Back to Zopa Blog

The tricky world of US regulation

Given there’s been plenty happening recently in the world of P2P finance in the US, including our withdrawal from the US market for the moment, I thought I would share a few thoughts.

We always took the view that the SEC would likely view our platform, as operated in the UK and Italy, as requiring registration with them. Individual promissory notes from borrowers could be seen as “securities” needing registration, and even if not then the firm at the centre dealing with them could require it. That’s the key reason why we didn’t launch our UK model in the US and watched with great interest when others did proceed with platforms that we felt carried regulatory risk. Lending Club were the first to acknowledge this risk in seeking registration in April, a process which took 6 months at a time when the SEC were arguably a little less “occupied” than today. At least they submitted themselves voluntarily which must have earned them some brownie points. They had also, rather smartly in my view, obtained some institutional funding in order to be able to continue lending, albeit on a small scale, while they were closed to working with normal “retail” lenders. We share something with Lending Club in that we both believe that P2P platforms should provide some added value in credit assessment and not leave this highly complex area solely to uninformed amateurs – no offence intended to any such people reading! The benefit of this approach has been borne out by their much better loan repayment performance than other US players.

However the interesting point is not just whether SEC registration is required, and if so how to get it, but what does an SEC registered business then look like? Our understanding is that it involves making your entire website in effect into a giant prospectus with all the verification issues that entails. I think it looks very difficult to run an interesting business that way.

The next event of note was Prosper deciding last month, one day after issuing a statement that it saw no need and after Lending Club had reopened for business , to seek SEC registration à la Lending Club. What sequence of events led to this Damascene conversion is open to conjecture. However it is noteworthy that the SEC issued a “Cease and Desist” notice to Prosper earlier this week, so it looks like some feathers are somewhat ruffled.

Finally we have just heard that Loanio has also entered a “quiet period” while it makes the appropriate registrations with securities authorities. See this story at finextra for more.

I think it’s a real shame. I doubt all the players will re-emerge from their quiet periods, or even if they do if their propositions will be unscathed. I suppose it vindicates our original thinking but that’s a pretty hollow victory given our own lack of success in the US to date. US consumers have shown they welcome P2P finance (as both lenders and borrowers) and we would have loved to take our model to them, difficult credit market conditions notwithstanding. Maybe one day….