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DISB Finalizes Settlement Agreement with Prosper Marketplace

Friday, June 11, 2010

DISB Finalizes Settlement Agreement with Prosper Marketplace

The Consent Order completes the District’s case against Prosper, a San Francisco-based online peer-to peer lending service, which was tentatively settled in November 2008.

Washington, DC — Commissioner Gennet Purcell, Esq., of the DC Department of Insurance, Securities and Banking (DISB) today announced that according to a Consent Order with Prosper Marketplace, Inc., the company has paid the District of Columbia a fine of $5,145. This amount represents the District of Columbia’s pro-rata share of a $1 million settlement negotiated by a multistate working group of state regulators formed by the North American Securities Administrators Association (NASAA) to resolve matters relating to the sale and offer of unregistered investments, and the omission of facts in connection with the offer, sale or purchase of an investment.

The Consent Order completes the District’s case against Prosper, a San Francisco-based online peer-to peer lending service, which was tentatively settled in November 2008. Under the terms of the settlement, Prosper agreed not to offer or sell any investments in any jurisdiction until it is in compliance with that jurisdiction’s securities registration laws.

“The notes issued by Prosper are securities, but they were not properly registered for sale,” Commissioner Purcell said, adding that the sale of interests and promissory notes to lender members in Prosper’s online private lending program constitutes the offer and sale of securities as that term is defined under federal securities law.  “Any investments sold in the District of Columbia must be registered with DISB; or they must be exempt from registration before they can be sold.”

Prosper provides a private online lending marketplace that allows prospective borrowers and lenders to find one another. Through its website, Prosper conducts an electronic auction to fund unsecured promissory notes. The website features a list of potential loans, and investors bid against each other to finance the loans. Funds from the lowest bidders are pooled together to fund the loans. Prosper issues notes to the bidders that fund the loans, and service those notes.

From February 2006 to mid-October 2008, Prosper had 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 website reported that it had 810,000 members and $175 million in loans funded.

Several states had been investigating Prosper’s activity before the tentative settlement, and were considering or preparing enforcement actions. During the investigation of Prosper, it was determined that the firm also failed to provide investors with necessary information, such as its financial statements. In mid-October 2008, Prosper stopped issuing new loans and accepting new investors while it sought registration with the U.S. Securities and Exchange Commission