Your guide to peer to peer lending

Loanio Closing Down in Next Two Weeks

by Peter Renton on March 31, 2011

Loanio launched on October 1st, 2008 as the third peer to peer lender in the US (after Prosper and Lending Club). There was plenty of excitement at launch time and over 300 lenders signed up right away. But the excitement quickly faded.

The timing for Loanio was unfortunate to say the least. On October 14th, less than two weeks after their launch Prosper announced it was entering a quiet period. Then a month later Prosper received a cease and desist letter from the SEC making it very clear that SEC registration was mandatory for all peer to peer lenders.

SEC Registration Would Likely Have Been Approved

So founder Michael Solomon, a New York attorney, started the registration process with the SEC. Loanio entered a quiet period with just seven loans originated by a small number of investors. Being an attorney Solomon had an advantage in that he could do a lot of the filing work himself. He filed an S-1 in June 2009 and after going back and forth a few times, they were certain that their next draft would have likely received the “effective date” nod from the SEC.

You would think that would be a green light to start operations. But herein lies the problem. After receiving a successful filing with the SEC Loanio would have had to start operations again immediately. And with VC’s still reluctant to back his operation Solomon felt that it would have been irresponsible to start without some solid financial backing. So, in September last year he made the painful decision to withdraw his SEC registration.

Since then Solomon has kept the site going in the hope that maybe some VC money would be forthcoming. He said it would be easy to re-file all his documents with the SEC. But he realized this month that it was unlikely any money could be raised that would allow him to restart operations. So, he has made the decision to shut the company down.

A 100% Default Rate on Seven Loans

In researching this story I contacted two lenders who invested in loans with Loanio. Each said that payments continued for their loans for quite a while and then in the last year they just stopped. So what happened to the seven loans on the platform? Well two of the borrowers went bankrupt and eventually the other five borrowers all defaulted. So Loanio ended up with a 100% default rate.

In the next two weeks Solomon said that all lenders will be receiving a notification of Loanio’s shutdown. He will be actively talking to and looking for buyers for the domain, trademarks, lending technology, and all other intellectual property the company had. If he does not find any buyers, he said he will most likely use the Loanio trademark and domain for a business that compliments the peer to peer lending industry.

The Lessons We Can Take From Loanio

If the life and death of Loanio has taught us one thing it is this: any new company entering the p2p lending space needs to be very well funded. Not only is the SEC registration an expensive process costing several million dollars, but to be profitable a very large volume of loans is needed. Both Prosper and Lending Club know this all too well. Neither company is yet to turn a profit and Prosper just turned five and Lending Club will turn four later this year. Both have raised over $50 million and will likely need to raise many more millions before they become profitable.

I asked Solomon whether he thought the Loanio shutdown provided any precedent for the p2p lending industry. He said that his company operated before SEC registration was mandatory and as such the promissory notes were held directly between the borrower and the lender. With Prosper and Lending Club, the notes are owned by the companies themselves so it is a different animal. He was reluctant to provide any opinion on what might happen if Prosper or Lending Club were to shut down. But both companies have safeguards in place such as a backup loan servicer in the unlikely event that happens.

It is disappointing that government regulation makes it so difficult for competitors to enter and thrive in this space. But for that we would likely have a thriving industry today in the US with many players. Whether Loanio would have made it anyway is unclear. We know that huge loan volumes are needed in order to make money in this industry.

Solomon said he learned a great deal over the life of Loanio. He quipped that he now knows how to file an S-1 and could help any other new company enter the industry. This knowledge may well come in handy as new industry hopefuls seem to be appearing more and more. I hope they all pay close attention to the experiences of Loanio.

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{ 6 comments… read them below or add one }

Dan B March 31, 2011 at 6:21 pm

Ok, if what this guy is saying is truthful then I guess I stand corrected. I never considered the possibility that their lending standards were so pathetic that 7 out of 7 loans would default. I mean that takes real talent, or lack thereof I suppose.

bill clark March 31, 2011 at 6:59 pm

Interesting story. I can’t imagine going through that whole process and then backing out right before getting approved by the SEC. Seems like there would have to be someone out there who would find that approval valuable.

Dan B March 31, 2011 at 7:27 pm

If it truly costs millions of dollars just to jump through all the SEC hoops, then that’s a tremendously high hurdle that 99% of entrepreneurs would balk at…………………unless they had serious financial backing (i.e. someone else’s money) I mean damn, I though a liquor license in California was expensive!

Peter Renton March 31, 2011 at 8:02 pm

@Dan, Interesting side note that Michael Solomon told me. He said that his S-1 registration cost less than $50,000 in legal fees, but he is a lawyer and he and a partner did all the leg work (months of work) themselves. The extra costs come from all the legal work with each state and then with the Fed banking regulators too. BTW, Prosper provides a line item for professional services in their financials and it was $2.6 million in 2010 (and this is after SEC registration) against total sales of $1.1 million….

@bill, I could tell when I chatted with him, he was pretty devastated to back out when he did. Because the most difficult startup hurdle was overcome.

Steve Rabago April 6, 2011 at 3:48 pm is still up and growing each months. We took the CircleLending – VirginMoney approach to providing financing to people inside your circle of friends and family. We have several commercial users managing 100′s of loans as well. And a bank reselling our services to their customers. Too bad for Loanio.

Peter Renton April 7, 2011 at 6:10 am

@Steve, Thanks for the update on Zimple Money and congratulations on your success. One of these days I want to do a roundup of all the friends and family lenders like yourself.

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