My legal practice, among other things,  involves counseling companies on the regulatory requirements applicable to their businesses, and a large part of that involves trying to determine how existing laws and regulations apply to new business models.  This can often be time-consuming (as in "expensive"), and often little guidance is provided by the laws or regulations themselves, or the regulators.  As with taxes, no one wants to volunteer to incur obligations if not required, so finding a reasonable basis for non-applicability of a law or regulation is always welcome.  Unfortunately, it is possible for wishful thinking to prevail.

Person to person lender enterprise Prosper Marketplace recently discovered the risks of (apparently) over-aggressive legal advice when the SEC instituted Cease and Desist Proceedings pursuant to the Securities Act of 1933, finding:

"Prosper operates an online lending platform connecting borrowers with lenders. The loan notes issued by Prosper pursuant to this platform are securities and Prosper, from approximately January 2006 through October 14, 2008, violated Sections 5(a) and (c) of the Securities Act, which prohibit the offer or sale of securities without an effective registration statement or a valid exemption from registration."

Prosper settled the claim and has suspended any new lending activities until it is issued a registration for its loan notes.  Loanio also has a notice on its site that it has suspended activities pending registration of its notes. Blog chatter about these developments includes complaints that this seems only a slap on the wrist (Prosper "settled" with the SEC in lieu of prosecution, although the terms of the settlement are not public).  There is another shoe to drop here that I assume plaintiff's lawyers are now explaining to the Prosper and Loanio communities.

Sale of a  security that has not been registered under Section 5 of the Securities Act of 1933 gives rise to a private right of action under Section 12(a)1 of that Act.  The remedy that can be enforced with this private right of action is recission of the sale of the unregistered security.   In practical terms this means that investors in unregistered Prosper notes that were ultimately uncollectible can get their money back.  The Prosper site states that approximately $178,000,000 in loans have been funded, and although the portion of that amount that is uncollectible is not disclosed, there does seem to be disaffection in the Prosper community with Prosper's collection performance. See p2pla.org/docs/4187_001.pdf for a demand letter from the attorney for a group of Prosper investor lenders.

Further, every state in which Prosper markets its securities has its own securities registration requirements ("so-called "Blue Sky Laws"), and the Prosper securities probably require registration under a number of these laws (there are exemptions from state registration available, but the SEC finding that the Proper notes are securities probably means state registrations are also required).  There are similar private right of action remedies for failure to register under these Blue Sky Laws, with a possibly wider net of joint and several liability, extending to officers, employees, directors and possibly advisers of the violator of the registration requirement.

Call me old-fashioned, but I got my hands on someone else's money as a part of some business scheme or service I assume that there would be extensive regulation out there to protect the public interest (I am painfully aware of the recent evidence to the contrary in the financial markets).  If the business scheme involves selling opportunities to participate in funding above-market-rate (and commonly risky) loans to third parties that will be administered by the scheme operator, I would have to ask myself if this is a regulated investment product.  If not sure, I might look at some of the operators of similar schemes to see if they were regulated.  What do you know, the Lending Club does offer its notes pursuant to registered prospectus.  If I had a Board of Directors with extensive experience in the investment industry, I might ask them.  I note that Prosper has such a Board of Directors.  Didn't anyone raise a question about the need for registration?  Of course, I would want to consult an attorney with securities experience.  I assume this was done, but if no registration was obtained by Prosper based on the opinion of such an attorney, I would suggest they find another attorney who has a nose.