The purpose of pa4pl is to address the recent prohibition on Pennsylvanians from lending on the peer-to-peer lending site, Prosper.com.

p2p lending is an incredible concept! I give Prosper so much credit and appreciation for creating a venue where Americans can invest directly in their fellow American.

This new and intimate method of investing is wonderful, especially now as our sense of trust and security in our traditional methods of investment are being put to the test.

Email me at pa4prosperlending@gmail.com if you have anything you would like to see addressed on pa4pl.

Please sign the pa4prosperlending petition!

Saturday, September 20, 2008

Is a Promissory Note considered a Security?

In my last post I left it with the question of:

Are the Promissory Notes that we are purchasing on Prosper considered Securities?

Well, nevermind Pennsylvania for now,

What does the SEC have to say?

Here's what they have to say about Promissory Notes:

Do The Notes Need To Be Registered?

Most promissory notes must be registered as securities with the SEC and the states in which they’re being sold. But remember that some promissory notes, such as those that have nine-month or shorter terms, may be “exempt.” That means that they don’t have to be registered. Since these notes fly under the radar screen of securities regulatory review, they have been the major source of investor complaints and fraudulent activity.


The above citation is available here (html) and here (pdf).

What I noticed about these particular publications by the SEC is that they seem to be only talking about Promissory Notes issued by businesses as a means to raise capital.

I found another site here that discusses the problem with Promissory Notes:

They state that problems with promissory notes fall into three main categories:

Deception of Investors
The promissory note programs that are scams are often sold with the following deceptive statements: 1) investors would receive very high, double digit returns, 2) returns were guaranteed, and 3) the notes were backed by collateral to guarantee them. Frequently, a fraudulent promoter will persuade an independent life insurance agent, by offering very large commissions, to sell the notes to the agent's trusting customers. Often, promissory note schemes target the elderly and their retirement savings.


Unregistered Securities

Although those selling them may not know or admit it, these promissory notes are usually securities and must be registered with the SEC or the State they are sold in - or they must have a specific exemption from registration under the law. If the note is not registered, it will not be subject to review by regulators before it is sold, and investors have to do their own investigation to confirm that the company can pay its debt.

Unregistered Sellers

These promissory notes are usually securities, but those selling them often do not have the required securities sales license. If registered individual brokers are involved, they may be selling the notes without their firms' approval.

I definitely would not say that we are dealing with deception as described above. In general, Prosper lenders understand the risks, and Prosper goes to great length in the bidding process to point out the risk.

If anything, and as we're seeing in PA, it's boiling down to the registration of the notes, and maybe even the registration of Prosper, and maybe even the registration of WebBank, who is "assigning" the loans to Prosper who in turn "assigns" them to bidders.

Does "Assign" mean sell? It states in our Prosper Lender Agreement that we are "purchasing promissory notes". It says it plain and simple. It also says pretty clearly on the SEC website that "most promissory notes must be registered with the SEC and the state inwhich they're being sold."

For the first time all week, I'm beginning to feel a little better about Pennsylvania which is good, because I really do like PA.

I'll come back to this.

My kids are looking forward to going to Military Appreciation day at Kennywood this afternoon, and this stuffs been killing me all week, so honestly, I'm looking forward to it as well! But alas, I'm starting to feel like I'm understanding what's going on here.

Please sign the petition!

Ask a friend to sign!

I Spoke with Pennsylvania Securities Commission

I spoke with Pennsylvania Securities Commission yesterday. As it turns out, they are in fact, the regulatory body Prosper is in discussions with.

I was really impressed and pleasantly surprised because they returned my call from Thursday. So my apologies to the Official Prosper Blog for doubting their statement of who they're in discussions with, and to the Commission for questioning their familiarity with the issue. I was hasty in my comments on Thursday, but in my defense, my blood pressure still hasn't returned to healthy levels yet.

Jill from the Commission was great, at least as great as she could be with obvious restraints on what she could say, and not personally having the power to make any problems go away.

She was knowledgeable of the issue. She was very easy to talk to, and she heard me out. That was refreshing, but like Prosper, because it's an open issue, she was not able to give me any specific details, or clue me in on what direction the issue is heading.

I was hoping to find out whether "Lending" on Prosper is something the Commission frowns upon, and wants to restrict it's citizens from doing, or is it just a matter of enforcing regulation, and Prosper taking steps to comply with state regulations. She couldn't answer the question of, "Are you guys for it, or against it?"

Her response was, "All I can say is that, any action the Commission takes is to protect the interest of Pennsylvania Investors."

-Hey,

Thanks for the protection!

Glad to know you've got my back! As a personal standard, I love Government Intervention, especially when it protects me from earning good interest and using my money as I see fit for me. You're making me all warm and fuzzy.

Hey Government!!

How about protecting your citizens from ridiculous Credit Card Rates, Pay Day Loans, oh yeah, and how about the collection fee in excess of 24% of principle the Department of Education can charge, and then add to principle on student loan defaults.

Anyway, she really was helpful because she provided some information that was new to me. She did point out that there has been "no order issued against Prosper", but that Prosper is in violation of this specific regulation:

Pennsylvania Securities Act of 1972

Specifically, Section 1-201, Registration Requirement. This is on page 7 of the Act.

Long story short: According to the Act, Notes are considered Securities, and Prosper has not registered their Notes that we, as Prosper "Lenders", are purchasing, therefore Prosper is in violation of Section 1-201 of Pennsylvania Statute 70. (more formally presented as, 70 P.S. § 1-201)

Refer to page 6 of the Act if you would like to see where a "note" is defined as a Security.

It's safe to say, my conversation shed some new light on the situation.

In regards to the Pennsylvania Department of Banking, and the Loan Interest and Protection Law (Act 6 of 1974), and the Consumer Discount Company Act (Act 66 of 1937), I would say that these are NOT the regulations that are keeping me and yunz other Pennsylvania Lenders from doing our thing on Prosper. It is much more likely to be this.

Like Prosper said in their announcement, it has to do with Interpretation.

The Prosper Lender Agreement states that we are "making loan purchasing commitments" (bidding), and "purchasing promissory notes from Prosper". That is why in this post I say that it's a stretch on Pennsylvania's part in regards to the Department of Banking regulations.

The BIG question that comes to me is:

Are the Promissory Notes that we are purchasing on Prosper considered Securities?

Well yeah, according to Pennsylvania they are.

Am I satisfied with that?

NOPE -not yet.


By the way, where are all the Pennsylvania Prosper Lenders, and why haven't they signed the petition?

Please sign the petition!

Ask a friend to sign!