Another Hard Knock for Crowdsourced Securities, and a Glimmer of Hope

December 1st, 2008

I have written a bunch about applying principles of crowdsourcing to securities offerings, including an article last year in Business Week.  The prospects have been dim.  I also met Kiva.org founder Matt Flannery a couple of years ago and asked him if the company would pay interest on Kiva loans.  His response was “No.  We do not want to be regulated like a bank”.

It comes as no surprise, then, that the SEC has told crowdsourced lender Prosper.com that it needs to stop matching lenders with buyers on its site.  Borrowers on Prosper submit loan requests, lenders bid for them, then Prosper packages the loans and manages the borrower-lender relationships.  Borrowers and lenders never know one another’s identities.

The SEC reviewed the facts and applicable law and decided that the operation was really a sale of securities that needed to be registered, esp. based on the facts that the lenders put money in explicitly looking for a return and have essentially no ability to affect transactions- the loans are passive investments intended to make money.

Again, no great surprise here.  There is (still) a lot of capital available in retail-level amounts and it would be great to see Prosper go through the SEC registration process and come out the other side with a vehicle people can use to borrow money and to make some additional income in a novel way.

My guess is that Prosper has known this was coming for some time and was simply building enough business to make the registration process worth the expense.  The SEC reports that it has facilitated $174M in loans, so it could well be there.  I look forward to seeing them register, come back with an SEC-compliant and take a big step forward for crowdsourced securities everywhere.  Fittingly, the SEC registration documents are all public records, so maybe the next company can use Prosper’s process and SEC feedback to make the process a little smoother the next time around.

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