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CONSENT ORDER No. CO-09-7705-S |
PRELIMINARY STATEMENT
WHEREAS, the Banking Commissioner (the “Commissioner”) is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the “Act”), and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under the Act (the “Regulations”);
WHEREAS, Section 36b-31(a) of the Act, provides, in relevant part, that “[t]he commissioner may from time to time make … such … orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive”;
WHEREAS, Section 4-177(c) of the Connecticut General Statutes provides, in relevant part, that “[u]nless precluded by law, a contested case may be resolved by . . . consent order”;
WHEREAS, the Commissioner finds that the entry of this Consent Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
WHEREAS, Prosper Marketplace, Inc. (“Prosper”) is an issuer of securities whose principal place of business is located at 111 Sutter Street, 22nd Floor, San Francisco, California 94104. Prosper has not made a foreign business corporation filing with the State of Connecticut Secretary of the State, nor has it been licensed in any capacity, such as a small loan lender, under Title 36a or Title 36b of the Connecticut General Statutes;
WHEREAS, on November 8, 2007, Prosper filed an application to register securities by coordination pursuant to Section 36b-17 of the Act. The registration, which was subsequently amended, covered an offering of promissory notes, and was declared effective by the Securities and Exchange Commission on July 10, 2009 (SEC File No. 333-147019);
WHEREAS, the North American Securities Administrators Association, Inc. (“NASAA”) is a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico;
WHEREAS, in mid 2008, NASAA formed a multi-state working group (the “State Working Group”) to coordinate the results of various state investigations of Prosper then underway and to seek a collaborative resolution of the issues involved;
WHEREAS, such state investigations focused on the offer and sale of unregistered securities by Prosper between 2006 and October 2008;
WHEREAS, Prosper has cooperated with the State Working Group by responding to inquiries, providing documentary evidence and other materials, and halting further offers and sales in the affected states until the securities are appropriately registered;
WHEREAS, on November 24, 2008, the Securities and Exchange Commission issued a cease and desist order against Prosper after determining that Prosper had violated Sections 5(a) and (c) of the Securities Act of 1933 by selling unregistered loan notes from approximately January 2006 through October 14, 2008 (Release No. 8984; Administrative Proceeding File No. 3-13296);
WHEREAS, Section 36b-31(c) of the Act provides, in part, that: “To encourage uniform interpretation and administration of sections 36b-2 to 36b-33, inclusive, and effective securities regulation and enforcement, the commissioner may cooperate with the securities agencies or administrators of other states, Canadian provinces or territories . . . [and] any national or international organization of securities officials or agencies, and any governmental law enforcement or regulatory agency. The cooperation authorized by this subsection includes, but is not limited to, the following actions . . . (2) conducting joint . . . investigations; (3) sharing and exchanging information and documents subject to the restrictions of chapter 3; . . . and (5) executing joint agreements, memoranda of understanding and orders;”
WHEREAS, the Commissioner, acting pursuant to Sections 36b-31(c) and 36b-26 of the Act and through the Securities and Business Investments Division, conducted an investigation into the activities of Prosper to determine whether it had violated any provision of the Act or any regulation or order under the Act;
WHEREAS, Prosper, through its execution of this Consent Order, represents and undertakes not to make further offers or solicit further sales of securities until such securities are appropriately registered under the Act;
RESULTS OF THE STATE WORKING GROUP COORDINATED INVESTIGATION
WHEREAS, the coordinated investigation conducted by the State Working Group and the affected states ascertained the following:
Part 1: Prosper's Licensing and Registration History
| 1. | Prosper is a Delaware corporation (Delaware Division of Corporations #3943799) that was incorporated on March 22, 2005. Its principal place of business is located at 111 Sutter Street, 22nd Floor, San Francisco, California 94104. Since February 2006, Prosper has held itself out, through its Internet website, www.prosper.com, as an online marketplace for “person to person” lending. |
| 2. | Prosper has been licensed as a California finance lender (license number 605-3227) since December 19, 2005. |
Part 2: The Prosper Product Prior to October 16, 2008
| 3. | Prosper’s lending platform functioned like a double-blind auction, connecting individuals who wish to borrow money, or “borrowers,” with individuals or institutions who wish to commit to purchase loans extended to borrowers, referred to on the platform as “lenders.” Lenders and borrowers registered on the website and created Prosper identities. They were prohibited from disclosing their actual identities anywhere on the Prosper website. |
| 4. | Borrowers requested three-year, fixed rate, unsecured loans in amounts between $1,000 and $25,000 by posting “listings” on the platform indicating the amount they wanted to borrow and the maximum interest rate they were willing to pay. Prosper assigned borrowers a credit grade based on a commercial credit score obtained from a credit bureau, but Prosper did not verify personal information, such as employment and income. |
| 5. | Potential lenders bid on funding all or portions of loans at specified interest rates, which were typically higher than rates available from depository accounts at financial institutions. Each loan was usually funded with bids by multiple lenders. After an auction closed and a loan was fully bid upon, the borrower received the requested loan with the interest rate set by Prosper and determined by the auction bidding at the lowest rate acceptable to all winning bidders. |
| 6. | Individual lenders did not lend money directly to the borrower; rather, the borrower received a loan from a bank with which Prosper had contracted. (Prior to April, 2008, loans were made directly by Prosper.) The interests in that loan were then sold and assigned through Prosper to the lenders, with each lender receiving an individual non-recourse promissory note. |
| 7. | Since the inception of its platform in January 2006, Prosper has initiated approximately $174 million in loans nationwide. Prosper collected an origination fee from each borrower of one to three percent of loan proceeds, and collected servicing fees from each lender from loan payments at an annual rate of one percent of the outstanding principal balance of the notes. |
| 8. | Prosper administered the collection of loan payments from the borrower and the distribution of such payments to the lenders. Prosper also initiated collection of past due loans from borrowers and assigned delinquent loan accounts to collection agencies. Lenders and borrowers were prohibited from transacting business directly and were unable to learn each others’ true identities. |
| 9. | Prosper voluntarily suspended all offers and sales of securities on October 16, 2008. |
| 10. | Approximately 600 Connecticut residents purchased almost 25,000 notes and have financed Prosper loans totaling approximately $2.2 million during the period in question. |
Part 3: Prosper's Omissions in Connection with Sales to Investors
| 11. | Prosper provided information to lenders concerning the issues noted below, although it did not provide the information in the manner typically required of a securities registrant regarding: details of the company’s business model; biographical information about the background and experience of Prosper’s management; certain risk factors in connection with the purchase of a Prosper facilitated note, including the fact that the notes were speculative investments; significant financial risks that investors may be subjected to when investing in the Prosper notes that could result in a complete loss of their investment, such as the fact that borrowers may not fulfill their obligations to make payments for reasons of death or incapacity, bankruptcy, or inability to pay; information concerning Prosper’s status as a development stage company with a limited operating history; and the possibility that Prosper could cease operations at any time due to the failure to raise additional capital, because of a lack of profitability, or because of regulatory concerns. |
| 12. | The Prosper website, the company’s exclusive mode of dissemination of information to prospective investors, did not contain financial statements for Prosper, did not disclose that the notes were not registered with state securities regulatory authorities, and that Prosper might have significant contingent liability for the offer and sale of unregistered securities. |
OFFER OF SETTLEMENT
WHEREAS, Prosper has advised the affected state securities regulators, including the Commissioner, of its agreement to informally resolve the investigations arising from the conduct described herein;
WHEREAS, Prosper, without admitting or denying any of the allegations or findings herein contained, and seeking to avoid protracted and expensive proceedings in numerous states, expressly consents to the Commissioner’s jurisdiction under the Act and to the terms of this Consent Order relating to the offers and sales of unregistered securities described herein;
WHEREAS, Prosper, through its execution of this Consent Order, represents and agrees that none of the violations alleged in this Consent Order shall occur in the future;
FINDINGS OF THE COMMISSIONER AS TO EVIDENTIARY SUFFICIENCY TO INITIATE ADMINISTRATIVE PROCEEDINGS
WHEREAS, the Commissioner finds that sufficient grounds would exist to initiate enforcement proceedings against Prosper under Sections 36b-27 and 36b-20 of the Act, based on the following, all of which are more fully described above, after granting Prosper an opportunity for a hearing:
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1. |
Between 2006 and October 2008, Prosper violated Section 36b-16 of the Act by offering and selling unregistered securities in the form of loan notes, which conduct forms a basis for (a) a stop order pursuant to Section 36b-20(a)(2)(B) of the Act; (b) a cease and desist order pursuant to Section 36b-27(a) of the Act; and (c) the imposition of a fine of up to $100,000 per violation under Section 36b-27(d) of the Act; and |
| 2. |
Between 2006 and October 2008, in connection with the offer or sale of a security to Connecticut residents, Prosper either failed to include information or failed to describe in the manner typically required of a securities registrant certain business or loan information including investment risk factors, that would have aided investors, or prospective investors in making an objective decision on whether to invest in the Prosper notes. Such conduct would constitute a violation of Section 36b-4 of the Act and form a basis for (a) a stop order pursuant to Section 36b-20(a)(2)(B) of the Act; (b) a cease and desist order pursuant to Section 36b-27(a) of the Act; and (c) the imposition of a fine of up to $100,000 per violation under Section 36b-27(d) of the Act; |
CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, Prosper, through its execution of this Consent Order, voluntarily waives the following rights:
| 1. | To be afforded written notice and an opportunity for a hearing within the meaning of Sections 36b-20(c) and 36b-27 of the Act and Sections 4-177(a) and 4-177(b) of the Connecticut General Statutes; |
| 2. | To present evidence and argument and to otherwise avail itself of Section 4-177c(a) of the Connecticut General Statutes; |
| 3. | To present its position in a hearing in which it is represented by counsel; |
| 4. |
To have a written record of the hearing made and a written decision issued by a hearing officer; and
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| 5. |
To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order. |
CONSENT TO ENTRY OF SANCTIONS
WHEREAS, Prosper, through its execution of this Consent Order, acknowledges the possible consequences of an administrative hearing and voluntarily consents to the Commissioner issuing an order imposing on it the following sanctions:
| 1. |
Prosper, its affiliates and successors in interest shall cease and desist from engaging, directly or indirectly, in conduct constituting or which would constitute a violation of the Act or any regulation or order under the Act, including, without limitation, offering or selling securities in this state in contravention of Section 36b-16 of the Act; |
| 2. | No later than the date this Consent Order is entered by the Commissioner, Prosper shall remit to the State of Connecticut by certified or bank check payable to “Treasurer, State of Connecticut” the following amounts totaling Twelve Thousand Six Hundred Two dollars ($12,602): Eleven Thousand Six Hundred dollars ($11,600) as an administrative fine and One Thousand Two dollars ($1,002) to be applied to defray the Division’s investigative costs; |
CONSENT ORDER
NOW THEREFORE, the Commissioner enters the following:
1.
2.
This Consent Order concludes the investigation by the Commissioner under the Act and any other action that the Commissioner could commence under the Act solely as it relates to Prosper’s offer and sale of unregistered securities as described herein; provided, excluded from and not covered by this paragraph are any claims by the Commissioner arising from or relating to enforcement of this Consent Order;
3.
4.
5.
Nothing in this Consent Order constitutes a waiver of any right, power, or authority of the Commissioner to enforce any other provision of law within his jurisdiction, including, without limitation, Title 36a of the Connecticut General Statutes, in an administrative, civil or criminal forum;
6.
This Consent Order and any dispute related thereto shall be construed and enforced in accordance with, and governed by, the laws of the State of Connecticut without regard to any choice of law principles;
7.
This Consent Order shall be binding upon Prosper and its successors and assigns as well as upon successors and assigns of its affiliates with respect to all conduct subject to the provisions herein and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events, and conditions; and
8.
This Consent Order shall become final when entered.
So ordered at Hartford, Connecticut
this 27th day of July 2009. _________/s/_________
Howard F. Pitkin
Banking Commissioner
CONSENT TO ENTRY OF ORDER
I, Kirk T. Inglis, state that I am an officer of Prosper Marketplace, Inc. and I am authorized to act on its behalf; that I have read the foregoing Consent Order and that I know and fully understand the contents hereof; that Prosper Marketplace, Inc. voluntarily consents to the entry of this Consent Order, agreeing freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that Prosper Marketplace, Inc. consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. Prosper Marketplace, Inc. understands that the State of Connecticut Department of Banking reserves the right to take further actions to enforce this Consent Order or to take appropriate action upon discovery of other violations of the laws under the Banking Commissioner’s jurisdiction by Prosper Marketplace Inc. Prosper Marketplace, Inc. further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty paid or due pursuant to this Consent Order.
Prosper Marketplace Inc. understands that this Consent Order is a public record document.
Prosper Marketplace Inc. has been represented by counsel of its choosing in connection with the resolution of this matter, specifically, Randall J. Fons, Partner, Morrison & [Foerster] LLP.
Prosper Marketplace, Inc.
By ___________/s/_________________
Kirk T. Inglis
Chief Financial Officer
On this the 23 day of July 2009, before me, the undersigned officer, personally appeared Kirk T. Inglis, who acknowledged himself to be the Chief Financial Officer of Prosper Marketplace, Inc., a corporation, and that he, in such capacity, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as Chief Financial Officer.
In witness whereof I hereunto set my hand.
____________/s/___________________
Notary Public
My Commission Expires: Feb. 6, 2012