Since Prosper.com and the Pennsylvania Securities Commission can't seem to get on the same page I thought I would see what the SEC has to say.
In general, I want to know if Promissory Notes are considered securities by the SEC?
Specifically, I want to know if the Promissory Notes sold on Prosper are considered securities in the eye's of the SEC?
If you look at my previous post you will see that I don't expect a cut & dry answer. As we know, "Most Promissory Notes are considered securities" based on this SEC publication.
Yesterday I called the SEC Office of Small Business Policy. I received a call back today, but I was away from my desk so I missed the call, however the representative did leave me a voice mail.
I was invited to give a call back, however the gentleman left a generous amount of information in regards to my "general" question. I would like to consider the information he left before giving him a call back.
In his voice mail, he pointed me towards a Supreme Court case that provides a test to determine if a Promissory Note is a security, or if it is exempt from registration.
He further mentioned that most exemptions meet Regulation D criteria.
If you would like to take a crack at the Supreme Court Case it is Reves v. Ernst & Young, 494 U.S. 56 (1990).
He said that if I email him he will send a copy of the case so I replied with the response copied below.
I intend to follow-up with him tomorrow once I've had a chance to review the case.
If nothing else, please pay special attention to my 2nd to last paragraph, because I point out a couple of things. Basically, if Prosper and the Pennsylvania Securities Commission are not going to take care of Pennsylvanians who have already invested on Prosper then I think it is more than appropriate that the SEC become aware of this situation.
"Thank you for returning my phone call from yesterday, 9-22-08. I really appreciate your sharing of expertise and I further appreciate your pointing me in the appropriate direction via Reves v. Ernst & Young. The "test" you described in your message, sounds like it is exactly what I am looking for. Please feel free to reply with a copy of the case at your convenience.
As I mentioned in my phone message, I am specifically attempting to understand if the Promissory Notes sold on the peer-to-peer lending site, Prosper.com are, or should be considered securities in the eyes of the SEC, and either appropriately exempted, or registered as such.
My query stems from a decision by Prosper.com on 9/15/08 to suspend members residing in the Commonwealth of Pennsylvania from purchasing notes on the site. This apparently is the result of an interpretive dispute between the Pennsylvania Securities Commission and Prosper.com.
In a conversation with the PA Securities Commission I was told that while no order has been issued against the company, that Prosper.com is in violation of Pennsylvania Statute 70, Section 1-201 Registration of Securities,(http://www.psc.state.pa.us/policy/Act2K502.pdf) Section 201 is on page 7. I was further directed to cross reference "(t)" on page 6 of the linked document, which states that a note is a security.
Long story short, Prosper says they are not securities, Pennsylvania says they are.
The result is that Pennsylvania investors in Prosper.com are left in a precarious situation. These are unsecured Notes with a three year term with no right to sell or transfer. Thus investors have been left without option or ability to liquidate, expand, diversify, or compound their portfolios. Because of the high default risk of these notes, portfolio expansion, diversification, and compounding of earnings are vital abilities and benefits that Pennsylvania investors are now deprived of.
Thank you for your time and thank you again for your help in this matter. I plan to follow up with you with any questions once I have had an opportunity to review the case. If in the mean time you are able to provide any other insight, please do not hesitate to email or reach me by phone."
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6 comments:
Thanks for all your work on this issue!
I recently received this email from Jill D. Helbling, Supervising Counsel, Pennsylvania Securities Commission (whom I think you already spoke with):
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Thank you for your inquiry regarding Prosper Marketplace, which sells promissory notes through its website. Section 201 of the Pennsylvania Securities Act of 1972 requires that all securities offered or sold in Pennsylvania be either registered with the Pennsylvania Securities Commission or exempt from registration. The notes sold through Prosper are not registered with the Commission at the present time.
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My question: Why didn't Prosper either arrange to register our promissory notes or get an exemption ruling?
David - Thank you so much for your comments and for sharing the email you received. That was one of my goals with the blog, to share and collaborate with others on this issue.
The very same question has crossed my mind. In fact, over the weekend I was pulling up information on the Pennsylvania Securities Act of 1972 and I came across a case that involved a violation of section 201. The case went on to discuss a resulting court ordered Rescission Offer.
A rescission is "an equitable remedy that wipes out the existing contract and restores the parties to their situation prior to entering into the contract."
In this specific case, it went on to discuss that such a violation did not have to be intentional, the rescission order was dependant only on the fact that the violation occurred.
I do not have the case handy here at home, but I will follow up tomorrow from my office with a link to the case.
I also just want to be clear that I am by no means qualified to give a solid interpretation, but the point I want to make by mentioning this case is that when I saw it, I asked myself the same question you're asking, and I even took it one step further.
That is, if Prosper should have registered the Promissory Notes they sold us, or if they could have and should have filed for exemption and didn't, whether intentionally or not, that possibly we are owed some form of rescission.
By the way, just before I posted my earlier to your site, I submitted a comment to the Prosper Blog for this topic.
I questioned Prosper's claim that the subject of their discussions with the PA Securities Commission was confidential; I reprinted the email I received from Ms. Helbling, and I asked why Prosper neither arranged to register our promissory notes nor got an exemption ruling.
Prosper has not yet published my comment. I suspect that they won't.
I am a newspaper reporter. This is off my beat, but if you are willing, I will suggest to my editor that the paper do a story about this.
elwin - I am absolutely willing. Please do not hesitate to email me if there is anything I can do to assist.
I actually emailed Patricia Sabatini from the Pittsburgh Post-Gazette on 9/16 who reported on p2p lending and Prosper in this article: http://www.post-gazette.com/pg/07252/815600-28.stm to see if she would be willing to report on this development. I have not heard anything back.
Thank you!
David - that's one of the things I find so frustrating here, is that for one, there should be a definitive "one or the other" in this.
The notes either qualify as securities and should be registered, or they don't qualify, and should thus have some form of official exemption.
Secondly, I'm frustrated with the fact that there seems to be no one advocating for those of us who are vested and stuck in limbo.
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