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!

Tuesday, September 23, 2008

The SEC called me back.

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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