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Prosper Announces the Creation of Bankruptcy Remote Entity

by Peter Renton on May 16, 2012

In their latest quarterly report (Form 10-Q) just filed with the SEC Prosper shared a fascinating tidbit of information. They announced the creation of a new entity called Prosper Funding LLC.

Here is the relevant piece from the 10-Q filing:

In February 2012, we formed Prosper Funding LLC, a Delaware limited liability company (“PFL”). We are the sole member of PFL and its accounts have been consolidated with the consolidated financial statements presented in this report. PFL has been organized and will be operated in a manner that is intended to minimize the likelihood that it will (i) become subject to bankruptcy proceedings or (ii) be substantively consolidated with the Company, and thus have its assets subject to claims by the Company’s creditors, in the event the Company becomes subject to a bankruptcy proceeding. We intended to restructure the platform so borrower loans are held by PFL and PFL issues and sells the borrower payment dependent notes tied to the loans. On March 7, 2012, PFL filed a registration statement on Form S-1 with the SEC for a continuous offering and sale of such notes. Prosper Funding LLC has not commenced operations as of the date of this report.

I called Prosper for comment and predictably they said there was nothing they could say about Prosper Funding LLC. It is currently under consideration by the SEC so nothing has been officially approved yet. But it is not difficult to make a guess as to the implication here.

Protection for All Prosper Investors

Prosper are working on a bankruptcy remote vehicle that will hold the notes for investors. Here is the S-1 filing for Prosper Funding LLC where it is pretty clear that Prosper Marketplace Inc. (PMI) will no longer be involved in the offering of notes to investors. When reading through the S-1 (and I admit I haven’t read the whole thing) it looks like this would mean that all Prosper investors would be protected by this bankruptcy remote vehicle, not just the larger investors as is the case now at Lending Club.

There will be a “Servicing Agreement” in place between Prosper Marketplace Inc. and Prosper Funding LLC as stated in the filing:

Prosper Funding LLC and PMI have executed a Servicing Agreement pursuant to which PMI has licensed to Prosper Funding LLC the right to operate the platform and Prosper Funding LLC has appointed PMI to provide certain administrative services and to service all borrower loans and Notes.  We refer to PMI in its capacity as the servicer as the “Servicer.”

So, it looks like they are splitting the company into two parts. Prosper Funding LLC will offer the notes to investors and Prosper Marketplace Inc. will service the notes and provide the technology platform.

This is big news. If everything gets approved by the SEC (and, of course, we have no way of knowing if and when that will happen) this could mean that all Prosper investors would be protected in the unlikely event of a bankruptcy proceeding against Prosper.

Any legal scholars or others care to comment?

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{ 7 comments… read them below or add one }

Neal S. May 16, 2012 at 10:53 pm

Thank you. This could be very good news. If this works it would certainly encourage me to make a much larger investment in prosper loans.

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Brady May 16, 2012 at 10:57 pm

That’s a very interesting development that would give us serious, but perhaps not accredited investor level, folks a bit more motivation to put a larger portion of our dollars into Prosper.

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Peter Renton May 17, 2012 at 4:58 am

@Neal/@Brady, Prosper are fully aware that the protection of their investor money is key if they are to attract much larger sums to their platform. I’ll be following these developments closely and hopefully we will know something in a couple of months.

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Dan B May 17, 2012 at 8:51 am

So if Prosper can do this for everyone, then Lending Club can & should do this for everyone as well (not just institutional investors). Of course I’ve already said that less than a month ago right here in the financial advisor thread.

I don’t remember exactly who it was that stated that something like this could only be offered as part of the “specialized funds” available only to institutional investors & that Lending Club would offer it to everyone if they could. Who said that ? Oh wait, I remember now, Peter?

Now of course I seriously doubt Lending Club is going to face bankruptcy, but offering something like this to all its lenders will no doubt make everyone feel just that little bit more secure about their investment. And that can only be a win/win. I recommend that we all get on the phone or email to our LC reps & tell them that this is something we want LC to offer too.

Regardless of how the SEC approval on this plays out, I find myself in the position of once again congratulating Prosper for making this “investor friendly” move.

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Chris May 17, 2012 at 2:39 pm

This right here could be a game changer….

Peter, thanks a ton for sharing. How ironic you should post this considering the very discussion we had a few posts back.

Despite the excitement I may feel I am forced to put my contrarian hat on for a moment and ask, “How can we be certain that PFL would be more financially sound that PMI?” Is it because PFL would receive no venture capital or would have no risk-based growth goals other an operating as a holding company?

Nonetheless, I think this is great news…

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Peter Renton May 17, 2012 at 3:33 pm

@Dan, I am always happy to admit it when I am wrong which I obviously was with my statements a couple of weeks ago. My information came from the legal people at LC and no doubt they will be looking over the Prosper Funding initiative with interest. Prosper obviously believes that there is a way to protect all investors although I should stress that nothing has been approved yet by the SEC. If they do approve this there will be pressure on LC to go ahead and do something similar.

@Chris, I don’t think it is difficult to do some accounting maneuvers to ensure PFL could never go bankrupt because Prosper gets to decide all of PFL’s debts.

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[email protected] May 18, 2012 at 9:47 am

Thanks a lot for this piece of information. This news is really much of a help. If this works out, I am planning to have a bigger investment than before. The throughout procedure, if directed properly, is going to be a great strength for the dollar investors.

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