Terrific post from a lawyer summarising the securities issues on social lending / p2p lending
Hats off to ThickenMyWallet for nailing the issue on p2p lending. Suggest anyone who is tired of reading the speculation on LendingClub please take the time to read this, which includes a US definition of how securities regulations apply. Emphasis is his, and no further comment required 
Here’s the regulatory issue- IF A PERSON INVESTS MONEY AND HER
EXPECTATION OF PROFIT IS DERIVED SUBSTANTIALLY THROUGH THE
ENTREPRENEURIAL AND MANAGERIAL EFFORTS OF OTHERS, IT IS DEFINED AS A
SECURITY.
….And, yes, this also applies to Canada as well- so CommunityLend will have to file with in jurisdictions where it operates as well if it works on a similar business model.
No further comment required? Sorry – that fellow doesn’t understand either the business models involved or the legal problem that they are trying (and one of them will succeed) to artfully dodge.
(For that matter, I’m not sure that anyone who’d agree with that analysis has an idea of where and/or what these P2P lending models, if they manage to survive, will eventually wind up and/or turn into…)
LendingClub, in particular, hadn’t been around a sufficient amount of time to even get to a point where they would run across some of the trickier issues that do not, in any way, involve securities regulations. Granted, they were heavy on the Web 2.0 and light on the legal from the beginning, but it’s certainly not certain as to whether that would have saved them – given a sufficient amount of aging (“seasoning”, if you will…) to reach something more akin to maturity, or at least adolescence.
(As an aside, I’m of the opinion that LC will re-emerge successfully, and go on in a different way.)
I look forward to reading CommunityLend’s legal agreements and learning about its legal structure.
Until then, I’ll leave off comment – except to say that “no further comment necessary” is rather silly!
Live long, and… well, you know the rest.
Peer Lend
April 22, 2008 at 2:49 pm
Thanks for the comment, and pardon the inference about comments. Comments are welcome and encouraged … I only meant to indicate the emphasised point was clear, nothing less.
Colin
April 23, 2008 at 8:23 am
Hi again,
No pardon necessary for your implication. On the emphasized point though, I think it’s, in fact, rather circular logic, and anything -but- clear (which is why attorneys have jobs, and courts exist!):
IF A PERSON INVESTS (1) MONEY AND HER EXPECTATION OF PROFIT IS DERIVED SUBSTANTIALLY THROUGH THE ENTREPRENEURIAL AND MANAGERIAL EFFORTS OF OTHERS (2), IT IS DEFINED AS A
SECURITY (3).
1: Transactionally, I think it’s safe to say that it’s still open to interpretation whether a P2P loan is an “investment” or whether it is simply a debt instrument that is being sold/purchased. As P2P lending companies cave in to regulation, though, I do agree this becomes less and less of a “valid argument” when entrenched interests come calling – regardless of the actual truth of the underlying transaction. (And of course things get even more complicated when one focuses on secondary/tertiary markets!)
2: Rigorously, this language might apply to any number of things, whether I’m buying a box of apartments for which I outsource to a management agency the marketing and administration, or whether I am engaged (via purchase agreement) in some sort of product distributorship from which both parties derive revenue in a pre-determined way, though (and the key statutory word here is “solely”) that revenue is not, in either case, solely dependent upon the efforts of any other parties
(and debt instruments have an escape hatch in this context, “efforts” != repayment performance).
3: See 1. And thusly my pointing out the circular nature of the statement, and its “interpretability”. While this looks like a nice statement, and one is tempted to “close the book”, there’s a reason that there are piles and piles of (highly nuanced) legislation concerning this (and most every other) issue.
Anyway – didn’t mean for you to read my comment as such a downer, and necessitating an apology!
I love the P2P space, and find it rather fascinating.
Peer Lend
April 24, 2008 at 3:04 am
@Peer Lend … Thanks again for taking the time to write. Stay tuned, and lets see where the social lending space takes us.
Colin
April 24, 2008 at 3:17 am