indenture trustee, for the benefit of the Note holders, a security interest in the borrower loans, the payments and proceeds that Prosper Funding receives on the borrower loans, the bank account in which the borrower loan payments are deposited and the FBO account.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the Amended and Restated Borrower Payment Dependent Notes Indenture for the Notes (the "indenture"), which would include Prosper Funding's becoming subject to a bankruptcy or similar proceeding.  Only the indenture trustee, not the holders of the Notes, has a security interest in the above collateral.  If the indenture trustee were to exercise its legal rights to the collateral, the indenture provides that amounts collected on a particular borrower loan (minus allowable fees and expenses) are to be applied to amounts due and owing on the corresponding Note.  There can be no assurance, however, that the indenture trustee, or ultimately the Note holders, would realize any amounts from the collateral.  See "Risk Factors—Risks Related to Prosper Funding and PMI, the Platform and Prosper Funding's Ability to Service the Notes" for more information.


https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Fwww.sec.gov%2FArchives%2Fedgar%2Fdata%2F1416265%2F000114036112052353%2Fchart.jpg&hash=889667699673c5d66cdb4b61ceab464e" alt="" class="bbc_img" />

Does this new structure apply to loans issued starting now? Anybody know?

[hippo387]

I think this is a game changer (as long as it wasn't done with the expectation of a PMI bankruptcy, but I highly doubt it would've been approved if that were the case). The biggest risk to investing via Prosper was not the notes themselves, it was the stability of the platform. This structure provides greatly increased stability and reassurance to investors. I will be increasing my investment (which is currently $70K+) in 2013.

[Peter]

Woo - hoo!

(Game on!)

[mo]

Does Lending Club have anything like this setup?  Last I read their prospectus one of the risks was them going bankrupt...

[DanB]

No, LC does not, but they should be reminded, badgered, hassled etc............ by all of us until they do.

[Dennis]

This is a HUGE game changer for me.  If notes are protected, the biggest risk to investing in Prosper has been removed (IMHO).  I'll wait until an official release from Prosper and then it's off to the races with new $$ from me.  I hope they also get the software problem fixed very soon.

[Fiscal Sergeant]

This is rather bad news.  Once again I have to race Worth Blanket for notes...

[faeriering]

so I sent a message to LC.  DanB thanks for reminding me that we have the power to take our issues to the source.  I keep forgetting to do that, and tend to bitch behind there backs.  A lesson I could definitely apply to my personal and business life.

The response I got back seemed to show that LC was really comfortable with their risk profile vs. Prosper's Risk Profile and that they didn't see any reason to mitigate that further.  They also said they are working on FoiloFN.

I agree that their financial situation is in a much better place than Prosper . . . Do other's see risks in LC going bankrupt and needing the kind of protection that Prosper achieves with this SEC approval?

[TravelingPennies]

While I have no inside information on this I would be very surprised if LC doesn't come up with some kind of bankruptcy remote structure in 2013. I expect they do not want a competitive disadvantage this big.

[TravelingPennies]

I'd be surprised as well Peter. I think everyone agrees that LC is in a much stronger financial position than Prosper. I don't believe that to be the issue here though.

Just to recap for those who may not be aware:

The issue here is that Lending Club already has had such a vehicle in place for its institutional investors. Why? I'm guessing it wasn't just out of the goodness of their heart but rather because institutional investors have either demanded it or it has been determined that such a vehicle assuages the concerns of institutional investors by adding a "layer" of protection in the very unlikely event that a bk becomes an issue.
Ok, so fast forward to the present & Prosper has now apparently shown that such a vehicle can be put in place for individual/retail investors as well. So one would think that LC would be eager to extend that same layer of protection to us retail investors, regardless of whether they are "really comfortable with their risk profile vs. Prosper's Risk Profile" or not. To deny us that same level of protection, given all of the above is imo unconscionable & I'd encourage others who sees this as I do to remind them of this until they see it our way.

[TravelingPennies]

The only reason I could LC not doing this for the retail investor is because 99% of their retail investors have no idea about this issue and therefor spending on the legal fees etc. to put it in place would not be cost effective for them.

[TravelingPennies]

priuspilot............That is so true.