Tuesday, February 17, 2009

Prosper.com - SEC Offer of Settlement

Back on 11/24/08 the Securities and Exchange Commission issued a Cease & Desist order which told us that Prosper.com had violated the securities act. That SEC order mentioned that the SEC had accepted Prosper's "offer of settlement", but the offer was not made pubic at that time. Prosper's offer has now been released by the SEC, and we bring it to you here and now.

I've transcribed Prosper's offer letter below, and provided a link to a scanned version. The transcribed text differs in formatting, but is identical in word.

Before the

File No.
In the Matter of
Prosper Marketplace, Inc.


I. Prosper Marketplace, Inc. ("Prosper" or "Respondent"), pursuant to Rule 240(a) of the Rules of Practice of the Securities and Exchange Commission ("Commission") [17 C.F.R. § 201.240(a)], submits this Offer of Settlement ("Offer") in anticipation of cease-and-desist proceedings to be instituted against it by the Commission, pursuant to Section 8A of the Securities Act of 1933 ("Securities Act").

II. This Offer is submitted solely for the purpose of settling these proceedings, with the express understanding that it will not be used in any way in these or any other proceedings, unless the Offer is accepted by the Commission. If the Offer is not accepted by the Commission, the Offer is withdrawn without prejudice to the Respondent and shall not become a part of the record in these or any other proceedings, except for the waiver expressed in Section IV with respect to Rule 240(c)(5) of the Commission's Rules of Practice [17 C.F.R. § 201.240(c)(5)].

III. On the basis of the foregoing, the Respondent hereby:

A. Admits the jurisdiction of the Commission over it and over the matters set forth in the Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing a Cease-and-Desist Order ("Order").

B. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. § 201.100 et seq., and without admitting or denying the findings contained in that Order, except as to the Commission's jurisdiction over Prosper and the subject matter of these proceedings, which are admitted, Prosper consents to the entry of an Order by the Commission containing the following findings:

1. that Prosper violated Sections 5(a) and (c) of the Securities Act; and

2. ordering that, pursuant to Section 8A of the Securities Act, Prosper cease and desist from committing or causing any violations of, and committing or causing any future violations of, Sections 5(a) and (c) of the Securities Act.

IV. By submitting this Offer, Respondent hereby acknowledges its waiver of those rights specified in Rules 240(c)(4) and (5) [17 C.F.R. § 240(c)(4) and (5)] of the Commission's Rules of Practice. respondent also hereby waives service of the Order.

V. Respondent understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings" (17 C.F.R. § 202.5(e)). In compliance with this policy, Respondent agrees: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any finding in the Order or creating the impression that the Order is without factual basis; and (ii) that upon the filing of this Offer of Settlement, Respondent hereby withdraws any papers previously filed in this proceeding to the extent that they deny, directly or indirectly, any finding in the Order. If Respondent breaches this agreement, the Division of Enforcement may petition the Commission to vacate the Order and restore this proceeding to its active docket. Nothing in this provision affects Respondent's: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.

VI. Consistent with the provisions of 17 C.F.R. § 202.5(f), Respondent waives any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein.

VII. Respondent hereby waives any rights under the Equal Access to Justice Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of the law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement of attorney's fees or other fees, expenses, or costs expended by Respondent to defend against this action. For these purposes, Respondent agrees that Respondent is not the prevailing party in this action since the parties have reached a good faith settlement.

VIII. Prosper states that it has read and understands the foregoing Offer, that this Offer is made voluntarily, and that no promises, offers, threats, or inducements of any kind or nature whatsoever have been made by the Commission or any member, officer, employee, agent, or representative of the Commission in consideration of this Offer or otherwise to induce it to submit to this Offer.

10th day of November {2008}
Prosper Marketplace Inc
By: {signature}
Print Name: Christian A. Larsen
Title: CEO & Chairman

Here's a scanned version of Prosper's Offer of Settlement.

Doesn't make for very exciting reading, does it?

When I read the SEC Cease & Desist order, and saw that it said the SEC had accepted Prosper's offer of settlement, I wondered whether the offer (and therefore the acceptance by the SEC) had contained some elements not found in the SEC's public Cease & Desist order. For example I wondered whether Prosper had agreed to any specific actions that had not been made public. Turns out, there aren't any such agreements in the offer. Most of the words in the offer simply say that if the SEC agrees to end the matter by issuing the Cease & Desist, then Prosper won't argue about it. It looks to be all boilerplate. Its like something from a sci fi horror flick: Sign here so the shock treatments can begin. Then we can set you free.

Thank you to the SEC for releasing this document to the public.

For those of you who have read the above and are completely baffled, be advised that the SEC Cease & Desist order makes much better reading. It actually sets the stage by explaining the context of the SEC's action.

The best discussion among peer-to-peer lenders takes place at prospers.org
See you there!


  1. It would be interesting to learn what Prosper's legal theory was for why it thought it was not subject to the securities registration laws. The fact that Prosper Marketplace Inc. and its executives have not been charged with a crime tells me that its legal theory has merit.

    It's possible that because Internet-based people-to-people lending is so new, it straddles several areas of existing law and the SEC thought it best to bring it under its jurisdiction. With the SEC taking the action it took and Prosper agreeing to abide by it, a potential legal ambiguity has been resolved that will remove a regulatory cloud over for-profit-based people-to-people lending platforms in the United States.

  2. Ok.. so what does this ultimately mean with regards to the 'quiet period' being lifted and normal (hopefully improved in areas like collections) operations resuming?

    Also, something I have been meaning to ask: LenderClub has something in its legalese that one can only be a resident of certain states to be a lender. Is there a distinct possibility this may also occur with Prosper? This would be devastating for me as I live in one of the restricted states.

    Thank you for the update Fred!!!