UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20132016

Commission
File Number
 
Exact Name of Registrant as Specified in its Charter,
State or Other Jurisdiction of Incorporation,
Address of Principal Executive Offices, Zip Code
and Telephone Number (Including Area Code)
 
I.R.S.
Employer
Identification
Number
 
333-147019
333-179941-01
333-204880
 
PROSPER MARKETPLACE, INC.
a Delaware corporation
101 Second221 Main Street, 15th3rd Floor
San Francisco, CA 94105
Telephone: (415)593-5400
 73-1733867
 
333-179941
333-204880-01
 
PROSPER FUNDING LLC
a Delaware limited liability company
101 Second221 Main Street, 15th3rd Floor
San Francisco, CA 94105
Telephone: (415)593-5479

 45-4526070
Securities registered pursuant to Section 12(b) of the Act:
Registrant Title of Each Class Name of Each Exchange on Which Registered
Prosper Marketplace, Inc. None None
Prosper Funding LLC None None

Securities registered pursuant to Section 12(g) of the Act:

Registrant Title of Each Class  
Prosper Marketplace, Inc. None  
Prosper Funding LLC None  
Indicate by check mark if theeach registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes¨ No xý
Yes¨ No xý
Indicate by check mark if theeach registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes¨ No xý
Yes¨ No xý
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
Yesxý No ¨
Yesxý No ¨
Indicate by check mark whether theeach registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesxý No ¨
Yes xý No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K (applicable to Prosper Marketplace, Inc. only). ¨



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large
Accelerated
Filer
 
Accelerated
Filer
 
Non-Non-Accelerated
Accelerated
Filer
 
Smaller
Reporting
Company
Prosper Marketplace, Inc.¨¨ý¨
Prosper Funding LLC¨ ¨ ¨ x
Prosper Funding LLC¨¨¨xý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ No xý
Yes¨ No xý
Prosper Marketplace Inc. and Prosper Funding LLC meetmeets the conditions set forth in General Instruction I(1)(a), (b) and (b)(d) of Form 10-K and areis therefore filing this Annual Report on Form 10-K with the reduced disclosure format specified in General Instruction I(2) of Form 10-K.
Registrant Aggregate Market Value of Voting and Non-Voting Common Equity Held by Non-Affiliates of the Registrant at June 30, 20132016 
Number of Shares of
Common Stock of the
Registrant
Outstanding at
March 27, 20143, 2017
Prosper Marketplace, Inc. $(a)924,012(a)
13,425,86369,702,689
($.01 par value)
Prosper Funding LLC None (a)(b) None
None

(a)Solely for purposes of calculating this aggregate market value, Prosper Marketplace, Inc. has defined its affiliates to include (i) those persons who were, as of June 30, 2013, its executive officers, directors and beneficial owners of more than 10% of its common stock, and (ii) such other persons who were, as of June 30, 2013, controlled by, or under common control with, the persons described in clause (i) above.  Prosper Marketplace, Inc.’s common stock is not publicly traded; therefore, it has assumed the fair market value of its common stock is equal to the valuation of its common stock made pursuant to Section 409A of the Internal Revenue Code completed most recently before June 30, 2013.Not applicable.

(b)All voting and non-voting common equity is owned by Prosper Marketplace, Inc.
THIS COMBINED FORM 10-K IS SEPARATELY FILED BY PROSPER MARKETPLACE, INCINC. AND PROSPER FUNDING LLC. INFORMATION CONTAINED HEREIN RELATING TO ANY INDIVIDUAL REGISTRANT IS FILED BY SUCH REGISTRANT ON ITS OWN BEHALF. EACH REGISTRANT MAKES NO REPRESENTATION AS TO INFORMATION RELATING TO THE OTHER REGISTRANT.

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TABLE OF CONTENTS
ITEM
 Page
PART I
ITEM 1
Business
6
ITEM 1A
Risk Factors
44
16
ITEM 1B
Unresolved Staff Comments
67
35
ITEM 2
Properties
67
35
ITEM 3
Legal Proceedings
67
35
ITEM 4
Mine Safety Disclosures
67
36
 
PART II
ITEM 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
68
37
ITEM 6
Selected Financial Data
68
38
ITEM 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
69
39
ITEM 7A
Quantitative and Qualitative Disclosures About Market Risk
86
56
ITEM 8
Financial Statements and Supplementary Data
87
56
ITEM 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
87
57
ITEM 9A
Controls and Procedures
87
57
ITEM 9B
Other Information
87
58
 
PART III
ITEM 10
Directors, Executive Officers and Corporate Governance
88
59
ITEM 11
Executive Compensation
95
64
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
102
76
ITEM 13
Certain Relationships and Related Transactions, and Director Independence
106
79
ITEM 14
Principal Accounting Fees and Services
109
82
 
PART IV
ITEM 15
Exhibits, Financial Statement Schedules
110
83
 
  
SIGNATURES
S-1
 
  
EXHIBIT INDEX
 
 
  
Exhibit 31.1 
Exhibit 31.2 
Exhibit 32.1 
 
  
XBRL Content 


Except as the context requires otherwise, as used herein, “Registrants” refers to Prosper Marketplace, Inc. (“PMI”), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC (“PFL”), a Delaware limited liability company; “we,” “us,” “our,” “Prosper,” and the “Company” refer to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. (“BillGuard”), a Delaware corporation, Prosper Capital Management LLC (“PCM”), a Delaware limited liability company, and Prosper Healthcare Lending LLC (“PHL”), a Delaware limited liability company, on a consolidated basis; and “Prosper Funding” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis.  In addition, the unsecured, consumer loans originated through our marketplace are referred to as “Borrower Loans,” and the borrower payment dependent notes issued through our marketplace, whether issued by PMI or PFL, are referred to as “Notes.” Finally, although historically we have referred to investors as “lender members,” we call them “investors” herein to avoid confusion since WebBank is the lender for Borrower Loans originated through our marketplace.  All share and per share numbers presented in this Annual Report on Form 10-K have been adjusted to reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
3
TableThe following filings are available for download free of Contents
charge at www.prosper.com as soon as reasonably practicable after such filings are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”): Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov. The information posted on our website is not incorporated herein by reference and is not a part of this Annual Report on Form 10-K.
Forward-Looking Statements

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing underThese statements may appear throughout this Annual Report on Form 10-K, including the sections titled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes forward-looking statements.Operations.” Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, Prosper Funding LLC (“Prosper Funding”)PMI or Prosper Marketplace, Inc. (“PMI” and, collectively with Prosper Funding, the “Registrants”)PFL expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of Prosper Funding and PMI’sour respective managements, is expressed in good faith, and is believed to have a reasonable basis. Nevertheless, there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
·the performance of the Prosper Funding Borrower Payment Dependent Notes or “Prosper Funding Notes”, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;

·Prosper Funding’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding loans;

·the reliability of the information about borrowers that is supplied by borrowers;

·Prosper Funding and PMI’s ability to service the loans, and their ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;

·credit risks posed by the credit worthiness of borrowers and the effectiveness of the registrants’ credit rating systems;

·actions by some borrowers to defraud lender members and risks associated with identity theft;

·Prosper Funding and PMI’s limited operational history and lack of significant historical performance data about borrower performance;

·the impact of current economic conditions on the performance of the Prosper Funding Notes and loss rates of the Prosper Funding Notes;

·payments by borrowers on the loans in light of the facts that the loans do not impose restrictions on borrowers and do not include cross-default provisions;

·Prosper Funding and PMI’s compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;

·potential efforts by state regulators or litigants to characterize Prosper Funding or PMI, rather than WebBank, as the lender of the loans originated through the platform;

·the application of federal and state bankruptcy and insolvency laws to borrowers and to Prosper Funding and PMI;

·the impact of borrower delinquencies, defaults and prepayments on the returns on the Prosper Funding Notes;

·the lack of a public trading market for the Prosper Funding Notes and any inability to resell the Prosper Funding Notes on the Note Trader platform;

·the federal income tax treatment of an investment in the Prosper Funding Notes and the PMI Management Rights;

·Prosper Funding and PMI’s ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on their data systems, reduce the attractiveness of the platform or adversely impact their ability to service loans;

·the resolution of pending litigation involving PMI, including any state or federal securities litigation; and

·Prosper Funding’s ability to compete successfully in the peer-to-peer and consumer lending industry.

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Table of Contents
There may be other factors that may cause actual results to differ materially from the forward-looking statements in this Annual Report on Form 10-K.  Prosper Funding and PMIwe can give no assurances that any of the events anticipated by thethese forward-looking statements will occur or, if any of them does, what impact they will have on Prosper Funding or PMI’sProsper Funding’s results of operations and financial condition.
There are a number of important factors that could cause actual results or events to differ materially from those indicated in the forward-looking statements, including, among other things:
the performance of the Notes, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
PFL’s ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding Borrower Loans;
our ability to attract potential borrowers and investors to our marketplace;
the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors;
our ability to service the Borrower Loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
credit risks posed by the credit worthiness of borrowers and the effectiveness of our credit rating systems;


potential efforts by state regulators or litigants to impose liability that could affect PFL’s (or any subsequent assignee’s) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their loans;
the impact of future economic conditions on the performance of the Notes and the loss rates for the Notes;
our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the loans originated through our marketplace;
the application of federal and state bankruptcy and insolvency laws to borrowers and to PFL and PMI;
the impact of borrower delinquencies, defaults and prepayments on the returns on the Notes;
the lack of a public trading market for the Notes and the lack of any trading platform on which investors can resell the Notes;
the federal income tax treatment of an investment in the Notes and the PMI Management Rights;
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service Borrower Loans; and
the other risks discussed under the “Risk Factors” section of this Annual Report on Form 10-K.  
There may also be other factors that could cause our actual results to differ materially from the forward-looking statements in this Annual Report on Form 10-K.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  You should carefully read the factors described in the “Risk Factors” section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause Prosper Funding and PMI’sPMI or PFL’s actual results to differ from these forward-looking statements.

All forward-looking statements included in this report speak only as of the date of this Annual Report on Form 10-Khereof and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. Prosper FundingPMI and PMIPFL undertake no obligation to update or revise such forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.

5
Table of Contents


PART I

Item 1.Business

Overview
Prosper Funding LLC (“is a pioneer of online marketplace lending. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return. Our marketplace facilitated $2.2 billion in Borrower Loan originations during 2016 and $8.3 billion in Borrower Loan originations since it first launched in 2006.
We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency, and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operation. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
We believe that we offer many consumers access to better pricing, on average, than the pricing that they would pay on outstanding credit card balances or unsecured installment loans from a traditional bank. We also believe that we offer faster decisions and loan originations, and greater transparency, resulting in a better customer experience than that provided by traditional consumer finance institutions.
To individual and institutional investors, we offer an asset class that we believe has attractive risk adjusted returns, transparency, and lower duration risk.
Our marketplace offers fixed rate, fully amortizing, unsecured consumer loans ranging from $2,000 to $35,000 with no prepayment penalty. Loan terms of three and five years are available, depending upon the rating assigned to the borrower at issuance and loan amount being sought. All Borrower Loans are originated and funded by WebBank, an FDIC-insured, state chartered industrial bank organized under the laws of Utah. After origination, WebBank sells the Borrower Loans to PFL, which either holds them or sells them to accredited institutional investors.
Investors invest in Borrower Loans through two channels – (i) the “Note Channel,” which allows investors to purchase Notes from PFL, the payments of which are dependent on PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows accredited institutional investors to purchase a Borrower Loan in its entirety directly from PFL. PFL continues to own the Borrower Loans originated through the Note Channel.  Prosper Funding”) ownsservices all of the Borrower Loans made through the marketplace.
Company Background and operatesHistory
PMI was incorporated in the state of Delaware on March 22, 2005.  PFL was formed as a peer-to-peer online credit platform (the “platform”). Prosper Marketplace, Inc. (“PMI”limited liability company in the state of Delaware on February 17, 2012, and collectively with Prosper Funding, the “Registrants” or “PMI Group”)is a wholly-owned subsidiary of PMI.
PMI developed the platformour marketplace and, prior tountil February 1, 2013, owned the proprietary technology that makes operation of the platformour marketplace possible. Prior to February 1, 2013, PMI operated the platform, facilitated the origination of unsecured, consumer loans by WebBank, an FDIC-insured, Utah-chartered industrial bank, through the platform and issued and sold borrower payment dependent notes corresponding to those loans. In this Annual Report, consumer loans originated through the platform prior to February 1, 2013 are referred to as “PMI Borrower Loans” and borrower payment dependent notes issued and sold by PMI prior to February 1, 2013 are referred to as “PMI Notes”. On February 1, 2013, PMI transferred ownership of the platform, including all ofmarketplace to PFL. PFL has been organized and is operated in a manner that is intended (i) to minimize the rights relatedlikelihood that it will become subject to a voluntary or involuntary bankruptcy or similar proceeding, and (ii) to minimize the operation oflikelihood that, in the platform, as well as all then-outstanding PMI Borrower Loans, to its wholly-owned subsidiary, Prosper Funding. At that same time, Prosper Funding assumed allevent of PMI’s obligationsbankruptcy, PFL would be substantively consolidated with respectPMI and thus have its assets subjected to all then-outstanding PMI Notes.  Sinceclaims of PMI’s creditors. We believe we have achieved this by imposing through PFL’s organizational documents and covenants in the Amended and Restated Indenture (as defined below in “Item 13. Certain Relationships and related Transactions, and Director Independence”) certain restrictions on PFL’s activities and certain formalities designed to reinforce PFL’s status as a distinct entity from PMI. In addition, under the Administration Agreement, dated February 1, 2013, all borrower payment dependent notes issued and sold through the platform are issued and sold by Prosper Funding.  In this Annual Report, borrower loans originated through the platform on or after that February 1, 2013 are referred to as “Prosper Funding Borrower Loans” and borrower payment dependent notes issued and sold by Prosper Funding on or after February 1, 2013 are referred to as “Prosper Funding Notes”, respectively. Pursuant to a Loan Account Program Agreement between PMI and WebBank,PFL (as amended to date, the “Administration Agreement”), PMI manageshas agreed, in its dealings with PFL and with third parties, to observe certain “separateness covenants” related to its corporate formalities.


PMI has also adopted resolutions limiting its own activities and interactions with PFL in order to further reduce the operation of the platform, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the making of related loans by WebBank and the funding of such loans by WebBank. On February 1, 2013, Prosper Funding entered into an Administration Agreementlikelihood that PFL would be substantively consolidated with PMI in the event of PMI’s bankruptcy.  
PFL has retained PMI, pursuant to the Administration Agreement, to provide certain administrative services relating to our marketplace. Specifically, the Administration Agreement contains a license granted by PFL to PMI that entitles PMI to use the marketplace for and in relation to: (i) PMI’s performance of its capacity as licensee,duties and obligations under the Administration Agreement relating to corporate administrator,administration, loan platform administrator and loan and note servicer, pursuant to which PMI provides certain back office support, loan platform administration andservices, loan and note servicing, and marketing, and (ii) PMI’s performance of its duties and obligations to Prosper Funding.  In this Annual Report, any actions takenWebBank in relation to loan origination and funding. The license is terminable in whole or in part upon the failure by PMI pursuant to pay PFL the Loan Account Program Agreementlicensing fee, or upon PMI’s termination as the Administration Agreement are described as actions taken by PMI, in spiteprovider of some or all of the fact that such actions are being taken by PMI on behalf of WebBank or aforementioned services. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Prosper Funding, respectively.
The platform is designed to allow people to invest money in people in an open transparent marketplace,Marketplace, Inc.—Agreements with the aim of allowing both lender members and borrower members to profit financially as well as socially. The Registrants believe peer-to-peer lending represents a new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional lender. PMI launched the platform to the public in 2006 and had attracted over two million members and facilitated over $801,000 in consumer loans as of December 31, 2013. Throughout this Annual Report, exceptPFL” for per share amounts and as otherwise noted, dollar amounts are presented in thousands, which is consistent with the manner of presenting such amounts in the financial statements included in this Annual Report,
The Registrants believe peer-to-peer lending presents an enormous opportunity to create a more transparent form of consumer lending. Key drivers of peer-to-peer lending include:

·The possibility of lower rates and better terms for borrowers compared to traditional sources of consumer credit, such as credit cards;
·A new asset class for investors with the possibility of attractive risk adjusted returns that are not directly correlated to the performance of the stock market;
·An opportunity to combine social networking with financial services in a manner that allows users that help fund loans to feel they are directly helping other people while also potentially earning attractive returns; and
·Growing acceptance of the Internet as an efficient and convenient forum for consumer transactions.

information.
How the Platformour Marketplace Works
The platformOur marketplace is an online marketplace that matches individuals who wish to obtain unsecured consumer loans (“borrower members”) with thoseindividuals and institutions who are willing to help fundcommit funds to those loans (“lender members”).loans. A borrower member who wishes to obtain a loan through the platformour marketplace must apply and, if accepted, post a loan listing or listing, on the platform. PMI allocates listings to one of two lender member funding channels: (i) the first channel allows lender members to commit to purchase Prosper Funding Notes from Prosper Funding, the payments of which are dependent on the payments made on the corresponding Prosper Funding Borrower Loan (the “Note Channel”); and (ii) the second channel allows lender members to commit to purchase 100% of a Prosper Funding Borrower Loan directly from Prosper Funding (the “Whole Loan Channel”). If a listing receives enough lender member commitments to be funded, WebBank will originate the loan requested and then sell it to Prosper Funding. Each Prosper Funding Note issued and sold by Prosper Funding comes attached with a PMI Management Right issued by PMI. In this Annual Report, a borrower member who posts a loan listing is referred to as an “applicant” and an applicant who obtains a loan through the platform is referred to as a “borrower.”
In order to obtain a loan through the platform, an applicant must first complete a loan application. PMI then obtains a credit report on the applicant and uses data from that report as well as data supplied by the applicant to assign a risk grade to the listing, which is called a “Prosper Rating.”our marketplace. Each time PMI postswe post a group of listings on the platform, it determinesour marketplace, we determine the relative proportions of such listings that will be allocated to the Note Channel and the Whole Loan Channel, respectively, based on PMI’sour estimate of the relative overall demand in each channel. PMIWe then usesuse a random allocation methodology to allocate individual listings between the two channels based on those proportions. PMI currently postsIf a listing onreceives enough investor commitments, WebBank will originate the platform twice per day on weekdaysBorrower Loan requested and once per day on weekends, although the frequency with which PMI posts listings may change in the future. The format for listings is shown below. The images are not from actual listings, but rather depict hypothetical listings created for purposes of illustration. Each listing includes the Prosper Rating, selected items from the applicant’s credit report, intended use of the potential loan, plus information regarding any previous loans obtained by the applicant through the platform.then sell it to PFL.  

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Within the Note Channel, lender members can bid on listings in amounts ranging from 50% of the loan amount requested to as little as $25 (not in thousands). Thus, it is typical to have multiple lender members bid on a single listing.


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The registration, processing and payment systems are automated and electronic. Prosper Funding has no physical branches, no deposit-taking and interest payment activities and limited loan underwriting activities. Prosper Funding’s website, which is located at www.prosper.com, and which is referred to in this Annual Report as the “website”, provides detailed information about the platform, including detailed fee information, the full text of the member legal agreements, help pages and white papers. In addition to the customer support materials available on the website, Prosper Funding makes additional customer support available to members by email and phone (which services are currently handled by PMI as servicer pursuant to the Administration Agreement). Prosper Funding’s customer support team is currently located in Killeen, Texas and at its headquarters in San Francisco, California.

PMI attracts lender members and borrowers to the website through a variety of sources, including referrals from other parties (such as online communities, social networks and marketers), search engine results and online and offline advertising. Prosper Funding is not dependent on any one source of traffic to the website. In December 2013, the website received approximately 348,971 unique visitors.

Prosper Funding generates revenue by charging lender members ongoing servicing fees on the PMI Notes, Prosper Funding Notes and Prosper Funding Borrower Loans they have purchased, and from licensing fees paid by PMI under the Administration Agreement. PMI generates revenue by collecting fees from Prosper Funding under the Administration Agreement and by collecting origination fees from WebBank as compensation for its loan origination activities on WebBank’s behalf.
Platform Participants, Registration Requirements and Minimum Credit Criteria

All platform participants must register with Prosper Funding and agree to the platform’s rules and terms of use, including consent to doing business electronically.  At the time of registration, individuals or authorized institutional agents must provide their name, address and an email address.  After responding to an email verification, registrants must agree to the terms and conditions (including the applicable registration agreement) for the specific borrower or lender role for which they are registering.

Borrower Members

Borrowers
Any natural person at least 18 years of age who is a U.S. resident in a state where loans through the platformour marketplace are available with a U.S. bank account and a social security number may apply to become a borrower member by registering at www.prosper.com.  After passing theborrower. All potential borrowers are subject to anti-fraud, anti-terrorism and identity verification process,processes and a potential borrower members can request unsecured borrower loans at interest rates set by PMI.  PMI sets minimum credit and other credit guidelines for borrowers, as discussed in the risk grading section.
cannot obtain a loan without passing those processes.
When an applicanta borrower requests a loan, PMIwe first evaluatesevaluate whether the applicantborrower meets the underwriting criteria established in conjunction withrequired by WebBank. WebBank makes loans to borrowers and then sells and assigns the promissory notes evidencing those loans to Prosper Funding.  The underwriting criteria apply forto all borrower loans originated through the platformour marketplace and may not be changed without WebBank’sWebBank's consent. All applicantsborrowers who request a loan are subject to the following minimum eligibility criteria: (1) have at least a 640 credit score, (2) have fewer than sevenfive credit bureau inquiries (after excluding duplicate inquiries) within the last 6 months, (2)(3) have a statedan annual income greater than $0, (3)(4) have a debt-to-income ratio below 50%, (4)(5) have at least twothree open trades reported on their credit bureau, (5) have no reported delinquencies of 30 or more days within the last 3 months,report, and (6) have not filed for bankruptcy within the last 12 months. Further, borrower members who have not borrowed through the platform previously must have at least a 640 credit score. The minimum credit score is also 640 for borrower members who have (1) previously obtained a loan through the platform and paid off such loan in full, (2) have no prior charge-offs on loans originated through the platform, and (3) satisfy the following requirements:
Credit Score Range
 
 
Minimum # Months Since
Origination of 1st Loan
 
# of Consecutive Months
Without 31+ DPD on 1st
Loan
640-71999
720+66

Underwriting requirements for borrower loans, including eligibility requirements for second loans, are subject to change over time.

Borrower membersBorrowers may have up to two borrower loans through Prosper outstanding at one time, provided that (1) the first borrower loan is current, (2) the aggregate outstanding principal balance of both borrower loans does not exceed the then-current maximum allowable loan amount for borrower loans (currently $35,000) (not in thousands), and (3) they complythe borrower complies with the prior borrower constrainsprior-borrower constraints above. Any outstanding loan madeFrom time to time, we have, with WebBank’s consent, tested new products that include features which are outside the standard eligibility criteria discussed above. These products are available on a limited basis, exclusively through our Whole Loan Channel and did not have a material impact on our business or our financial statements during the platform is treated as a "loan" for purposes of this two loan limit.fiscal year ended December 31, 2016.    
Investors
After receiving an applicant's loan request, PMI verifies the deposit account into which the loan proceeds will be deposited, to determine that the applicant is a holder of record of the account. Even if a listing receives bids that equal or exceed the minimum amount required to fund, PMI will cancel the listing if it is unable to verify the applicant's account. While PMI attempts to authenticate each platform participant's identity, its fraud checks could fail to detect identity theft, fraud and inaccuracies.  See “Item 1A. Risk Factors—Risks Related to Borrower Default” for more information.

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Lender Members
Lender membersInvestors are individuals and institutions that have the opportunity to buy Prosper Funding Notes or Prosper Funding Borrower Loans. Lender members must register on the platform. Only lender members that are approved by Prosper Funding are eligible to participate in the Whole Loan Channel.  At a minimum, a lender member cannot participate in the Whole Loan Channel unless it is an institutional investor and meets the definition of an “accredited investor” set forth in Regulation D under the Securities Act of 1933, as amended.  During lender registration, potential lender members who are individuals must authorize Prosper Funding, or its agent, to obtain their credit report for identification purposes. Lender members also must consent to any applicable tax withholding statement and must agree to the terms and conditions of the website. Lender members who participate in the Note Channel must also enter into a lender registration agreement with Prosper Funding and PMI, which agreement governs all sales of Prosper Funding Notes to such lender members. Lender members who participate in the Whole Loan Channel must enter into loan purchase and loan servicing agreements with Prosper Funding.  Lender members are not required to give credit information to the same extent as borrower members. An individual lender memberinvestor must be a natural person at least 18 years of age and a U.S. resident, must provide his or her social security number, and may be required to provide his or her state driver’s license or state identification card number. An institutional lender memberinvestor must provide its taxpayer identification number. number and entity formation documentation. All potential investors are subject to anti-fraud, anti-terrorism and identity verification processes and a potential investor cannot invest in Notes or Borrower Loans without passing those processes.  
At the time a lender memberan individual investor registers to participate in the Note Channel, the lender membersuch investor must satisfy any minimum financial suitability standards and maximum investment limits established for the Note Channel or the Note Trader platform by the state in which the lender memberinvestor resides. Investors who participate in the Note Channel must enter into an investor registration agreement, which agreement governs all sales of Notes to such investors.

Prior
Only investors that are approved by us are eligible to bidding onparticipate in the Whole Loan Channel.  At a listing, lender members must transfer fundsminimum, to a funding account maintained on the platform. The funds of most lender members are held in a single, pooled funding account, which is referred to in this Annual Report as, the “pooled funding account”.  PMI has also established dedicated funding accounts for certain lender members that participate in the Whole Loan Channel, eachan investor must meet the definition of which is referred toan “accredited investor” set forth in this Annual Report as a “dedicated funding account”.   The pooled funding account and each dedicated funding account forRegulation D under the benefitSecurities Act of the lenders (collectively the FBO Funding accounts) is a non-interest bearing, demand deposit account, currently maintained by PMI or Prosper Funding at Wells Fargo Bank, National Association (“Wells Fargo”). The pooled funding account is held1933. Investors who participate in the name of Prosper Funding for the benefit of its lender members, and each dedicated funding account is held in the name of PMI or Prosper Funding for the benefit of the applicable lender member.

PMI causes all payments made or collected on any Prosper Funding Note, PMI Note or Prosper Funding BorrowerWhole Loan owned by a lender member to be depositedChannel must enter into the applicable funding account.  A lender member that wishes to make a commitment toloan purchase a Prosper Funding Note or a Prosper Funding Borrower Loan must have funds equal to the sum of such commitment and all the lender member’s other outstanding purchase commitments in the applicable funding account.  For the FBO Funding accounts, PMI maintains sub-account balances on its system to track commitments and purchases made and loan proceeds received at the lender member level. These sub-accounts are purely administrative and reflect balances and transactions concerning funds in the FBO Funding accounts. Individual lender members have no direct relationshipservicing agreements with Wells Fargo by virtue of funds or transactions within the FBO Funding accounts or by virtue of participating on the platform. No Prosper Funding or PMI funds are commingled with the assets of lender members in any of the FBO accounts.us. 

Each funding account is FDIC-insured on a “pass through” basis to the individual lender members, subject to applicable limits. This means that each individual lender member's cash balance is protected by FDIC insurance, up to the limits established by the FDIC. Other funds the lender member has on deposit with Wells Fargo may count against any applicable FDIC insurance limits. Funds of a lender member in a funding account can consist of amounts deposited by the lender member but never committed to Prosper Funding Note or Prosper Funding Borrower Loan purchases; amounts the lender member has committed to one or more such purchases, where origination of the corresponding Prosper Funding Borrower Loan has not yet occurred; or amounts received as principal and interest payments on Prosper Funding Notes, PMI Notes or Prosper Funding Borrower Loans owned by the lender member that the lender member has not yet withdrawn. Upon request by a lender member, PMI will transfer funds from the applicable funding account to the lender member’s designated and verified external bank account, provided such funds are not already committed to Prosper Funding Note or Prosper Funding Borrower Loan purchases.  To the extent a lender member does not withdraw any such amounts, they will remain in the applicable funding account indefinitely.
Relationship with WebBank
WebBank is aan FDIC-insured, Utah-chartered industrial bank that originates all loansBorrower Loans made through the platform.our marketplace. WebBank and PMI are parties to a Loan Account Program Agreement,an agreement under which PMI manages the operations of the platformour marketplace that relate to the submission of loan applications by potential borrowers and the making of related loans by WebBank and the funding of such loansBorrower Loans by WebBank in exchange for a fee equal tofee. WebBank makes each Borrower Loan with its own funds.  A joint WebBank-Prosper Credit Policy, which can be changed only with WebBank’s approval, constitutes the origination fee chargedpolicy Prosper must follow in reviewing, approving and administering Borrower Loans made by WebBank. As of February 1, 2013, WebBank Prosper Fundingthrough the marketplace. WebBank, PMI and PMIPFL are parties to a Loan Sale Agreement, under which WebBank sells and assigns the promissory notes evidencing the Prosper Funding Borrower Loans to Prosper Funding.PFL. As consideration for WebBank’sWebBank's agreement to sell and assign the promissory notes, Prosper FundingPFL pays WebBank a monthly fee in addition to the purchase price of the promissory notes, themselves. Underas well as a monthly fee, which is partially tied to the Loan Account Program Agreement,terms and performance of the loans.  PMI has agreed to indemnifyreceives payments from WebBank with respect to any damages arising from WebBank’s participation inas compensation for the origination of Prosper Funding Borrower Loans as contemplated in the Loan Account Program Agreement.
activities it undertakes on WebBank's behalf.
Risk Management
PMI’s risk management has evolved from its inception. PMI has consistently worked to improve the information provided to lender members in order to help them make sound investment decisions. A major source of improvement has been to progressively incorporate the historical performance of loans originated through the platform into the Prosper Ratings as moreEach loan outcome data becomes available over time. PMI intends to continuously refine the proprietary rating system by regularly reassessing the system and notifying Prosper Funding of any changes PMI believes should be made to the Prosper Ratings system. For more information about how the Prosper Ratings and estimated loss rates are calculated and reassessed, see the following sections under this discussion of “Risk Management”. For more information about PMI’s obligation to regularly reassess the Prosper Ratings systems, including the reasonableness of the implied loss rates, see “About the Platform—Risk Management—Comparing Estimated Loss Rates to Actual Losses.” As of February 1, 2013, PMI transferred to Prosper Funding the software and intellectual property associated with the Prosper Ratings system.
Prosper Rating Assigned to Listings
Each listing is assigned a Prosper Rating. The Prosper Rating, which is a letter grade that indicates the expected level of risk associated with the listing. Each letter grade corresponds to an estimated average gross annualized loss rate range. The ratingProsper Rating associated with a loan listing reflects the loss expectations for that listing as of the time the rating is given. This means that otherwise similar borrowers may have different Prosper Ratings at different points in time as the Prosper Rating is updated to incorporate more recent information. There are currently seven Prosper Ratings, but this, as well as the loss ranges associated with each, may change over time as the marketplace dictates. PMI intends to regularly update the loss rates associated with the Prosper Ratings to reflect the ongoing actual performance of PMI Borrower Loans and Prosper Funding Borrower Loans. The updates will occur at least annually.
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The current Prosper Ratings and the estimated loss ranges associated with them are as follows:

Prosper RatingEst. Avg. Annual Loss Rate
AA0.00% - 1.99 %
A2.00% - 3.99%
B4.00% - 5.99%
C6.00% - 8.99%
D9.00% - 11.99%
E12.00% - 14.99%
HR>=15.00%

The estimated loss rate for each loan listing is based primarily on the historical performance of PMI Borrower Loans and Prosper Funding Borrower Loans with similar characteristics and is primarily determined by two scores: (i) a custom Prosper Score, and (ii) a credit score obtained from a credit reporting agency. The custom Prosper Score is updated periodically to include new information that is predictive of borrower risk as itsuch information becomes available or as the evidence supporting a particular datum becomes strong enough to merit its inclusion in the custom Prosper Score.
If a particular piece of information is found to be highly predictive of a borrower’s risk prior to a custom Prosper Score re-development, then it may be added to the rating process as an overlay until its impact on borrower risk is sufficiently captured by the combination of the custom Prosper Score and the credit bureau score.  Throughout 2011, for instance, increasingly strong evidence continued to emerge that successful performance on a previous loan through the platform was a strong predictor of borrower risk.  Once this evidence was sufficiently robust, the presence of a second loan became an integral determinant of a borrower’s Prosper Rating.

Prosper Score

The Prosper Score predicts the probability of a borrower loanBorrower Loan going “bad,” where “bad” is defined as going more than 60 days past due within twelve months of the application date. To create the Prosper Score, PMIwe have developed and refined a custom risk model using itsour historical data as well as a data archive from a consumer credit bureau. PMIWe built the model on its applicantour borrower population, and included as variables information provided directly by the borrowers as well as included in their credit reports, so that itthe model would incorporate behavior that is unique to that population. In contrast, a credit score obtained from a credit reporting agency is based on a much broader population, of which applicants through the platform are just a small subset. PMI uses both the Prosper Score and a credit score to assess the level of risk associated with a listing.
To build and validate the custom risk model, PMI used applicants from April 2008 through April 2011 and measured their performance for the twelve months following their date of application. PMI analyzed variables available at the time of listing for potential inclusion in the final model. Potential variables included those from the credit report and also those provided by the borrower. PMI dropped or kept variables in the final model based on their contribution and stability over time, and went through a number of iterations before finalizing the model in its current form. The final model includes variables such as “Inquiries last six months” and “Debt-to-Income Ratio”. The former is an example of a credit report variable and the latter uses both credit report information as well as income information provided by the borrower.
The model assigns weights to all of the variables based on their value in predicting the likelihood of a loan going bad.  For a given applicant, the model estimates the probability of the applicant becoming bad, which is called the applicant’s “probability of bad.”  The probability of bad for an applicant is then mapped to a Prosper Score, which is displayed as part of that listing.  Prosper Scores range from 1 to 11, with 11 being the best, or lowest risk value.  The probability of bad ranges and the corresponding Prosper Scores are as follows.

Probability of BadProsper Score
> 10.50%1
9.50 < x <= 10.50%2
8.50 < x <= 9.50%3
7.00 < x <= 8.50%4
6.50 < x <= 7.00%5
5.75 < x <= 6.50%6
5.00 < x <= 5.75%7
4.25 < x <= 5.00%8
3.75 < x <= 4.25%9
3.00 < x <= 3.75%10
0.00 < x <= 3.00%11

For example, a probability of bad of 3.29% equates to a Prosper Score of 10 and a probability of bad of 12.00% equates to a Prosper Score of 1.  The probability of bad ranges may change over time as additional performance data is acquired.

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Credit Bureau Score

In addition to the Prosper Score, another major element used to determine the Prosper Rating for a loan listing is a credit score from a consumer reporting agency. PMIWe currently uses Experian’suse TransUnion’s FICO08 score, although it may use one or more different scores in the future. (PMI used Experian's Scorex PLUS score for all listings begun prior to September 6, 2013.) The minimum credit score required for a borrower to post a listing is 640.

PMI obtainsscore. We obtain a borrower’s credit score at the time the loan listing is created, unless itwe already hashave a credit score on file that is not more than thirty days old.  This credit score is used to determine the Prosper Rating for the listing,
Sale of Notes and the range that credit score falls within is also included in the listing.  If available, PMI obtains updated credit scores on a monthly basis for borrowers with outstanding loans, and it includes the applicable score ranges by month in listings on the Note Trader platform.  Neither Prosper Funding nor PMI disclose the borrower’s exact credit score to any of Prosper Funding members, except for the borrower himself.

Assigning Estimated Loss Rates

Estimated loss rates are based on the historical performance of loans originated through the platform with similar characteristics and are primarily determined by Prosper Scores and credit scores.  The starting point for this determination is the base loss rate table, shown below, which PMI created by dividing the range of Prosper Scores and credit scores into multiple segments and combining them into a single grid.  A base loss rate is estimated for each cell in the table, based on the historical performance of loans originated on the platform that occupied the same cell (i.e., that had the same point of intersection for their Prosper Score and credit score).  Cells may be given the same loss rate due to small volume, similar behavior or both.  PMI reviews loan performance on a monthly basis to see how the loss rate estimates compare to the actual performance of borrower loans, and makes adjustments as necessary based on such reviews.  Please refer to the website for the estimated base loss rate table currently in use.  Estimated base loss rates for the cells in the table below correspond to those in effect for PMI applicants as of December 31, 2013.

 
Experian FICO08 Credit Score
1st Loans, 3 yr. term
Prosper Score
600-
619
620-
639
640-
659
660-
679
680-
699
700-
719
720-
739
740-
759
760-
779
780-
799
800-
829
830-
850
122.25%22.25%14.75%14.75%13.75%9.25%7.49%6.99%6.24%4.74%3.24%3.24%
222.25%22.25%14.75%11.75%11.25%7.74%7.24%5.99%4.74%3.99%3.24%2.99%
322.25%22.25%11.75%8.99%6.99%6.99%6.24%5.49%4.24%3.49%2.99%2.49%
422.25%22.25%8.99%6.49%5.99%5.74%4.99%3.99%3.99%2.74%1.99%1.49%
522.25%22.25%7.24%6.24%5.49%5.49%4.49%3.74%3.49%2.49%1.74%1.49%
622.25%22.25%6.49%5.49%4.49%4.24%3.74%3.24%2.99%2.24%1.74%1.24%
722.25%22.25%6.24%4.99%3.99%3.49%3.49%2.99%2.49%1.74%1.74%0.99%
822.25%22.25%4.99%3.99%3.74%2.99%2.99%2.49%1.99%1.74%1.49%0.99%
922.25%22.25%4.74%3.74%3.74%2.99%2.74%1.99%1.74%1.49%1.24%0.74%
1022.25%22.25%4.74%3.49%3.24%2.24%1.99%1.49%1.49%0.99%0.74%0.74%

The table above applies to borrowers seeking their first loan through the platform. Although borrowers with credit scores below 640 are depicted in the table above, borrowers seeking a first loan whose credit score is below 640 are not currently eligible for a loan on the platform. PMI can make adjustments to the base loss rate to determine the final loss rate. For example PMI makes adjustments for whether the applicant has already been a borrower on the platform and for the term of the loan. The final loss rate determines the Proper Rating. The value of the adjustments are based on historical data, where available, as well as observed industry performance and behavior. An example of a potential adjustment is shown below:
Here is an example of how the final loss rate and Prosper Rating for a loan listing would be calculated:
- Applicant credit bureau score = 730 and Prosper score = 6
- Applicant has a previous Prosper loan
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Base Loss Rate:3.74%
Adjustments:
-Previous Loan:-0.50%
Final Loss Rate:3.24%
Prosper Rating:A

Calculating Loss Estimates
Loss rates for a particular group of loans will be a function of the group’s delinquency and loss behavior over time, pre-payment behavior over time, and responsiveness to collections activity.  For loans originated through the platform, the largest driver of the loss rate is the rate at which a group of loans becomes delinquent and charges off. A loan becomes “charged off” and is considered a loss when it becomes 121+ days past due.
Modeling Loss Rates.  The loss rate is the balance-weighted average of the monthly loss rates for the group of loans over the term of the loans. The gross loss rate is adjusted for principal recovery net of collection expenses to arrive at a net loss rate.

Estimating Losses.  PMI determines the loss component of the loss rate calculation by analyzing losses for PMI Borrower Loans and Prosper Funding Borrower Loans and making adjustments to reflect anticipated deviations from historical performance that may exist due to the current macro-economic or competitive environment. Changes in delinquency and losses have the largest impact on the expected loss rate of a group of loans, and so changes in loan delinquency and loss performance are monitored on at least a monthly basis.

Calculating Average Balance. To calculate the average balance for each period, PMI used the amount of loan principal on loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each loan declines over time.

When a loan pays faster than its amortization schedule (pre-payment), the portion of the principal that is pre-paid is no longer included in the outstanding balance for subsequent periods. Once a loan has been charged-off, the principal associated with this loan is considered a credit loss and is no longer included in the outstanding periodic balance.

Collection Expense and Recovery Adjustments. When an account becomes past due, PMI may collect on the account directly or refer the account to a third-party collection agency. PMI’s in-house collections department and third-party collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule. Once an account has been charged-off, any subsequent payments received or proceeds from the sale of the loan in a debt sale are considered recoveries and reduce the amount of principal lost.
Comparing Estimated Loss Rates to Actual Losses
PMI reviews the performance of PMI Borrower Loans and Prosper Funding Borrower Loans on a monthly basis to determine how loss rate estimates compare to actual performance. As part of this monthly review, the processes for calculating and assigning loss rates and Prosper Ratings described in the preceding sections are reassessed to ensure continued accuracy. The graphs below show the estimated versus actual cumulative dollar loss rates by Prosper Rating for Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, booked from July 13, 2009 through December 31, 2013. Performance is as of December 31, 2013. The loss performance is tracked by vintage, meaning each line represents all loans originated in a given period. The graphs only include PMI Borrower Loans and Prosper Funding Borrower Loans that have been outstanding at least 6 months. In addition, data for a point along the x axis is only included if the entire vintage is at least that mature. So, although loans originated in April 2013 have 8 months of performance, only 6 months of performance are reflected in the graphs below because the June 2013 loans, which are also a part of the 2013 Q2 vintage, have only completed 6 months of performance.
Vintages generally contain enough loan volume for their performance curves to be meaningful.  For presentation purposes, some of the older vintages have been grouped into annual and half-year vintages.
Below is a graph that shows cumulative net charge-offs as a percentage of originations across all Prosper Ratings by vintage for Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, originated from July 13, 2009 to June 30, 2013. The addition of “H1” means that the information reported reflects the first six months of the year presented, while “H2” reflects loans in the second 6 months of the year presented. Similarly, “Q1” or “Q2” means that the information reported reflects the first or second quarter of the year presented.

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Overall, vintages originated in 2012H2 and early 2013 are demonstrating meaningfully lower cumulative losses than those originated in 2011 and 2012H1. The PMI Group considers changes in the risk management process implemented at the end of 2012 and in early 2013 to be a meaningful driver of this trend.

The graphs below show cumulative net charge-offs for Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, as a percentage of originations for each Prosper Rating presented by vintage from July 13, 2009 to December 31, 2013.
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Note: Estimated lines represent the high end of the estimated loss rate range for each Prosper Rating, except for HR, where the high end of the range is 100% and the estimated curve was set at 19.50% cumulative principal loss.
In many rating grades, risk is trending above estimates for the 2011 and 2012 vintages. In instances such as these where a material variance relative to estimates exists, PMI performs additional analysis to understand the reason for the variance and adjusts its credit policy as necessary to bring losses back in-line with estimates. To date, all of the 2013Q1 and 2013Q2 vintages have cumulative losses below their respective estimated lines. The PMI Group considers this change in performance to be a direct result of changes made by PMI to its risk management practices at the end of 2012 and the beginning of 2013.

Please note that the historical performance of PMI Borrower Loans may not be indicative of the future performance of PMI Borrower Loans or Prosper Funding Borrower Loans. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI, the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.

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Maximum Loan Amount

The maximum loan amount for a listing is determined by the applicant’s Prosper Rating.  The table below shows the maximum loan amount for each Prosper Rating:

Prosper RatingMaximum Loan Amount (In Thousands)
AA35
A35
B35
C25
D15
E10
HR4

 Borrower Identity and Financial Information Verification

Prosper Funding reserves the right in its member agreements to verify the accuracy of all statements and information provided by borrower members and lender members in connection with listings, commitments and borrower loans. PMI verifies such information on behalf of Prosper Funding pursuant to the Administration Agreement. PMI may conduct its review at any time before, during or after the posting of a listing, or before or after the funding of a Prosper Funding Borrower Loan. If it is unable to verify material information with respect to an applicant or listing, PMI will cancel or refuse to post the listing or cancel any or all commitments against the listing. PMI may also delay funding of a Prosper Funding Borrower Loan in order to verify the accuracy of information provided by an applicant in connection with the listing, or to determine whether there are any irregularities with respect to the listing. If PMI identifies material misstatements or inaccuracies in the listing or in other information provided by the applicant, it will cancel the listing or related loan. PMI or Prosper Funding’s participation in funding loans on the platform from time to time has had, and will continue to have, no effect on the income and employment verification process, the selection of loan requests verified or the frequency of income and employment verification.

PMI verifies the identity of every borrower who obtains a loan through the platform using a combination of documentary and non-documentary methods. PMI compares the information contained in each applicant’s credit report with the information contained in the application, and runs the application information through a fraud database. In addition, PMI asks certain applicants to submit a copy of their current driver’s license, passport or other government-issued, photo identification card, which are then authenticated using third-party reference materials. Finally, PMI requires the applicant to submit bank statements, cancelled checks or other documentary evidence to verify the accuracy of her bank account information. To the extent any of these processes identify inconsistencies between the information submitted by the applicant and the information contained in another data source, the applicant must submit documentation to resolve the discrepancy to PMI’s satisfaction. For example, the applicant might be required to submit a recent utility bill to reconcile a discrepancy between the current address listed in her application and the one listed in her credit report. If it is unable to verify the identity of an applicant in the manner described above, PMI will cancel the applicant’s listing or pending loan.
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In addition to the identity verification processes just described, PMI verifies income and employment information for a subset of applicants based on a proprietary algorithm.  The intention of this algorithm is to identify instances where the applicant’s self-reported income is highly determinative of the applicant’s Prosper Rating.  The algorithm gives greatest weight to the following factors:

·Prosper Rating;
·loan amount;
·stated income; and
·debt-to-income ratio.

To verify an applicant’s income, PMI requires the applicant to submit a paystub from within the last thirty days and a W-2 or Form 1099 from the prior calendar year.  To verify an applicant’s employment, PMI obtains confirmation from the human resources department of the applicant’s employer, verbally or by email, or phones the main phone number of the applicant’s employer and confirms that it can be connected directly to the applicant’s work number from that main number.
Between July 14, 2009 and December 31, 2013 (based on start time of the applicable bidding period), PMI verified employment and/or income on approximately 54% of the Prosper Funding Borrower Loans and PMI Borrower Loans originated on the platform on a unit basis (39,291 out of 72,957) and approximately 76% of such loans on a dollar basis ($480,725 out of $630,364). Breaking these numbers down by Prosper Rating:
●for Prosper Funding Borrower Loans and PMI Borrower Loans with a Prosper Rating of AA, A or B, PMI verified income and/or employment information on approximately 71% of such loans on a unit basis (20,413 out of 28,940) and approximately 87% of such loans on a dollar basis ($280,307 out of $322,982) ;

●for Prosper Funding Borrower Loans and PMI Borrower Loans with a Prosper Rating of C or D, PMI verified income and/or employment information on approximately 61% of such loans on a unit basis (17,128 out of 28,227) and approximately 78% of such loans on a dollar basis ($189,606 out of $243,787) ; and

●for Prosper Funding Borrower Loans and PMI Borrower Loans with a Prosper Rating of E or HR, PMI verified income and/or employment information on approximately 11% of such loans on a unit basis (1,750 of 15,790) and approximately 17% of such loans on a dollar basis ($10,812 out of $63,595) .
Between July 14, 2009 and December 31, 2013, PMI canceled 14% of the loan listings for which it verified employment and/or income information because the listings contained inaccurate or insufficient employment or income information. Under the Administration Agreement, PMI is required to perform borrower identity and financial information verification services in the manner and to the extent contemplated in this section. Please note, however, that historical data regarding PMI Borrower Loans may not be indicative of the characteristics of Prosper Funding Borrower Loans. See “Item 1A. Risk Factors—Risks Related to the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.

If an applicant fails to provide satisfactory information in response to an income or employment verification inquiry, PMI will (a) request additional information from the applicant, (b) cancel the applicant’s listing or (c) refuse to proceed with the funding of the loan. Where PMI chooses to verify an applicant’s income or employment information, the verification is normally done after the applicant’s listing has already been posted. This allows PMI to focus its verification efforts on the listings most likely to fund, and increases the percentage of funded loans that are subject to verification.

When PMI identifies inaccurate employment or income information in an application or listing that has resulted in the applicant obtaining a different Prosper Rating or interest rate for her listing than she would have obtained if she had provided the correct information, PMI cancels the listing. If PMI identifies inaccurate information in a listing that does not trigger cancellation of the listing, it does not update the listing to include the corrected information. Cancellation automatically triggers a notice to the applicant and any lender members who made commitments to the listing that the listing has been cancelled, and PMI sends an adverse action notice to the applicant indicating the reasons for cancellation. PMI makes the funds committed by the lender members on the cancelled listing immediately available to them for bidding on other listings.

PMI generally does not verify information included by applicants in their listings other than identity, income and employment information. PMI derives the applicant’s debt-to-income ratio, or “DTI,” from a combination of the applicant’s self-reported income and information from the applicant’s credit report. The credit data that appears in listings is taken directly from the applicant’s credit report. Although applicants may provide proof of homeownership to establish homeownership status, in most instances, homeownership status is derived from the credit report as well. For example, if the credit report reflects an active mortgage loan, the applicant is presumed to be a homeowner. Lender members should not rely on unverified information provided by applicants. See “Item I.A. Risk Factors—Risks Related to Borrower Default—The maximum debt-to-income ratio for all applicants is 50%” for more information.

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PMI is continuously looking for ways to improve the verification procedures in a cost-effective manner in order to increase the repayment performance of loans.  See “Item 1A. Risk Factors—Risks Related to Borrower Default—Information supplied by applicants may be inaccurate or intentionally false. Information regarding income and employment is not verified in many cases” for more information.

Prosper Funding Note Repurchase and Indemnification Obligations
Under the terms of each Prosper Funding Note, if a “Repurchase Event” occurs with respect to that Prosper Funding Note, Prosper Funding will, at its sole option, either repurchase the Prosper Funding Note from the holder or indemnify the holder of the Prosper Funding Note for any losses resulting from nonpayment of the Prosper Funding Note or from any claim, demand or defense arising as a result of such Repurchase Event. A “Repurchase Event” with respect to a Prosper Funding Note means (i) a Prosper Rating different from the Prosper Rating actually calculated by PMI (on behalf of Prosper Funding) was included in the listing for the corresponding Prosper Funding Borrower Loan, as a result of which the interest of the holder in the Prosper Funding Note is materially and adversely affected, (ii) a Prosper Rating different from the Prosper Rating that should have appeared was included in the listing for the corresponding Prosper Funding Borrower Loan because either PMI (on behalf of Prosper Funding) inaccurately input data into the formula for determining the Prosper Rating or inaccurately applied the formula for determining the Prosper Rating and, as a result, the interest of the holder in the Prosper Funding Note is materially and adversely affected, or (iii) the corresponding Prosper Funding Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower member and a material payment default under the corresponding Prosper Funding Borrower Loan has occurred.

Under Prosper Funding’s standard form of loan purchase agreement for participants in the Whole Loan Channel, Prosper Funding will repurchase a Prosper Funding Borrower Loan from the purchaser if the Prosper Funding Borrower Loan is legally unenforceable because it did not comply with applicable laws in effect at the time the Prosper Funding Borrower Loan was originated, or if the Prosper Funding Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower member.
The determination of whether verifiable identify theft has occurred is in Prosper Funding’s sole discretion, and Prosper Funding has the exclusive right to investigate such claims. Prosper Funding may, in its reasonable discretion, require proof of the identify theft, such as a copy of a police report filed by the person whose identity was wrongfully used to obtain the corresponding Prosper Funding Borrower Loan, an identity theft affidavit, a bank verification letter or all of the above. Because PMI is the sole entity with the ability to investigate and determine verifiable identity theft, which in turn triggers Prosper Funding’s repurchase or indemnification obligations, a conflict of interest exists. The PMI Group believes the risk created by this conflict of interest is mitigated by three factors that incent Prosper Funding to vigorously investigate claims of identity theft. First, without the protection offered by its repurchase and indemnification obligations, fewer potential lender members will have the confidence to participate in the platform, limiting the growth and long term profitability of Prosper Funding. Second, the Loan Program Agreement between PMI and WebBank includes a requirement—and accompanying audit function—to ensure that claims of identity theft are thoroughly investigated and accurately reported. Third, California statutes provide strong remedies to victims of identity theft whose claims are not adequately investigated or was frivolously dismissed. See “Item 1A. Risk Factors—Risks Related to Borrower Default—The fact that PMI has the exclusive right and ability to investigate claims of identity theft in the origination of loans creates a significant conflict of interest between the lender members.”
Prosper Funding is under no obligation to repurchase a series of Prosper Funding Notes or indemnify any holder of Prosper Funding Notes if a correctly determined Prosper Rating fails to accurately predict the actual lossesinvestor successfully bids on a Prosper Funding Borrower Loan. In addition, the remedy described above for identity theft with respect to Prosper Funding Notes and Prosper Funding Borrower Loans only provides protection against identity theft; in no way is it a guarantee of a borrower’s self-reported information (beyond identity) or a borrower’s creditworthiness. See “Item 1A. Risk Factors—Risks Inherent in Investing in the Prosper Funding Notes—Prosper Funding is not obligated to indemnify a Prosper Funding Note holder or repurchase any Prosper Funding Notes except in limited circumstances.” Prosper Funding expects the incidence of identity fraud on the platform to be low because of the identity verification process. From 2006 through December 31, 2013, Prosper Funding and PMI experienced identity fraud cases affecting 38 Prosper Funding Borrower Loans and PMI Borrower Loans. In the cases of identity theft Prosper Funding and PMI have experienced, PMI received a police report and identity theft affidavit from the victim evidencing that identity theft had occurred. Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of Prosper Funding Borrower Loans or PMI Borrower Loans. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI, the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.
Under Prosper Funding’s lender registration agreements with lender members who participate in the Prosper Funding Note Channel, Prosper Funding represents and warrants that (i) if a lender member uses an automated bidding tool or order execution service offered by Prosper Funding, such as Quick Invest, Auto Quick Invest or Premier, to identify Prosper Funding Notes for purchase, each Prosper Funding Note purchased will conform to the investment criteria provided by the lender member through such tool or service, and (ii) each Prosper Funding Note that a lender member purchases from Prosper Funding will be inloan listing, the principal amount of the bid such lender member placed andloan will correspond to the Prosper Funding Borrower Loan on which such lender member bid. If Prosper Funding breaches either of these representations and warranties and, as a result, the Prosper Funding Note sold to a lender member is materially different from the Prosper Funding Note that would have been sold had the breach not occurred or if the lender member would not have purchased the Prosper Funding Note at all absent such breach, Prosper Funding will, at its sole option, either indemnify the lender member from any losses resulting from such breach, repurchase the Prosper Funding Note or cure the breach, if the breach is susceptible to cure. If Prosper Funding breaches any of its other representations and warrantiesbe set aside in the lender member registration agreementinvestor’s account and such breach materially and adversely affects a lender member’s interest in a Prosper Funding Note, Prosper Funding will, at its sole option, either indemnify the lender member, repurchase the affected Prosper Funding Note from such lender member or cure the breach. The determination of whether a breach is susceptible to cure is in Prosper Funding’s sole discretion.
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Calculation of Repurchase Price and Indemnification Payments
If Prosper Funding elects to repurchase a Prosper Funding Note or Prosper Funding Borrower Loan in connection with a repurchase event or breach described above, the repurchase price will be equal to the principal amount outstanding on the Prosper Funding Note or Prosper Funding Borrower Loan as of the date of repurchase and will not include accrued and unpaid interest. If Prosper Funding elects to provide indemnification in connection with a repurchase event or the breach of a representation or warranty under the lender registration agreement for Note Channel participants, Prosper Funding will not be required to take any action with respect to any losses suffered until the affected Prosper Funding Note is at least one hundred twenty (120) days past due. For purposes of indemnification, Prosper Funding will calculate the losses resulting from nonpayment of a Prosper Funding Note based on the principal amount outstanding on the Prosper Funding Note. If Prosper Funding makes an indemnification payment, Prosper Funding will be entitled to retain any subsequent recoveries that it receives on the affected Prosper Funding Note.
Effect on PMI Management Rights

If Prosper Funding repurchases any Prosper Funding Notes, PMI will concurrently repurchase the related PMI Management Rights for zero consideration.

Historical Performance of PMI Borrower Loans and Prosper Funding Borrower Loans
The performance of Prosper Funding Borrower Loans and PMI Borrower Loans is a function of the credit quality of borrowers and the risk and return preferences of lender members. Lender members can choose to pursue a variety of bidding strategies, including strategies that may or may not maximize the return on their investment. When making commitment decisions, lender members consider applicants’ Prosper Ratings, credit scores, debt-to-income ratios and other credit data and information displayed with listings.  See “Item 1A. Risk Factors—Risks Related to Borrower Default.”
The graph below displays the overall level of delinquency for Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, on a calendar basis. Loss estimates for the portfolio on a vintage basis may be found in the section “Comparing Estimated Loss Rates to Actual Losses”. Loans that are more than 30 days past due are considered to be severely delinquent due to the significant decrease in the likelihood of receiving future payment once a loan has missed two payments.
The following table presents aggregated information as of December 31, 2013, grouped by Prosper Rating, for all Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, originated on the platform from July 13, 2009 through December 31, 2013. With respect to delinquent Prosper Funding Borrower Loans and PMI Borrower Loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of December 31, 2013.
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Prosper Funding Borrower Loan and PMI Borrower Loan Originations
July 13, 2009 - December 31, 2013
(as of December 31, 2013)
(in thousands, except for number amounts)

 Total Loan Originations Current Loans 1-30 Days Past Due 
Prosper
Rating
 No. Origination Amount No. 
Origination
Amount
 
Outstanding
Principal
 No. 
Origination
Amount
 
Outstanding
Principal
 
AA   4,288  $47,480   2,589  $33,854  $26,358   17  $249  $171 
A  11,562   127,917   8,138   100,732   83.606   75   946   744 
B  12,789   142,493   9,554   114,898   99,845   143   1,489   1,101 
C  14,884   149,360   11,149   121,234   107,765   215   2,222   1,814 
D  13,111   91,243   7,318   56,080   45,151   237   1,851   1,290 
E  8,915   39,466   5,071   23,014   18,562   167   692   460 
HR   6,830   23,619   3,055   10,764   7,233   140   516   343 
     72,379  $621,578   46,874  $460,576  $388,516   994  $7,965  $5,923 
   avg loan size:  $9                         
   Percent of total       64.8%  74.1%      1.4%  1.3%    
                                   
   Paid In Full 31+ Days Past Due 
Defaulted 1
 
Prosper
Rating
 No. Origination Amount No. 
Origination
Amount
 
Outstanding
Principal
 No. 
Origination
Amount
 
Net
Charged Off
Principal
 
AA   1,594  $12,427   16  $221  $156   72  $730  $536 
A  2,916   21,960   67   858   664   366   3,421   2,533 
B  2,434   19,920   153   1,661   1,303   505   4,524   3,585 
C  2,588   18,019   220   2,191   1,780   712   5,693   4,650 
D  3,762   21,334   250   1,970   1,537   1,544   10,006   7,958 
E  2,259   9,313   212   909   643   1,206   5,539   4,399 
HR   2,128   7,083   194   704   496   1,313   4,552   3,680 
     17,681  $110,056   1,112  $8,514  $6,579   5,718  $34,465  $27,341 
                                   
Percent of total   24.4%  17.7%  1.5%  1.4%      7.9%  5.5%    

1 Includes all PMI Borrower Loans and Prosper Funding Borrower Loans more than 120 days past due
2
Only includes PMI Borrower Loans and Prosper Funding Borrower Loans where the bankruptcy notification date is prior to the date the loan became more than 120 days past due. If Prosper Funding or PMI were notified of a bankruptcy after the loan was more than 120 days past due, the loan is included in the "Default due to Delinquency” totals.
Default due to  Delinquency:  4,945  $23,490 
Default due to  Bankruptcy2 :
  773  $3,850
From July 13, 2009 through December 31, 2013, 72,379 Prosper Funding Borrower Loans and PMI Borrower Loans were originated on the platform with an average original principal amount of $9 and an aggregate original principal amount of $621,578. As of December 31, 2013, 64.8% of these loans were current or had not reached their first billing cycle, 24.4% were paid in full, 1.4% were 1 to 30 days past due, 1.5% were more than 30 days past due, and 7.9% had defaulted. A PMI Borrower Loan or Prosper Funding Borrower Loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy. Of these 72,379 loans, 9,832 or 13.6%, have been greater than 15 days past due at any time, 8,067 or 11.1%, have been more than 30 days past due at any time, and 7,169 or 9.9%, have been more than 60 days past due at any time.

Of Prosper Funding Borrower Loans and PMI Borrower Loans originated after July 13, 2009, 5,718 have defaulted as of December 31, 2013, equaling a total net defaulted amount of $27,340. Of these 5,718 defaulted loans, the borrowers of 773 such loans have filed for bankruptcy, resulting in a net defaulted amount of $3,850.

The data in the preceding tables regarding Prosper Funding Borrower Loans and PMI Borrower Loans may not be representative ofused for other bids. In the loss experience that will develop for future Prosper Funding Borrower Loans. In addition, the dataevent a listing does not result in the preceding tables regarding prepayments may not be representative of the prepayments Prosper Funding experiences over time.

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The following table presents aggregate information, as of December 31, 2013, regarding the results of PMI’s collection efforts for PMI Borrower Loans originated before July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating (in thousands except for number amounts).

Prosper
Rating
  
Loans In
Collections
  
Origination
Amount
  
Aggregate
Amount
Sent to
Collections
  
Gross
Amount
Collected
on
Accounts
sent to
Collections
  
Number
of Loans
Charged-
off
  
Gross
Aggregate
Principal
Balance
of Loans
Charged-
Off
  
Gross
Amount
Recovered
on Loans
Charged-
Off
  
Net
Aggregate
Charge-
Off*
 
AA   57  $480  $29  $18   45  $218  $18  $200 
A  147   828   52   31   120   382   45   337 
B  46   347   23   5   39   166   7   159 
C  344   3,171   208   110   305   1,807   110   1,697 
D  536   3,902   262   167   459   2,075   164   1,912 
E  183   1,259   89   40   163   735   82   653 
HR   3,214   34,756   2,480   1,250   2,940   21,978   1,277   20,702 
N/A1   7,299   32,880   2,447   1,371   6,653   21,037   938   20,099 
     11,826  $77,623  $5,590  $2,992   10,724  $48,398  $2,642  $45,759 

* This amount excludes collection agency payments that were subsequently returned due to insufficient funds.
1 Includes PMI Borrower Loans with Credit Score<640 or insufficient credit data to determine Prosper Rating.
The following table presents aggregate information, as of December 31, 2013, regarding the results of PMI's collection efforts for Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, originated after July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating (in thousands except for number amounts).

Prosper
Rating
  
Loans In
Collections
  
Origination
Amount
  
Aggregate
Amount
Sent to
Collections
  
Gross
Amount
Collected on
Accounts
sent to
Collections
  
Number
of Loans
Charged-
off
  
Gross
Aggregate
Principal
Balance
of Loans
Charged-
Off
  
Gross
Amount
Recovered
on Loans
Charged-
Off
  
Net
Aggregate
Charge-
Off*
 
AA   107  $1,091  $63  $17   72  $539  $8  $531 
A  503   4,798   272   114   366   2,602   60   2,542 
B  763   7,097   444   215   505   3,641   51   3,590 
C  1057   8,864   588   324   712   4,784   39   4,745 
D  2026   13,440   999   512   1544   8,168   172   7,996 
E  1601   7,241   622   368   1206   4,500   107   4,393 
HR   1695   5,924   514   301   1313   3,786   44   3,742 
     7,752  $48,455  $3,502  $1,851   5,718  $28,020  $481  $27,539 

* This amount excludes collection agency payments that were subsequently returned due to insufficient funds.
PMI may alter the terms or make principal reductions on some Prosper Funding Borrower Loans or PMI Borrower Loans, which may include cases where a reduction in the initial interest rate is required by law. The Servicemembers’ Civil Relief Act requires interest rates to be reduced to 6% while a borrower in the armed forces is on active duty. In order to comply with the Servicemembers’ Civil Relief Act, PMI has elected to make “pre-refunds” of the interest differential to the affected borrower for the period of deployment. The borrower then continues to make their regular payments. In these cases, PMI has refunded the interest to the borrower from PMI’s own funds and, as a result, the payments received by the applicable lender members were unchanged.
Loan Originations
The following table presents aggregated information about borrowers for Prosper Funding Borrower Loans and PMI Borrower Loans, collectively, originated over the period from July 13, 2009 to December 31, 2013, grouped by Prosper Rating (in thousands except for number amounts).

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Prosper Rating  Number  Amount  
Average
Loan
Size
  
Weighted
Average
Lender
Yield
  
Weighted
Average B
orrower
Rate
  
Weighted
Average
Borrower
APR
 
AA   4,288  $47,480  $11   7.34%  8.34%  9.47%
A  11,562   127,917   11   10.68%  11.68%  14.20%
B  12,789   142,493   11   14.81%  15.81%  18.64%
C  14,884   149,360   10   18.85%  19.85%  22.91%
D  13,111   91,243   7   23.88%  24.88%  28.20%
E  8,915   39,466   4   28.53%  29.53%  33.21%
HR   6,830   23,619   3   30.75%  31.75%  35.59%
Total   72,379  $621,578  $8.14   17.17%  18.17%  21.02%

The following table presents aggregated information about borrowers for Prosper Funding Borrower Loans and PMI Borrower Loans originated over the period from July 13, 2009 to September 5, 2013, grouped by Prosper Rating. The information for each borrower was obtained from a credit reporting agency at the time the borrower’s application was submitted. PMI has not independently verified this information:
Prosper Rating  
Average
Experian
ScorexPlus
Score
  
Average
Number of
Current
Delinquencies
  
Average
Number
of Open
Credit
Lines
  
Average
Number
of Total
Credit
Lines
 
AA   796   0.06   9.49   27. 52 
A  752   0.17   9.65   27.84 
B  725   0.27   9.32   27.19 
C  706   0.35   9.26   27.68 
D  693   0.46   8.48   26.23 
E  674   0.67   8.66   27. 43 
HR   689   0.60   8. 25   26.96 
Total   719   0.37   9.02   27.26 

On September 6, 2013, PMI ceased using Experian’s ScorexPlus credit score and began using Experian’s FICO08 credit score. All listings begun after this date use Experian’s FICO08 credit score.
The following table presents aggregated information about borrowers for Prosper Funding Borrower Loans originated over the period from September 6, 2013 to December 31, 2013, grouped by Prosper Rating. The information for each borrower was obtained from a credit reporting agency at the time the borrower’s application was submitted. PMI has not independently verified this information:

Prosper Rating  
Average
Experian
FICO
Score
  
Average
Number of
Current
Delinquencies
  
Average
number of
Open
Credit
 Lines
  
Average
number of
Total
Credit
Lines
 
AA   768   0.03   11.02   29.30 
A  721   0.11   10.87   28.94 
B  704   0.20   10.58   28.94 
C  691   0.22   10.61   28.72 
D  679   0.32   9.89   27.91 
E  666   0.43   9.29   27.43 
HR   665   0.54   9.99   28.82 
Total   699   0.26   10.32   28.58 
Please note that historical data regarding Prosper Funding Borrower Loans and PMI Borrower Loans may not be indicative of the characteristics of future Prosper Funding Borrower Loans. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI, the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.
Posted Prosper Funding Borrower Loan Listings
Once a loan listing is completed by an applicant,being originated, the listing is posted on the website and then becomesfunds are made available for bidding by lender members. Athe investor.
For loan listings allocated to the Note Channel, a bid on a listing is an investor’s commitment to purchase a request by the applicantNote from PFL.  PFL generally issues and sells a series of Notes for a Prosper Fundingeach Borrower Loan in a specified amount.

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Listings fundedthat is originated through the Note Channel may be partially funded. Partial funding meansChannel. The Notes are sold to the applicant’sinvestors who successfully bid on the corresponding loan does not have to receive bids for 100% of the amount requested to fund, but can be funded if it receives bids for 70% or more of the amount requested. Each listing posted in the Note Channel indicates the minimum amountprincipal amounts of bids requiredtheir respective bids. Each series of Notes is dependent for the listing to fund. Prosper Funding may change the percentage threshold for partial funding, which is currently set at 70%, from time to time. Any such change will be disclosedpayment on PFL’s receipt of payments on the website, and will only affectcorresponding Borrower Loan. PFL uses the proceeds of each series of Notes to purchase the corresponding Borrower Loan from WebBank on the second business day after WebBank has originated the Borrower Loan.
For listings created after such change is implemented. Bids placed on listings posted inallocated to the Whole Loan Channel, must be for 100% ofa bid on a listing is an investor’s commitment to purchase the amount requested, so partial funding cannot occur for Prosper Funding Borrower Loans funded through the Whole Loan Channel.
Prosper Funding Borrower Loans are unsecured obligations of individual borrowers with an interest rate determined by PMI and with a specified loan term, currently set at three or five years, but which PMI may in the future extend to between three months to seven years. Applicants may currently request loans within specified minimum and maximum principal amounts (currently, between $2 and $35), which are subject to change from time to time. Prosper Funding Borrower Loans may be repaid at any time by borrowers without prepayment penalty. A Prosper Funding Borrower Loan will be madefrom PFL after origination by WebBank and sale to an applicant only ifPFL. On the applicant’s listingsecond business day after WebBank has received bids equal to or exceeding the minimum amount required for the listing to fund.
In addition to the applicant’s requested loan amount, listings include:

·the interest rate, annual percentage rate and monthly payment amount on the requested loan;

·the servicing fee lender members must pay;

·the lender yield percentage (interest rate on the loan, net of the servicing fee);

·the Prosper Rating and estimated loss rate;

·the Prosper Score and credit score range;

·the minimum amount required for the loan to fund (for listings posted in the Note Channel)

·the number of accounts on which the applicant is currently late on a payment, including unpaid derogatory accounts;

·the total past-due amount the applicant owes on all delinquent and derogatory accounts;

·the number of 90+ days past due delinquencies on the applicant’s credit report;

·the number of public records (e.g., bankruptcies, liens, and judgments) on the applicant’s credit report over the last 12 months, and over the last 10 years;

·the number of inquiries made by creditors to the applicant’s credit report in the last six months;

·the month and year the applicant’s oldest recorded credit line (e.g., revolving, installment, or mortgage credit) was opened;

·the total number of credit lines appearing on the applicant’s credit report, along with the number that are open and current;

·the total balance on all of the applicant’s open revolving credit lines;

·the applicant’s bankcard utilization ratio, expressed as a percentage, reflecting the ratio of the total balance used, to the aggregate credit limit on, all of the applicant’s open bankcards;

·whether the applicant owns a home;

·DTI percentage;

·the applicant’s self-reported income range, occupation, employment status, and intended use of funds; and
originated


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·if the applicant previously obtained one or more loans through the platform, a description of such loan activity, including the number and aggregate principal borrowed on such loans, the current outstanding principal balance of any existing loan, the payment history on such loans, and the applicant’s credit score ranges as of the four most recent dates credit reports were obtained on the applicant in connection with the applicant’s listings, with an arrow indicator denoting whether the applicant’s credit score has improved, declined or remained unchanged since the applicant’s most recent loan through the platform.

Part of an applicant’s credit profile displayed in listings is a DTI ratio.  DTI is one measurethe Borrower Loan, PFL purchases the Borrower Loan from WebBank and re-sells the Borrower Loan that same day to the corresponding investor. PFL records the investor as the owner of the applicant’s ability to take on additional debt.  This number takes into consideration how much debt the applicant has or will have, including the requested loan amount.  DTI is expressed as a percentage and is calculated by dividing the applicant’s monthly debt payments, including the debt resulting from the Prosper Funding Borrower Loan being requested, by the applicant’s monthly income.  Such debt amounts are taken from the applicant’s credit report without verification and exclude monthly housing payments, and the applicant’s income is self-reported and may not be verified by Prosper Funding or PMI.
For Prosper Funding Borrower Loans and PMI Borrower Loans funded between July 13, 2009 and December 31, 2013, borrowers identified their intended use of loan proceeds by unit distribution as follows:

·debt consolidation (approximately 60%);

·business use, such as financing their home-based or small businesses (approximately 7%);

·home improvement (approximately 9%);

·financing the purchase of an automobile (approximately 3%); and

·other (approximately 21%).

Please note that historical data regarding Prosper Funding Borrower Loans and PMI Borrower Loans may not be indicative of the future characteristics of Prosper Funding Borrower Loans. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.

How to Bid to Purchase Prosper Funding Notes
A bid on a listing posted in the Note Channel is a lender member’s binding commitment to purchase a Prosper Funding Note in the principal amount of the lender member’s bid, should the listing receive bids equaling or exceeding the amount required for the listing to fund. Lender members bid the amount they are willing to commit to purchase a Prosper Funding Note dependent for payment on payments Prosper Funding receives on the Prosper Funding Borrower Loan described in the listing. A bid on a listing posted in the Whole Loan Channel is a lender member’s commitment to purchase the entire Prosper Funding Borrower Loan.
The bidding period for a listing posted in the Note Channel begins when the listing is posted on the platform and ends either 14 days after posting or on the first date on which the listing has received bids totaling the loan amount requested, whichever is earlier. The bidding period for a listing posted in the Whole Loan Channel ends on the earlier of a lender member committing to purchase the Prosper Funding Borrower Loan requested or approximately 1 hour after the listing is posted.  Lender members cannot place bids on a listing once its bidding period has ended.

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Listings that are posted in the Whole Loan Channel and do not receive purchase commitments are re-posted for bidding in the Note Channel.  These re-posted listings are identified within the Note Channel as having already been offered in the Whole Loan Channel. If the listing posted in the Note Channel does not receive bids equal to or exceeding the minimum amount required for the Prosper Funding Borrower Loan requested to fund by the end of the bidding period, the listing will terminate and will not be funded. Applicants whose listings expire due to an insufficient amount of bids may post a new listing on the platform, although Prosper Funding has the right under the borrower registration agreement to limit the number of listings a borrower member may post on the platform.

In order to bid on a listing, a lender member must have funds on deposit in the applicable funding account in at least the amount of the bid. Once bids are placed, they are irrevocable. Lender members may not cancel their bids or withdraw the amount of their bids from the applicable funding accounts unless the bidding period expires without the listing having received bids in the required minimum amount, or unless the listing is withdrawn or cancelled.   See “Item 1. Business—Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.

Currently, for listings posted in the Note Channel, the minimum amount a lender member may bid is $25 (not in thousands), and the maximum amount a lender member may bid is 50% of the amount of the requested Prosper Funding Borrower Loan. The maximum aggregate amount an individual lender member may bid on the platform is currently $25,000. There is no maximum aggregate bid amount for institutional lender members. Prosper Funding may change the minimum bid amount or the maximum aggregate bid amounts from time to time. Depending on the amount of the winning bids at the end of the bidding period, there may be a winning bidder on a listing posted in the Note Channel with a winning bid of less than $25 (not in thousands). But there cannot be more than one partial winning bid on any such listing.

A listing that gets funded through the Note Channel typically receives bids from many different lender members. For example, from July 13, 2009 through December 31, 2013, the average aggregate size of Prosper Funding Borrower Loans and PMI Borrower Loans funded through the Note Channel was approximately $8 and the average purchase price paid for corresponding Prosper Funding Notes or PMI Notes was approximately $115 (not in thousands). Please note that historical data regarding Prosper Funding Borrower Loans and PMI Borrower Loans may not be indicative of the future characteristics of Prosper Funding Borrower Loans. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.

Lender members may browse online through available listings displayed on the platform by desired borrower loan amount, yield percentage, Prosper Rating, estimated loss rate, debt-to-income ratio, or other applicant characteristics. For listings posted in the Note Channel, lender members can use Quick Invest, a loan search tool, to identify loan listings that meet their investment criteria. Only lender members that have been approved to participate in the Whole Loan Channel are able to view or bid on listings posted in the Whole Loan Channel. A lender member can bid on as many listings as the lender member desires, subject, in the case of individual lender members, to the aggregate bidding limit. A lender member can diversify her risk of default if she elects to do so. It is solely up to lender members to select their bidding method and the credit characteristics that are acceptable to the lender member and to determine a diversification strategy.
Quick Invest
Quick Invest is a loan search tool that allows lender members to identify listings in the Note Channel that meet their investment criteria. A lender member using Quick Invest is asked to indicate (i) the Prosper Rating or Ratings she wishes to use as search criteria, (ii) the total amount she wishes to invest, and (iii) the amount she wishes to invest per Prosper Funding Note. If she wishes to search for Prosper Funding Notes using criteria other than, or in addition to, the Prosper Rating, she can use one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio and credit score. The only criterion a lender member cannot specify in Quick Invest is the monthly payment amount.

Quick Invest then compiles a basket of Prosper Funding Notes for the lender member’s consideration that meet her search criteria.  If the pool of Prosper Funding Notes that meet her criteria exceeds the total amount she wishes to invest, Quick Invest selects Prosper Funding Notes from the pool based on how far the listings corresponding to the Prosper Funding Notes have progressed through the loan verification process, i.e., Prosper Funding Notes from the pool that correspond to listings for which the loan verification process has been completed will be selected first.  If the pool of Prosper Funding Notes that meet the lender member’s criteria and for which the loan verification process has been completed still exceeds the amount she wishes to invest, Quick Invest selects Prosper Funding Notes from that pool based on the principle of first in, first out, i.e., the Prosper Funding Notes from the pool with the corresponding listings that were posted on the platform earliest will be selected first.  If the pool of Prosper Funding Notes that meet the lender member’s specified criteria exceeds the amount she wishes to invest, but the subset of that pool for which the loan verification process has been completed does not equal the amount she wishes to invest, Quick Invest selects all of the Prosper Funding Notes that correspond to listings for which the loan verification has been completed and makes up the difference by selecting Prosper Funding Notes from the remaining pool on a first in, first out basis.  To the extent available Prosper Funding Notes that meet the lender member’s criteria are insufficient to fill her order, the lender member is advised of this shortfall and given an opportunity either to reduce the size of her order or modify her search criteria to make her search more expansive.

If the lender member’s search criteria included multiple Prosper Ratings, Quick Invest divides her basket into equal portions, one portion representing each Prosper Rating selected, and then attempts to fill each portion in the manner just described.  To the extent there are insufficient Prosper Funding Notes available with a particular Prosper Rating to fill that portion of the lender member’s basket, Quick Invest attempts to make up the deficit by including additional Prosper Funding Notes with the other Prosper Ratings selected in equal proportions. To the extent available Prosper Funding Notes with these other Prosper Ratings are still insufficient to fill the lender member’s order, the lender member is advised of this shortfall and given an opportunity either to reduce the size of her order or to modify her search criteria to make her search more expansive.

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For example (not in thousands), if a lender member using Quick Invest indicated that she wished to invest a total of $600 in Prosper Funding Notes with a Prosper Rating of B, C or D, Quick Invest would first attempt to fill her order with equal portions of B, C and D Prosper Funding Notes ($200 – B; $200 – C; $200 – D). If there were only $100 of D Prosper Funding Notes available, the search tool would attempt to increase the allocation of B and C Prosper Funding Notes from $200 to $250 ($250 – B; $250 – C; $100 – D). If there were $250 of B Prosper Funding Notes available but only $200 of C Prosper Funding Notes available, the search tool would then attempt to make up the remaining gap by increasing the allocation of B Prosper Funding Notes from $250 to $300 ($300 – B; $200 – C; $100 – D). But if there were only $275 worth of B Prosper Funding Notes available, the lender member would be given the choice of expanding her search criteria or reducing the total size of her order from $600 to $575. If she elected to reduce the size of her order, her final order would consist of $575 of Prosper Funding Notes: $275 of B Prosper Funding Notes, $200 of C Prosper Funding Notes and $100 of D Prosper Funding Notes.

The Auto Quick Invest feature allows lender members (i) to have Quick Invest searches run on their designated criteria automatically each time new listings are posted on the platform, and (ii) to have bids placed automatically on any Prosper Funding Notes identified by each such search. As with a lender member making manual bids, a lender member using Quick Invest or Auto Quick Invest is not permitted to place a bid unless the lender member’s funds in the applicable funding account are sufficient to cover the bid, and funds will only be debited from her account if and when her bid is successful.

Since it was first implemented in July 2011, the Quick Invest tool has experienced errors that affected 8,630 Prosper Funding Notes and PMI Notes out of the 3,489,413 Prosper Funding Notes and PMI Notes purchased. Of the affected Prosper Funding Notes and PMI Notes, 2,053 Prosper Funding Notes and PMI Notes purchased by 600 lender members were affected by the erroneous selection by Quick Invest of all possible search criteria; 2,517 Prosper Funding Notes and PMI Notes purchased by 28 lender members were affected by the erroneous use of inactive searches to purchase Prosper Funding Notes and PMI Notes; 96 Prosper Funding Notes and PMI Notes purchased by 23 lender members were affected by an error that resulted in a search identifying every listing’s Prosper Score as the best rating, regardless of the actual Prosper Score; 1,209 Prosper Funding Notes and PMI Notes purchased by 160 lender members were affected by an error that resulted in a lender member who had multiple searches with overlapping criteria bidding on the same listing more than once even though the lender member had also selected an option that was supposed to preclude him from investing in the same listing more than once; 168 Prosper Funding Notes and PMI Notes purchased by 42 lender members were affected by a server failure that resulted in Quick Invest bidding on the same listing more than once; and 2,587 Prosper Funding Notes and PMI Notes purchased by 458 lender members were affected by an Auto Quick Invest refactor that queued orders too quickly and resulted in multiple orders being executed. Please note that historical data regarding Prosper Funding Notes and PMI Notes may not be indicative of the future characteristics of Prosper Funding Notes. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.

In the event of any errors in Quick Invest that cause a lender member to purchase a Prosper Funding Note that such lender member would not otherwise have purchased or that differs materially from the Prosper Funding Note such lender member would have purchased had there been no error, Prosper Funding will either repurchase the Prosper Funding Note, indemnify the lender member against losses suffered on that Prosper Funding Note or cure the breach. Neither Quick Invest nor Auto Quick Invest can be used to bid on listings posted in the Whole Loan Channel.
Setting Interest Rates
PMI has an interest rate committee which meets regularly to set interest rates for all Prosper Funding Borrower Loans. These rates are set forth in a rate table, which is posted on the website. The table specifies a range of interest rates for all Prosper Funding Borrower Loans, based on the Prosper Rating. Additional factors, which may change from time to time, such as competitive conditions and the general economic environment, affect the specific interest rate within a specified range that a borrower receives. The yield percentage on each series of Prosper Funding Notes is equal to the interest rate on the related Prosper Funding Borrower Loan, minus a servicing fee, currently set at 1% per annum of the outstanding principal balance of the corresponding Prosper Funding Borrower Loan prior to applying the current payment. Prosper Funding may increase the servicing fee to no more than 3% per annum if its servicing costs increase or to reflect changes to the market rate for servicing similar assets. Any change to the servicing fee will only apply to Prosper Funding Notes offered and sold after the date of the change.
The interest rate table currently in effect is set forth below. In addition, the interest rate for each loan listing, as well as the yield percentage for the corresponding Prosper Funding Notes, is included in the listing report filed for that listing. This information is also included in the listing itself when it is posted on the website.

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ProsperBorrower RateBorrower Rate
RatingMinMax
   
AA6.05%8.09%
   
A8.74%11.99%
   
B12.24%14.85%
   
C15.35%19.20%
   
D19.60%23.44%
   
E24.24%28.00%
   
HR28.74%30.09%
Purchase of Prosper Funding Notes by Prosper Funding, PMI or Related Parties

From time to time, Prosper Funding or PMI may bid on listings and each may hold any Prosper Funding Notes or Prosper Funding Borrower Loans purchased as a result of such bids for its own account.
In some cases, Prosper Funding’s or PMI’s bidding on a listing posted in the Note Channel may cause it to fund, and in some cases, fund faster, than it would fund in the absence of such bid. The amount that Prosper Funding or PMI may choose to bid on any particular listing may vary significantly and Prosper Funding and PMI each reserve the right to bid up to the entire amount of a listing.
Some of Prosper Funding’s or PMI’s executive officers, directors and 5% shareholders have bid on listings and purchased Prosper Funding Notes and PMI Notes from time to time in the past, and may purchase Prosper Funding Notes in the future. As of December 31, 2013, these individuals had purchased $4,088 in Prosper Funding Notes and PMI Notes or loans. These Prosper Funding Notes and PMI Notes and loans were obtained on the same terms and conditions as those obtained by other lender members. However, as certain of these executive officers and directors, by virtue of their duties as employees, officers or directors of Prosper Funding or PMI, have access to information not available to the general population of lender members, Prosper Funding and PMI have adopted the following procedures to prevent or detect the improper use of non-public information in bidding activities by any of their respective officers and directors:
·PMI’s corporate policies, distributed to all employees, prohibit an employee’s use of non-public information and any violation of this policy is grounds for immediate termination.

·Security features that limit access to data only to that needed to perform particular employee job functions. These limitations are defined by “security group,” which corresponds to both job title and function and the number of PMI’s employees that have access to such non-public information on a “bulk” or “query” basis is extremely limited.

·In addition to prevention efforts, Prosper Funding and PMI have developed an audit process that identifies and investigates bidding and funds transfer activities that are classified as “suspicious.”

Structure of Lender Member Accounts and Treatment of Lender Member Balances
PMI and Prosper Funding maintain the FBO Funding accounts at Wells Fargo Bank to hold the funds of lender members. In order to bid on listings, a lender member must have sufficient funds in the applicable funding account. A lender member can transfer funds into the applicable funding account by authorizing an electronic transfer using the Automated Clearing House, or ACH, network from the lender member’s designated and verified bank account to such funding account. All payments to fund purchases of Prosper Funding Notes or Prosper Funding Borrower Loans are made by deposit into the applicable funding account. Upon request by the lender member, Prosper Funding will transfer lender member funds from the applicable funding account to the lender member’s designated and verified bank account by ACH transfer, provided such funds are not already committed to the future purchase of Prosper Funding Notes or Prosper Funding Borrower Loans.

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For the FBO Funding accounts, PMI maintains sub-account balances on its system to track all commitments and purchases made and proceeds received by such lender member. These record-keeping sub-accounts are purely administrative and reflect balances and transactions concerning Funds in the FBO Funding accounts. Lender members have no direct relationship with Wells Fargo Bank by virtue of funds or transactions within the FBO Funding accounts or by virtue of participating on the platform.
Each funding account is FDIC-insured on a “pass through” basis to the individual lender members, subject to applicable limits. This means that each individual lender member's cash balance is protected by FDIC insurance, up to the limits established by the FDIC. Other funds the lender member has on deposit with Wells Fargo may count against any applicable FDIC insurance limits. Funds of a lender member in a funding account can consist of amounts deposited by the lender member but never committed to Prosper Funding Note or Prosper Funding Borrower Loan purchases; amounts the lender member has committed to one or more such purchases, where origination of the corresponding Prosper Funding Borrower Loan has not yet occurred; or amounts received as principal and interest payments on Prosper Funding Notes, PMI Notes or Prosper Funding Borrower Loans owned by the lender member that the lender member has not yet withdrawn. Upon request by a lender member, PMI will transfer funds from the applicable funding account to the lender member’s designated and verified external bank account, provided such funds are not already committed to Prosper Funding Note or Prosper Funding Borrower Loan purchases.  To the extent a lender member does not withdraw any such amounts, they will remain in the applicable funding account indefinitely.
Prosper Funding Borrower Loan Funding and Purchases; Sale of Prosper Funding Notes

Once the bidding period for a listing ends, if the listing has received bids from lender members equal to or exceeding the minimum amount required to fund, the funding of the corresponding Prosper Funding Borrower Loan and the sale of the Prosper Funding Notes or Prosper Funding Borrower Loan to the lender members who bid on the listing will proceed.

Applicants execute an electronic borrower registration agreement at the time they post a listing on the platform.  After expiration of the bidding period for the listing and satisfactory completion of the pre-funding verification process, the applicant executes an electronic promissory note in favor of WebBank in an amount equal to the total amount of winning bids.  WebBank then sells and assigns the promissory note to Prosper Funding without recourse. The promissory note and the borrower registration agreement contain customary agreements and covenants requiring the applicants to repay their loans and describing the process of posting listings and obtaining loans through the platform.
WebBank funds all loans originated on the platform, and disburses the loan proceeds to the borrower. Each borrower authorizes the loan proceeds to be disbursed by ACH transfer into the borrower’s designated bank account.

Borrowers pay an origination fee out of the proceeds of the loan at the time of funding.  As of December 31, 2013, origination fees on Prosper Funding Borrower Loans were as follows:

Prosper Rating 
Origination Fee % (3 Year
Loan)
 
Origination Fee % (5 Year
Loan)
AA 1.00% - 1.95% 2.95%
A 3.95% 4.95%
B 4.95% 4.95%
C - HR 4.95% 4.95%

The origination fees are charged by WebBank, and PMI receives payments from WebBank equal to the origination fees as compensation for its loan origination activities on WebBank’s behalf.
Lender members know only the screen names, and do not know the actual names, of applicants. The actual names and mailing addresses of the applicants are known to Prosper Funding, PMI and WebBank. In addition, lender members who purchase Prosper Funding Borrower Loans through the Whole Loan Channel are entitled to receive borrower application information for Prosper Funding Borrower Loans that they purchase. Such lender members are required to use a qualified custodian (as that terms is defined in the Investment Advisers Act) to hold such borrower information, and also must ensure that such information is handled in a manner that is compliant with all applicable privacy laws.
When Prosper Funding issues and sells a Prosper Funding Note or a Prosper Funding Borrower Loan to a lender member, PMI registers the Prosper Funding Note or Prosper Funding Borrower Loan in the name of the lender member on Prosper Funding’s books and records. Each origination of a Prosper Funding Borrower Loan through the platform is followed by a two-step sale transaction: (i) WebBank sells the Prosper Funding Borrower Loan to Prosper Funding, and (ii) Prosper Funding either resells the Prosper Funding Borrower Loan to a lender member (if the Prosper Funding Borrower Loan is funded through the Whole Loan Channel), or sells Prosper Funding Notes corresponding to the Prosper Funding Borrower Loan to a group of lender members (if the Prosper Funding Borrower Loan is funded through the Note Channel).  In connection with this two-step transaction, PMI transfers the purchase price of the Prosper Funding Notes or Prosper Funding Borrower Loan, as the case may be, from the applicable funding accounts to WebBank. This transfer represents payment of the purchase price both by the applicable lender members to Prosper Funding and by Prosper Funding to WebBank. WebBank is the lender for all Prosper Funding Borrower Loans, which allows the platform to be available on a uniform basis to borrowers throughout the United States.
Borrower members are able to use the Prosper Funding Borrower Loan proceeds for any purpose other than (i) buying, carrying or trading in securities or buying or carrying any part of an investment contract security or (ii) paying for postsecondary educational expenses (i.e., tuition, fees, required equipment or supplies, or room and board) at a college/university/vocational school, as the term “postsecondary educational expenses” is defined in Bureau of Consumer Finance Protection Regulation Z, 12 C.F.R. § 1026.46(b)(3), and they warrant and represent that they will not use the proceeds for any such purposes.

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Loan Servicing and Collection

Prior to February 1, 2013, PMI owned the platform and performed all of the activities described in this section on its own behalf.  After February 1, 2013, Prosper Funding owns the platform, but PMI continues to perform the activities described in this section on behalf of Prosper Funding pursuant to the Administration Agreement.  In general, any actions described below that Prosper Funding takes inWe are responsible for servicing the Prosper Funding Borrower Loans or Prosper Funding Notes may be taken on Prosper Funding’s behalf by PMI acting as its agent.

PMI maintains certain accounts at Wells Fargo,made through our marketplace. We will pay each of which serves as a dedicated account for receipt of payments on Prosper Funding Borrower Loans purchased by a particular lender member through the Whole Loan Channel. In this Annual Report, we refer to each of those accounts as a “dedicated servicing account”.  PMI also maintains a pooled account at Wells Fargo for receipt of payments on all Prosper Funding Borrower Loans not associated with a dedicated servicing account, which is referred to in this Annual Report as the “master servicing account”.  The master servicing account and the dedicated servicing accounts are all non-interest bearing, demand deposit accounts.  The master servicing account is held in the name of Prosper Funding for the benefit of its lender members, and each dedicated servicing account is held in the name of Prosper Funding for the benefit of the applicable lender member.  PMI nets its servicing fees from any Prosper Funding Borrower Loan proceeds deposited into the master servicing account or a dedicated servicing account.  After netting out its servicing fees, PMI remits the remaining funds from the servicing account to the deposit accounts designated by the applicable lender members. The payment dates for all PMI Notes and Prosper Funding Notes fall on the sixth business day after the due date for each monthly installment ofNote holder principal and interest on the corresponding Prosper Funding Borrower Loan, but interest accrues on the PMI Notes and Prosper Funding Notes only through the due date for the related Prosper Funding Borrower Loan payment. The stated interest rate onNote in an amount equal to each Prosper Funding Note is the lender yield percentage set forth in the loan listing. The yield percentage is the Prosper Funding Borrower Loan interest rate netsuch Note’s pro-rata portion of the servicing fee.
Prosper Funding subtracts a servicing fee from every PMI Borrower Loan and Prosper Funding Borrower Loan payment it receives. The amount of the servicing fee with respect to a particular payment is calculated by (a) multiplying the applicable annual servicing fee rate by a fraction, the numerator of which is equal to the number of days since the borrower’s last payment (or, in the case of the borrower’s first payment, since the date on which the relevant Prosper Funding Borrower Loan or PMI Borrower Loan was funded) and the denominator of which is 365, and (b) multiplying the product obtained by the outstanding principal balance of the Prosper Funding Borrower Loan or PMI Borrower Loan prior to applying the current payment. The rate of Prosper Funding’s annual servicing fee is currently set at 1.0% per annum of the outstanding principal balance, but Prosper Funding may increase that in the future to a rate greater than 1% but less than or equal to 3% per annum. Any change to Prosper Funding’s servicing fee will only apply to Prosper Funding Notes and Prosper Funding Borrower Loans offered and sold after the date of the change.
To the extent Prosper Funding does not receive the anticipated payments on a Prosper Funding Borrower Loan or PMI Borrower Loan funded through the Note Channel on or before any loan payment date, it will not make any payments on the corresponding Prosper Funding Notes on the corresponding Prosper Funding Note payment date, and a holder of any such Prosper Funding Note will not have any rights against Prosper Funding or the borrower in relation to any such delay or for any shortfalls in accrued Prosper Funding Note interest that result then or in relation to the final maturity of the Prosper Funding Note. Each holder’s right to receive principal and interest payments, and other amounts in respect of that Prosper Funding Note is limited in all cases to the holder’s pro rata portion of the amounts Prosper Funding timely receivesif any, which we receive on the corresponding Prosper Funding Borrower Loan, or PMInet of our servicing fee. We will also pay Note holders their pro rata portion of any other amounts we receive on the corresponding Borrower Loan,Loans, including without limitation, all payments orlate fees and prepayments, of principal and interest, subject to our servicing fee; provided, that we will not pay Note holders any non-sufficient funds fees and other charges and other fees retainedwe receive for failed borrower payments. In addition, the funds available for payment on the Notes will be reduced by Prosper Funding or by a third party, as set forth in the following chart.
PMI’s in-house collections department or third party collection agencies may charge up to 40.0% of the amount recovered, in addition toof any legalattorneys’ fees incurred in theor collection effort, up to the “total amount delinquent.”

The following table summarizes the fees that PMI charges and how these fees affect lender members:
Description of
Fee Charged by
Prosper Funding
Fee Amount
(not in thousands)
When Fee is ChargedEffect on Lender Member
Servicing fee
Annualized rate currently set at 1% per annum of
outstanding principal balance, but which Prosper Funding may increase in the future to an amount greater than 1% but less thanwe, a third-party servicer or equal to 3% per annum. Any change to the servicing fee will only apply to Prosper Funding Notes and Prosper Funding Borrower Loans offered and sold after the date of the change.
The servicing fee is payable on all payments received by Prosper Funding on Prosper Funding Borrower Loans, including, without limitation, partial payments.The servicing fee reduces the effective yield for Prosper Funding Note or Prosper Funding Borrower Loan holders below the interest rate on the Prosper Funding Borrower Loan. This reduction is reflected in the yield percentage

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Non-sufficient funds fee$15, unless a lesser amount is required by applicable law.
First failed payment for each billing period.
Prosper Funding retains 100% of the non-sufficient funds fees to cover its administrative expenses.
Late payment feeEqual to greater of 5% of the unpaid installment amount or $15, unless a lesser amount is required by applicable law.After 15-day grace period, Prosper Funding assesses a late fee. The late payment fee is charged only once per payment period.Any late payment fees Prosper Funding receives are paid to the lender members, subject to deductions for Collection Charges and Servicing Fees.
Collection ChargesUp to 40.0% of the amount recovered, plus any legal fees and transaction fees associated with payment processing, up to the "total amount delinquent"Prosper Funding may collect on a Prosper Funding Borrower Loan that becomes past due directly or it may refer such Prosper Funding Borrower Loan to a third party servicer's in-house collections department or to a collection agency. Collection fees and any related legal fees are only charged if delinquent amounts are collected.Collections fees charged by Prosper Funding, a third party servicer's in-house collections department or a third party collection agency will reduce payments and the effective yield on the related Prosper Funding Notes, and are not reflected in the yield percentage shown on the listing; collection fees will be retained by Prosper Funding, the third party servicer's in-house collection department or the third party collection agency as additional servicing compensation.
Prosper Funding's servicing fee is also deducted from the net payments it receives as a result of any collection efforts on a delinquent Prosper Funding Borrower Loan.

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PMI discloses borrowers’ payment performance on Prosper Funding Borrower Loans and PMI Borrower Loans to the relevant lender members on the website and also reports such information to consumer reporting agencies. PMI keeps lender members informed of the delinquency status of Prosper Funding Borrower Loans and PMI Borrower Loans by identifying delinquent loans on the website as “1 month late,” “2 months late,” “3 months late,” or “current.” Prosper Funding Borrower Loans and PMI Borrower Loans that become more than 120 days overdue are charged off and designated as such on the website. Through the website, lender members are able to monitor the Prosper Funding Borrower Loans they have purchased and Prosper Funding Borrower Loans and PMI Borrower Loans that correspond to Prosper Funding Notes they have purchased, but cannot participate in or otherwise intervene in the collection process.
Late payment performance is an early indicator of charge off probability. Of all Prosper Funding Borrower Loans and PMI Borrower Loans originated, collectively, between July 13, 2009 and December 31, 2013, 11.1% have been greater than 30 days past due at any time and 9.9% have been greater than 60 days past due at any time. As of December 31, 2013, 7,752 or 10.7% of all Prosper Funding Borrower Loans and PMI Borrower Loans originated, collectively, between July 13, 2009 and December 31, 2013 have been referred to a collection agency forimposes in connection with collection proceedings. On average, through December 31, 2013, holders of PMI Notes or Prosper Funding Notesefforts related to the corresponding to such PMI Borrower Loans or Prosper Funding Borrower Loans, or holders of such Prosper Funding Borrower Loans, have received $481 (not in thousands), net of collection fees, on such Prosper Funding Borrower Loans and PMI Borrower Loans. In addition, of the 7,752 Prosper Funding Borrower Loans and PMI Borrower Loans referred to a collection agency, a total of 5,718 or 73.8% have been charged off.
Of all PMI Borrower Loans originated between November 2005 and July 12, 2009, 56.3% have been greater than 30 days past due at any time and 54.5% have been greater than 60 days past due at any time. As of December 31, 2013, 11,826 or 40.8% of all PMI Borrower Loans originated between November 2005 and July 12, 2009 have been referred to a collection agency for collection proceedings. On average, through December 31, 2013, holders of corresponding PMI Notes have received $2,642 (not in thousands), net of collection fees, on such PMI Borrower Loans. In addition, of the 11,826 PMI Borrower Loans referred to a collection agency, a total of 10,724 or 90.7% have been charged off.
Please note that historical data regarding Prosper Funding Borrower Loans, PMI Borrower Loans, Prosper Funding Notes and PMI Notes may not be indicative of the future characteristics of Prosper Funding Borrower Loans and Prosper Funding Notes. See “Item 1A. Risk Factors—Risks Related to Prosper Funding and PMI the Platform and Prosper Funding and PMI’s Ability to Service the Prosper Funding Notes” for more information.
If a borrower dies while a Prosper Funding Borrower Loan or a PMI Borrower Loan is in repayment, PMI requires the executor or administrator of the estate to send a death certificate to PMI. Depending on the size of the estate and the other liabilities thereof, PMI may not be able to recover the outstanding amount of the loan. If the estate does not include sufficient assets to repay the outstanding Prosper Funding Borrower Loan or PMI Borrower Loan in full, or allocates its assets to other liabilities, PMI will treat the unsatisfied portion of that Prosper Funding Borrower Loan or PMI Borrower Loan as charged off with zero value. In addition, if a borrower dies near the end of the term of a Prosper Funding Borrower Loan or PMI Borrower Loan funded through the Note Channel, it is unlikely that any furtherLoan. No payments will be made on any PMI Notes or Prosper Funding Notes corresponding to such Prosper FundingNote after its final maturity date.
We will pay each investor that has purchased a Borrower Loan or PMI Borrower Loan, because the time required for the probate of the estate may extend beyond the final maturity date of the Prosper Funding Notes or PMI Notes.
When Prosper Funding receives notice of a borrower bankruptcy filing, it ceases all automatic monthly payments on any related Prosper Funding Borrower Loan or PMI Borrower Loan and defers any other collection activity, as required by law. The status of the Prosper Funding Borrower Loan or PMI Borrower Loan, which the relevant lender members may view through the website, switches to “bankruptcy.” PMI then determines whether it has a basis to object to the inclusion of the debt in any bankruptcy action (e.g., based on the time between loan origination and bankruptcy filing). If the proceeding is a Chapter 7 bankruptcy filing seeking liquidation, PMI attempts to determine if the proceeding is a “no asset” proceeding, based on instructions it receives from the bankruptcy court. If the proceeding is a “no asset” proceeding, PMI takes no further action and assumes that no recovery will be made on the Prosper Funding Borrower Loan or PMI Borrower Loan.

In all other cases, Prosper Funding files a proof of claim involving the borrower.  The decision to pursue additional relief beyond the proof of claim in any specific matter involving a borrower will be entirely within Prosper Funding’s discretion and will depend upon certain factors including:

·if the borrower used the proceeds of the Prosper Funding Borrower Loan or PMI Borrower Loan in a way other than that which was described in the listing;

·if the bankruptcy is a Chapter 13 proceeding, whether the proceeding was filed in good faith and if the proposed plan reflects a “best effort” on the borrower’s behalf; and

·Prosper Funding’s view of the costs and benefits to it of any proposed action.

Note Trader Platform
Lender members may not transfer the Prosper Funding Notes or PMI Notes except through the Note Trader platform operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer. The Note Trader platform is an internet-based trading platform on which lender members may offer the Prosper Funding Notes or the PMI Notes for sale or bid on and purchase Prosper Funding Notes or PMI Notes offered for sale by other lender members. Lender members must first establish a brokerage relationship with FOLIOfn Investments, Inc. before using the Note Trader platform. In this section, lender members who have established such brokerage relationships are referred to as “subscribers.” Only transactions involving the sale of previously-issued Prosper Funding Notes and PMI Notes will be effected through the Note Trader platform; the Note Trader platform will not handle any aspect of transactions involving the initial offer and sale of Prosper Funding Notes by Prosper Funding.

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Subscribers who sell Prosper Funding Notes or PMI Notes on the Note Trader platform will be subject to transaction fees charged by FOLIOfn Investments, Inc. The transaction fee is currently equal to one percent of the sale price of the Prosper Funding Note or PMI Note sold.
Neither Prosper Funding nor PMI is a registered national securities exchange, securities information processor, clearing agency, broker, dealer or investment adviser. All securities services relating to the Note Trader platform are provided by FOLIOfn Investments, Inc. Neither Prosper Funding, nor PMI nor FOLIOfn Investments, Inc. will make any recommendations with respect to transactions on the Note Trader platform. There is no assurance that lender members will be able to establish a brokerage relationship with FOLIOfn Investments, Inc. Furthermore, Prosper Funding cannot assure subscribers that they will be able to sell Prosper Funding Notes or PMI Notes they offer for sale through the Note Trader platform at the offered price or any other price, nor can Prosper Funding offer any assurance that the Note Trader platform will continue to be available to subscribers.
Sale of the Prosper Funding Notes and PMI Notes
Prosper Funding Notes and PMI Notes Subject to Sale by Subscribers. All Prosper Funding Notes and PMI Notes, including Prosper Funding Notes and PMI Notes for which the corresponding Prosper Funding Borrower Loans or PMI Borrower Loans have become delinquent, will be eligible for sale on the Note Trader platform.
There is no limit on the number of times a Prosper Funding Note or PMI Note may be sold on the Note Trader platform, so long as the Prosper Funding Note or PMI Note is outstanding.
Lender Members Eligible to Bid on Prosper Funding Note Listings. Lender members must first establish a brokerage relationship with FOLIOfn Investments, Inc. before using the Note Trader platform. To open an account, FOLIOfn Investments, Inc. may require lender members to confirm that they satisfy certain minimum financial suitability standards and maximum investment limits, if any, that may be imposed by the state in which the lender member resides. If the lender member does not satisfy these suitability requirements he or she will not be able to participate on the Note Trader platform.
Creation of Prosper Funding Note Listings. Subscribers may offer one or more of their Prosper Funding Notes or PMI Notes for sale on the Note Trader platform by creating and posting a “Note listing.” Subscribers may offer to sell any or all of the Prosper Funding Notes and PMI Notes they own and may offer to sell more than one Prosper Funding Note or PMI Note at the same time. When posting a Note listing, the subscriber will designate a minimum sale price the subscriber is willing to receive for the Prosper Funding Note or PMI Note.
Note listings will have a seven-day auction bidding period, but selling subscribers may elect to end the listing early at any time after a winning bid is made. Selling subscribers may also add an “automatic sale” feature to their Note listing, which would end the bidding period on a Note listing immediately after the listing receives an initial bid equal to an automatic sale price set by the selling subscriber. In such instances the Prosper Funding Note or PMI Note would be immediately sold to the subscriber who placed the bid.
The selling subscriber may withdraw Note listings without charge at any time prior to expiration of the auction bidding period, before any bids are received. Note listings with at least one bid cannot be withdrawn by the selling subscriber.
Display of Note Listings. Note listings will be displayed for auction on the Note Trader platform, and include the selling subscriber’s screen name, the offered sale price of the Prosper Funding Note or PMI Note, the interest rate on the Prosper Funding Note or PMI Note, the remaining term of the Prosper Funding Note or PMI Note, and the yield to maturity that corresponds to the offered sale price. Note listings will also include the repayment status of the Prosper Funding Borrower Loan or PMI Borrower Loan corresponding to the Prosper Funding Note or PMI Note (i.e., current or delinquent), the payment history on the Prosper Funding Borrower Loan or PMI Borrower Loan and the next scheduled payment on the Prosper Funding Note or PMI Note. In addition, Note listings will include the remaining duration of the Note listing, the number of bids, and whether the Note listing has an automatic sale feature.
Note listings will include a link to the original listing (including the listing title credit data and original bidding history) for the Prosper Funding Borrower Loan or PMI Borrower Loan that corresponds to the Prosper Funding Note or PMI Note being offered for sale. Although Note listings will be displayed publicly on the Note Trader platform, the borrower’s payment history and corresponding listings will be viewable only by registered subscribers.
Bidding on Note Listings. Only registered subscribers are eligible to bid for and purchase Prosper Funding Notes or PMI Notes listed for sale on the Note Trader platform. Subscribers may bid for and purchase one or more Prosper Funding Notes or PMI Notes from selling subscribers. As with bidding on loan listings, subscribers who bid on Note listings must have funds on deposit in the pooled funding account in at least the aggregate amount of the subscriber’s bids. Subscribers are prohibited from withdrawing amounts from the pooled funding account to the extent any such withdrawal would reduce the balance below the aggregate amount of the subscriber’s pending bids on loan listings and Note listings. Subscribers are not eligible to bid on their own Note listings.
Subscribers bidding on Note listings must bid for the full amount of the Prosper Funding Note or PMI Note being sold, and there may be only one winning bidder for a Prosper Funding Note or PMI Note offered for sale by a selling subscriber.

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Bids may be made by subscribers until the end of the auction bidding period specified in the Note listing.  The selling subscriber may, however, end the auction bidding period early at any time after a winning bid is made.  The winning bidder is the subscriber who has bid the highest price as of the end of the auction bidding period (or the automatic sale price with respect to a Note listing with such a feature).

Proxy Bidding.  The Note Trader platform employs an automated proxy bidding system that enables bidding subscribers to place a bid higher than the then current minimum bid, and have bids continually applied against a Note listing, up to a specified maximum bid amount.  The maximum bid amount is hidden from view until competing bids push the current sale price higher than the bidder’s maximum bid.
Close of Bidding and Sale of Prosper Funding Notes or PMI Notes. When a Note listing ends with a winning bidder, upon settlement of the sale of the Prosper Funding Note or PMI Note to the winning bidder, which will normally occur on the business day following expiration of the Note listing, the final sale price is withdrawn from the winning subscriber’s funding account balance to pay the selling subscriber. The transaction fee is deducted from the sale price and retained by FOLIOfn Investments, Inc.
Upon the selling subscriber’s receipt of the final net sale proceeds, the Prosper Funding Note or PMI Note is sold, transferred and assigned by the selling subscriber to the winning bidder without recourse. All further payments made on the Prosper Funding Note or PM Note following settlement of the sale will be credited to the account of the purchasing subscriber. The purchasing subscriber may retain ownership of the Prosper Funding Note or PMI Note for the remainder of its term, or list the Prosper Funding Note or PMI Note for sale on the Note Trader platform.

Sale of Loans Purchased through Whole Loan Channel
Prosper Funding Borrower Loans may not be sold through the Note Trader Platform.  Lender members who participate in the Whole Loan Channel may transfer ownershipprincipal and interest on the Borrower Loan purchased in an amount equal to the principal and interest payments, if any, that we receive, net of Prosper Fundingour servicing fee. We will also pay these investors any other amounts we receive on the Borrower Loans, including late fees and prepayments, subject to institutionalour servicing fee, provided that we will not pay these investors that meetany non-sufficient funds fees we receive for failed borrower payments or any payment processing fees we may collect. In addition, the eligibility requirementsfunds available for payment on the Borrower Loans will be reduced by the amount of any attorneys' fees or collection fees we, a third-party servicer or a collection agency imposes in connection with collection efforts related to the Borrower Loan.
If a Borrower Loan becomes past due, we may collect on it directly or refer it to a third-party collection agency.  Our in-house collections department and third-party collection agencies are compensated by keeping a portion of the Whole Loan Channel, subject to certain notice requirements to Prosper Funding and Prosper Funding’s right to continue servicing the transferred Prosper Funding Borrower Loans.payments they collect based on a predetermined schedule.  

Acquisitions
Information About Prosper Funding LLC and Prosper Marketplace, Inc.

AboutOn January 23, 2015, PMI

PMI developed the platform and, until February 1, 2013, owned the proprietary technology that makes operation of the platform possible. On February 1, 2013, PMI transferred ownership of the platform, including acquired all of the rights related to the operationoutstanding limited liability company interests of the platform, as well as all then-outstanding PMI Borrower Loans, to its wholly-owned subsidiary, Prosper Funding. PMI owns and did not transfer to Prosper Funding ownership of the computer hardwareAmerican HealthCare Lending, LLC (“American HealthCare Lending”), a company that PMI uses to develop, update, maintain and operate the platform (including the website), produce and record or register Prosper Funding Borrower Loans and Prosper Funding Notes, process and record the origination of Prosper Funding Borrower Loans, the acquisition thereof by Prosper Funding, funds transfers in relation to Prosper Funding Borrower Loans and collections on Prosper Funding Borrower Loans, the issuance and transfer of Prosper Funding Notes, funds transfers in relation to purchases of and payments on Prosper Funding Notes and PMI Notes, and which PMI uses to store, backup and manage the information and data used and generated by the platform (such as in relation to the preparation of reports). PMI isoperated a party to agreements with third parties relating to (i) the hosting and maintenance of servers and other computer and communications equipment used by PMI in relation to all of the foregoing aspects of the development, updating of, maintenance and operation of thepatient financing platform, and merged American HealthCare Lending with and into PHL, with PHL surviving the provisionmerger.
On October 9, 2015, PMI acquired BillGuard, a privately held personal finance analytics company that developed consumer apps that help consumers manage their identity, finances and credit, pursuant to an Agreement and Plan of related customer support services, (ii) the backup, offsite storageMerger, dated as of September 23, 2015, by and protectionamong PMI, BillGuard, Beach Merger Sub, Inc., a wholly owned subsidiary of all information and data produced and used by PMI in relation to all of the foregoing aspects of the development, updating of, maintenance and operation of the platform and the performance by it of all related services, and (iii) maintenance of the integrity, functionality and security of the platform from cyber-attacks and similar threats, which agreements PMI did not assign to Prosper Funding. Pursuant to a Loan Account Program Agreement between PMI, and WebBank, PMI manages the operation of the platform, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the making of related loans by WebBank and the funding of such loans by WebBank. On February 1, 2013, Prosper Funding entered into an Administration Agreement with PMIShareholder Representative Services LLC, solely in its capacity as licensee, corporate administrator, loan platform administratorthe Stockholders’ Representative.
Customers
A relatively small number of investors provide the funding commitments for a large percentage of all listings that result in Borrower Loans originated through our marketplace. Of all Borrower Loans originated in the year ended December 31, 2016, 20%, 16% and loan9% were purchased by three different parties.
Industry Background and note servicer, pursuantTrends
According to the Board of Governors of the Federal Reserve System, as of December 2016, the balance of outstanding consumer credit in the United States totaled $3.8 trillion. This amount included $996 billion of revolving consumer credit, which PMI provides certain back office support, loan platform administrationmany consumers seek to refinance for a lower interest rate.
The market for consumer lending is competitive and loanrapidly evolving, and note servicingthere is an opportunity for the online marketplace model to Prosper Funding. The Administration Agreement between Prosper Fundingtransform the traditional lending process. We believe our marketplace offers a superior solution for both borrowers and PMI containsinvestors.
For borrowers, we believe our marketplace offers the following principal competitive factors: better pricing versus other alternatives; a license granted by Prosper Funding to PMI that entitles PMI to usesimple, easy and intuitive customer experience; a fast and efficient process; and trust and transparency.


For investors, we believe our marketplace offers the platformfollowing principal competitive factors: attractive risk adjusted returns; lower duration risk; diversification from other asset classes; a simple, easy and intuitive customer experience; and trust and transparency.
Competition
We compete for borrowers and in relation to: (i) PMI’s performance of its dutiesinvestors against other financial products and obligations under the Administration Agreement relating to corporate administration, loan platform services, loancompanies. For borrowers, our competition includes banking institutions, credit unions, credit card issuers and note servicingother consumer finance companies. For investors, our competition includes other investment vehicles such as consumer lending funds and asset classes such as equities, bonds and commodities. Our competition for borrowers and investors also includes other online consumer lending companies, such as LendingClub Corporation, and other marketplace lending platforms. We may also face potential competition from new market entrants, or business expansion from established companies. These companies may have significantly greater financial, technical, marketing and (ii) PMI’s performanceother resources and may be able to devote greater resources to the development, promotion, sale and support of its dutiestheir offerings. 
Our Competitive Strengths
We believe the following strengths differentiate us from our competitors and obligationsprovide us with sustainable competitive advantages:
Leading Online Marketplace: Since inception, our marketplace has facilitated $8.3 billion in loan originations, of which $2.2 billion was for the year-ended December 31, 2016. As our business grows, our brand, reputation and scale strengthens. This allows us to WebBank in relation to Prosper Funding Borrower Loan originationattract top talent, speed up product innovation, attract market place participants and funding.drive down our cost structure, all of which further benefit borrowers and investors.
Robust Network Effect:   The license is terminable in whole or in part in relation to failure by PMI to pay the licensing fee or the terminationattractiveness of PMIour marketplace increases as the providernumber of some or allparticipants on our marketplace increases, yielding a classic network effect. Our marketplace offers consumer borrowers access to affordable credit, and allows individual and institutional investors to invest in an asset class with attractive risk-adjusted returns. The diversity of investors brings scale and breadth of funding to our marketplace and makes credit more affordable. As both sides of the aforementioned services.equation grow, the advantages (reduced risk, lower cost) scale accordingly, attracting even more borrowers and investors. The increased participant pool generates more data which we use to improve the effectiveness of our credit decisioning and scoring models. This enhances our aggregate loan performance and builds increased trust in our marketplace, which in turn attracts more borrowers and investors.

About Prosper Funding
Prosper Funding ownsTechnology Platform: Our technology platform automates key aspects of our operations, including the borrower application process, data gathering, underwriting, credit scoring, loan funding, investing and operates the platform. The platform is designed to allow people to invest money in people in an open transparent marketplace, with the aim of allowing both lender membersservicing, regulatory compliance and borrower members to profit financially as well as socially. Prosper Funding has been organizedfraud detection. This provides a significant time and is operated in a manner that is intended (i) to minimize the likelihood that it will become subject to a voluntary or involuntary bankruptcy or similar proceeding,cost advantage over traditional consumer lending business models and, (ii) to minimize the likelihood that it would be substantively consolidated with PMI in the event of PMI’s bankruptcy and thus have its assets subjected to claims of PMI’s creditors. Prosper Funding and PMIwe believe, they have achieved this by imposing through Prosper Funding’s organizational documents and covenants in the Amended and Restated Indenture dated January 22, 2013 and made effective February 1, 2013 between Prosper Funding, PMI and Wells Fargo (the “Amended and Restated Indenture”) certain restrictions on Prosper Funding’s activities and certain formalities designed to reinforce Prosper Funding’s status as a distinct entity from PMI. In addition, under the Administration Agreement, PMI has agreed, in its dealings with Prosper Funding and with third parties, to observe the “separateness covenants” described below as they relate to Prosper Funding.
Prosper Funding and PMI have entered into the Administration Agreement, pursuant to which PMI has agreedenables us to provide certain administrative services relatinga superior user experience to the platform.

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our borrowers and investors. Using our accumulated performance data, we continually invest in incremental improvements in our algorithms thus extending our technological advantage.
Business Strengths

Prosper Funding and PMI believe that the following business strengths differentiate them from competitors and are key to the success of their respective businesses:

Operating Infrastructure: The platform allows Prosper Funding to economically acquire and service Prosper Funding Borrower Loans and Prosper Funding Notes, and allows WebBank to efficiently originate and fund such loans.

Proprietary Risk Management CapabilitiesCapabilities::  PMI has We have developed a proprietary risk model based on P2P specificconsumer loan performance data, which we believe allows PMIus to accurately gaugeassess the riskinesscredit risk profile of applicantsborrowers and which we believe also allows lender membersinvestors to earn attractive risk adjusted returns;returns. We leverage the results from our growing data stream to continually refine this risk model and more accurately predict loan performance.

Unique RegulatoryCorporate Structure:  Prosper Funding has been organizedOur corporate structure was designed to offer our investors extra protection. The organization and will be operated in a manner that is intendedoperation of PFL and PMI as separate and distinct entities should serve to minimize the likelihood that it will become subject to a bankruptcy proceeding and to minimize the likelihood that it would be substantively consolidated with PMIprotect our Note investors in the event of PMI’s bankruptcy.  In addition, Prosper Funding has successfully registered its continuous public offering of Prosper Funding Notes, which allows it to create micro securities backeda bankruptcy filing by Prosper Funding Borrower Loans.or against PMI.  This organizational structure, along with the federal and state registration process, wasis expensive and time consuming to achieveundertake, and is not easily duplicated by competitors;competitors.


Management Team:  Prosper FundingEfficient and PMIAttractive Financial Model: We have respective management teamsmultiple revenue streams and an efficient cost model. We generate revenue from transaction fees from our marketplace’s role in matching borrowers with experience in a broad set of areas that are essentialinvestors to enable loan originations, as well as from servicing fees related to Borrower Loans for which we retain the operation of a P2P business.  These areas include but are not limitedservicing rights. Additionally, our technology platform significantly reduces the need for physical infrastructure and therefore allows our business to risk management, fraud detection, loan servicing operations, technology development, data management, financial controls, securities regulation, compliance, customer management and website development;
Brand:  The Prosper brand is well known since PMI introduced the first peer-to-peer online credit platform in the United States;

Open access:  Prosper Funding allows individualsgrow with a wide rangelower cost operating model, providing us with significant operating leverage.
Sources of credit characteristics to apply forRevenues
We have two primary sources of revenues: transaction fees and servicing fees. Prosper Fundingearns transaction fees from WebBank by facilitating the origination of Borrower Loans through the marketplace.  Prosper earns servicing fees from investors for processing principal and a wide variety of lender membersinterest payments made by borrowers and passing such payments on to fund such loans;investors.
Sales and

Transparency and data availability:  By making all transactions on the platform visible and available electronically for analysis, Prosper Funding allows its members to better understand its marketplace and make better decisions about their activity.

Corporate History

Prosper Funding was formed in the State of Delaware in February 2012. Its principal executive offices are located at 101 2nd Street, 15th Floor, San Francisco, California 94105. Its telephone number at that location is (415) 593-5479. Its website address is www.prosper.com.  The information contained on the website is not incorporated by reference into this annual report.
PMI was incorporated in the State of Delaware in March 2005.  Its principal executive offices are located at 101 2nd Street, 15th Floor, San Francisco, California 94105.  PMI’s telephone number at that location is (415) 593-5400.
The following filings are available for download free of charge at www.prosper.com after Prosper Funding and PMI files them with the SEC: Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Prosper Funding’s and PMI’s SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov.

Marketing
PMI’sOur sales and marketing efforts are designed to attract individuals and institutions to the platform, to enroll themour marketplace, encourage their enrollment and participation as membersusers, and to have them understandfacilitate and utilizeenhance their understanding and utilization of the services for borrowing or investing on the platform. Prosper Fundinginvesting. We employ a wide range of marketing channels to reach potential customers and PMI believe there are significant opportunities to increase the number of members who use the platform through additional marketing initiatives. PMI employs a combination of paid and unpaid sources to market the platform. PMI also invests in public relations to build itsour brand and visibility. PMI isvalue proposition.  These channels include word-of-mouth referrals, online marketing, direct mail, radio campaigns, partner and affiliate introductions, emails, and public media. We are constantly seeking new methods to reach more potential members. To date, PMI’s marketing initiativesmembers, while testing and optimizing the end to end customer experience.
Origination and Servicing
We have included advertising (e-mail campaigns, presentations, direct mail solicitationshighly efficient and paid search), organic search engine resultsscalable systems for credit risk assessment, loan underwriting, and word-of-mouth referrals.servicing. Our risk model takes borrowers’ supplied information and combines that information with public and proprietary data to make real time decisions. Our verification agents use automated tools to confirm credit eligibility. Our loan servicing platform calculates a loan’s amortization and processes payments received from borrowers and passes such payments on to investors.  In addition, PMI and the platformwe have been featured in a variety of media outlets, including television and print media.

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PMI continuously measures website visitor-to-member conversion.  It tests graphics and layout alternatives in order to improve website conversion.  It also seeks to customize the website to members’ needs whenever possible.  PMI carefully analyzes visitor website usage to enhance user experience.
From time to time, PMI may conduct special promotions to increase the participation of existing members on the platform or to attract new members. These promotions could include offering special incentives for registering as a lender member or a borrower member, posting a loan listing, moving money onto the platform, placing bids on loan listings or successfully bidding on a loan listing. The incentives could include cash bonuses or rebates or fee discounts or waivers. These promotions may be offered to all customers for all products or could be restricted to particular products or types of customers. For example, PMI could conduct a special promotion to attract customers who come to the website through a marketing partnership it has with another company.
For the twelve months ended December 31, 2013 and 2012, PMI spent approximately $14,851and $5,683, respectively, on marketing. Each marketing effort is measured, analyzed and optimized to improve scale and efficiency in each channel. Through optimization of targeting efforts PMI will shift marketing costs to efficient channels to balance the mix of growth and efficiency in marketing activities in subsequent quarters.

Technology
The system hardware for the platform, which is owned by PMI, is located in a hosting facility in San Francisco, California, owned and operated by Digital 365 Main, LLC under an agreement that expires in August 2014. Generally, unless PMI or Digital 365 Main, LLC delivers a termination notice, the agreement is automatically renewable for three year terms. The facility provides around- the-clock security personnel, video surveillance and is serviced by onsite electrical generators and fire detection and suppression systems. The facility has multiple interconnects to the Internet, and Internap Network Services Corporation is the Internet service provider for the platform. It also maintains a secure off-site backups.
PMI owns all of the hardware deployed in support of the platform. PMI continuously monitors the performance and availability of the platform. The infrastructure is scalable and utilizes standard techniques such as load-balancing and redundancies.
The platform utilizes proprietary accounting software to process electronic cash movements, record book entries and calculate cash balances in members' funding accounts. PMI processes electronic deposits and payments by originating ACH transactions. This software puts these transactions in the correct ACH transaction data formats and makes book entries between individual members' accounts using a Write-Once-Read-Many (WORM) ledger system.
Prosper Funding has entered into a back-up servicing agreement with First Associates Loan Servicing, LLC (“First Associates”), a loan servicing company that is willing and able to transitionassume servicing responsibilities in the event that Prosper Funding and/or PMIwe are no longer able to service the Prosper Funding Borrower Loans PMI Borrower Loans, Prosper Funding Notes and PMI Notes. First Associates.Associates is a financial services company that has entered into numerous successor loan servicing agreements . It is unlikely that First Associates would be ableagreements.
Technology
We have made substantial investment in our customer acquisition capability, customer experience, and credit underwriting, loan servicing and payment systems. Our marketplace utilizes proprietary software to perform functions other than servicing the existing Prosper Fundingprocess electronic cash movements, record book entries and calculate cash balances in users’ funding accounts. Electronic deposits and payments are mostly done via Automated Clearing House (“ACH”) transactions. The technology platform allows us to economically acquire and service Borrower Loans PMI Borrower Loans, Prosper Fundingand Notes, and PMI Notes. See “Item 1A. Risk Factors—Risks Relatedallows WebBank to Prosper Fundingefficiently originate and PMI,fund Borrower Loans. We believe the Platform and Prosper Funding and PMI’s Abilitygrowth of our marketplace will give us the economies of scale to Service the Notes—Arrangements for back-up servicing are limited.  If PMI fails to maintain operations or the Administration Agreement is rejected or terminated (in bankruptcy or otherwise), you may experience a delay and increased cost in respect of your expected principal and interest payments on your Prosper Funding Notes, and Prosper Funding may be unable to collect and process repayments from borrowers.”

Scalability

lower unit costs.
The platformsystem hardware for our marketplace is located in hosting facilities in Scottsdale, Arizona and Las Vegas, Nevada. We own all of the hardware deployed in support of our marketplace. We continuously monitor the performance and availability of our marketplace. The infrastructure is scalable and utilizes standard techniques such as load-balancing and redundancies.
Key aspects of our technology include:
Scalability: Our marketplace is designed and built as a highly scalable, multi-tier, redundant system. It incorporates technologies designed to prevent any single point of failure within the data center from taking the entire system offline. This is achieved by utilizing load-balancing technologies at the front end and business layer tiers and clustering technologies in the back-end tiers to allow scaling both horizontally and vertically depending on platformmarketplace utilization. In addition, the core network load-balancing, routing and switching infrastructure is built with fully redundant hardware and sub-second failover between those devices.


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Data integrity and security
Prosper Fundingsecurity:  We are committed to protecting our users' information and PMI transmit all sensitivewe take the integrity and security of the data to and from customers and service providers using a secure transport protocol. Communication of sensitive data via the web site to customers is secured utilizing SSL 256-bit enable encryption certificates provided by DigiCert, Inc. Communicationthem very seriously. To that end, we have established data protection policies which are implemented and enforced using the latest technologies. All sensitive information is transmitted on secure channels using SSL technology, with SSL certificates issued by VeriSign (Symantec) or DigiCert. We employ principles of least privilege and layered security to protect stored sensitive data with service providers is secured utilizing authenticated VPN, SSL 256-bit encryption and SSH protocols depending on the service providers' requirements. Storage of sensitive datainformation. Information at rest is encrypted utilizing AES 256-bitusing the industry level encryption technologies with appropriate controls to access the data. We protect the network perimeter using the latest technologies including but not limited to firewall and 3DES 168-bit cryptographic ciphers, depending upon the service providers' requirementsanti-virus threat management techniques. We use strong multi-factor authentication to protect and internal storage policies. Accessmonitor remote access. We back up all data securely and would expect to the data by PMI personnel is restricted based uponrecover operations in a least-privilege principle such that employees have access only to the information and systems needed to perform their function. Inshort period of time in the event of disaster, data is repeatedly stored securely offsite using strong multi-factor encryption on each object with a unique key, which is further encrypted with rotating master key. PMI protects the security of the platform using a multilayered defense strategy incorporating several different security technologies and points of monitoring. At the perimeter of the network, multi-function security technologies implement firewall, intrusion prevention, anti-virus and anti-spam threat management techniques. Internally, the network and hosts are segmented by function with another layer of firewalls and traffic inpection devices. At the host level, the platform utilizes host based intrusion prevention, anti-virus, anti-spyware, and application control systems. Logging and monitoring for the network security devices is done in real-time with notifications to the appropriate staff upon any suspicious event or action that requires attention.disaster. Logging and monitoring of hostthe systems is done in real-timeand security controls enables us to a centralized database with web based reportingensure that the controls are functional and additional notification to the appropriate staff for any remediation.
that alerts are triggered on security violations.
Fraud detection
Prosper Funding and PMI consider fraud detection to be of utmost importance to the successful operation of the platform. PMI employsdetection: We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. PMI employs techniques such as knowledge basedThese include knowledge-based authentication, or KBA, out-of-band authentication and notification, behavioral analytics and digital fingerprinting to prevent identity fraud. PMIWe use services from third-party vendors for user identification, credit checks and for checking customer names against the list of Specially Designated Nationals maintained by the Office of Foreign Assets Control (“OFAC”). In addition, PMI useswe use specialized third-party software to augment the identity fraud detection systems. PMIWe also hashave a dedicated team which conducts additional investigations of cases flagged for high fraud risk.  See “Item 1. Business—Borrower Identity and Financial Information Verification” for more information. Finally, Prosper Funding enables its lender memberswe enable investors to report suspicious activity, which PMIwe may then evaluate further.

Engineering

PMI has made substantial investment in software and website development and PMI expects to continue to make significant investments in software and website development. In addition to developing new products and maintaining an active online deployment, PMI’s technology team also performs technical competitive analysis as well as systematic product usability testing. As of December 31, 2013, PMI’s technology group consisted of twenty-four full-time employees.  These resources are made available to Prosper Funding pursuant to the Administration Agreement.

Competition

The market for peer-to-peer lending is competitive and rapidly evolving.  Prosper Funding believes the following are the principal competitive factors in the peer-to-peer lending market:

·fee structure;

·website attractiveness;

·member experience, including Prosper Funding Borrower Loan funding rates and lender member returns;

·acceptance as a social network;

·branding; and

·ease of use.


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Prosper Funding’s primary competitors are major credit card issuers, such as JPMorgan Chase Bank, Bank of America and Citibank, other commercial banks, savings banks and consumer finance companies.  Prosper Funding also faces competition from other peer-to-peer platforms such as LendingClub.

Prosper Funding may also face future competition from new companies entering the market. These companies may have significantly greater financial, technical, marketing and other resources and may be able to devote greater resources to the development, promotion, sale and support of their consumer platforms.  These potential competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns.  These potential competitors may have more extensive potential borrower bases.  In addition, these potential competitors may have longer operating histories and greater name recognition.  Moreover, if one or more of these competitors were to merge or partner with another competitor or a new market entrant, the change in competitive landscape could adversely affect Prosper Funding’s ability to compete effectively.

Intellectual Property

Prosper Funding’s intellectual property rights are important to its business.  Prosper Funding reliesWe rely on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions, to protect itsour proprietary technology, processes and other intellectual property.

Although the protection afforded by copyright, trade secret, trademark, written agreements and common law may provide some advantages, Prosper Funding believes that the following factors help it to maintain a competitive advantage:

·the technological skills of the PMI software and website development personnel who developed the platform;

·frequent enhancements to the platform; and
·high levels of member satisfaction.

Competitors may develop products that are similar to Prosper Funding’s technology.  For example, Prosper Funding’s legal agreements may be copied directly from the website by others.  As Loan and Note Servicer under the Administration Agreement, PMI has access to confidential information regarding Prosper Funding’s intellectual property.  PMI enters We enter into confidentiality and other written agreements with itsour employees, consultants and service providers, and through these and other written agreements, attemptsattempt to control access to and distribution of the software, documentation and other proprietary technology and information. Despite these efforts to protect Prosper Funding’sour proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute Prosper Funding’sour intellectual property rights or technology or otherwise develop a product with the same functionality. Policing all unauthorized use of intellectual property rights is nearly impossible. Therefore, Prosper Fundingwe cannot be certain that the steps it haswe have taken or will take in the future will prevent misappropriations of itsour technology or intellectual property rights.

We have registered trademarks in the United States for “Prosper,” “Prosper Healthcare Funding,” “Prosper.com,” the Prosper and Prosper Healthcare Funding logos, and PMI use software developed by PMI.  Neither Prosper Funding nor PMI use software licensed by third parties for processing electronic cash movements, or calculating cash balances in lender members’ accounts.

other trademarks.
Employees and Contractors

Prosper Funding does not have any employees.  As of December 31, 2013, PMI2016, we employed 88355 full-time employees. Of these employees:The following table shows a breakdown by function:

·24 were in engineering;

·42 were in operations;
Employees
Origination and Servicing151
Sales and Marketing28
General and Administrative - Research and Development78
General and Administrative – Other98
Total Headcount355

·11 were in sales and marketing; and

·11 were in general and administrative.

None of PMI’sour employees are represented by labor unions. PMI hasWe have not experienced any work stoppages, and Prosper Funding and PMIwe believe that PMI’sour relations with itsour employees are good.

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Facilities

Prosper Funding does not lease or own any real property or equipment.  Its headquarters is located in San Francisco, California, where PMI leases workstationsGovernment Regulation
Overview
The lending and conference rooms under a lease that will expire December 31, 2014.  Prosper Funding believes that its existing facilitiessecurities industries are adequate to meet its current needs,highly regulated. The marketplace, Notes and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

PMI’s corporate headquarters, including its principal administrative, marketing, technical support and engineering functions, is located in San Francisco, California, where it leases workstations and conference rooms under a lease that will expire December 31, 2014. PMI leases its co-location facility under a non-cancelable operating lease that expires in August 2014. PMI believes that its facilities are adequate to meet its current needs and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.

Legal Proceedings

Prosper Funding is not currently subject to any material legal proceedings.  Prosper Funding is not aware of any litigation matters which have had, or are expected to have, a material adverse effect on it.  PMI is subject to the legal proceedings described below.

From inception through October 16, 2008, PMI sold approximately $178,000 of PMI Borrower Loans to lender members through the initial platform structure, whereby PMI assigned promissory notes directly to lender members. PMI did not register the offer and sale of the promissory notes corresponding to these PMI Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws.  PMI believes that the question of whether or not the operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, PMI would have failed to comply with the registration and qualification requirements of federal and state laws and lender members who hold these promissory notes may be entitled to rescission of unpaid principal, plus statutory interest. Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act is one year from the violation, although the statute of limitations period under various state laws may be for a longer period of time.

PMI’s decision to restructure the platform and cease sales of promissory notes offered through the platform effective October 16, 2008 limited this contingent liability to the period covering its activities prior to October 16, 2008.

On April 21, 2009, PMI and the North American Securities Administrators Association (“NASAA”) reached agreement on the terms of a model consent order between PMI and the states in which PMI offered promissory notes for sale prior to November 2008. The consent order involves payment by PMI of up to an aggregate of $1,000 in penalties, which have been allocated among the states based on PMI’s promissory note sale transaction volume in each state prior to November 2008. A state that enters into a consent order receives its portion of the $1,000 in exchange for its agreement to terminate, or refrain from initiating, any investigation of PMI’s promissory note sale activities prior to November 2008. Penalties are paid promptly after a state enters into a consent order. NASAA has recommended that each state enter into a consent order. However, no state is obliged to do so, and there is no deadline by which a state must make its decision. PMI is not required to pay any portion of the penalty to those states that do not elect to enter into a consent order. If a state does not enter into a consent order, it is free to pursue its own remedies against PMI, subject to any applicable statute of limitations. As of December 31, 2013, PMI has entered into consent orders with 34 states and has paid an aggregate of $466 in penalties to those states.
As of December 31, 2013 and 2012, PMI had accrued approximately $248 and $248, respectively, in connection with the contingent liability associated with the states that have not entered into consent orders, in accordance with ASC Topic 450, Contingencies. The methodology applied to estimate the accrual was to divide the $1,000 maximum fee pro-rata by state, using PMI’s promissory note sales from inception through November 2008. A weighting was then applied to each state that has not entered into a consent order, assigning a likelihood that the penalty will be claimed. In estimating the probability of a claim being made by a state, PMI considered factors such as the standard terms of the consent orders; whether the state ever gave any indication of concern regarding the sale of promissory notes through the platform; the probability of a state electing not to enter into a consent order in order to pursue its own litigation against PMI; whether the penalty is sufficient to compensate a state for the cost of processing the settlement consent order; and finally the impact that current economic conditions have had on state governments. PMI will continue to evaluate this accrual and related assumptions as new information becomes known.

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On November 26, 2008, plaintiffs filed a class action lawsuit against PMI and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that PMI offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit sought rescission damages against PMI and the other named defendants, as well as treble damages against PMI and the award of attorneys’ fees, experts’ fees and costs, and pre-judgment and post-judgment interest.
On July 19, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation pending before the Superior Court, entered into a Stipulation and Agreement of Compromise, Settlement, and Release (the “Settlement”) setting forth an agreement to settle all claims related thereto. In connection with the Settlement, PMI agreed to pay the plaintiffs, and took the charge on the income statement, an aggregate amount of $10,000, payable according to the following schedule: (i) $2,000 within 10 days of entry of an order by the Court granting preliminary approval of the settlement (“Preliminary Approval”); (ii) $2,000 on the one-year anniversary of Preliminary Approval; (iii) $3,000 on the two-year anniversary of Preliminary Approval; and (iv) $3,000 on the three-year anniversary of Preliminary Approval. The settlement is subject to final approval by the Superior Court. Subject to satisfaction of the conditions set forth in the Settlement, the defendants will be released by the plaintiffs from all claims concerning or arising out of the offering of promissory notes on the platform from January 1, 2006 through October 14, 2008.
As a result of the Settlement, PMI recorded the Settlement in the condensed consolidated statement of operations and a reserve for class action settlement liability of $10,000 in the consolidated balance sheet as of December 31, 2013.
PMI’s insurance carrier with respect to the class action lawsuit, Greenwich Insurance Company (“Greenwich”), denied coverage.  On August 21, 2009, PMI filed suit against Greenwich in the Superior Court of California, County of San Francisco, California.  The lawsuit sought a declaration that PMI was entitled to coverage under its policy with Greenwich for losses arising out of the class action lawsuit as well as damages and the award of attorneys’ fees and pre- and post-judgment interest.
On January 26, 2011, the court issued a final statement of decision finding that Greenwich had a duty to defend the class action lawsuit, and requiring that Greenwich pay PMI’s past and future defense costs in the class action suit up to $2,000. Greenwich subsequently made payments to PMI in the amount of $2,000 to reimburse PMI for the defense costs it had incurred in the class action suit. On July 1, 2011, PMI and Greenwich entered into a Stipulated Order of Judgment pursuant to which PMI agreed to dismiss its remaining claims against Greenwich. On August 12, 2011, Greenwich filed a notice of appeal of the court's decision regarding Greenwich’s duty to defend up to $2,000. On July 16, 2012, the California Court of Appeal affirmed the trial court’s decision. On October 22, 2012 Greenwich made an additional payment of $143 to PMI for pre-judgment interest. As a result, Greenwich has now satisfied its obligations with respect to PMI’s defense costs for the class action suit.

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GOVERNMENT REGULATION

Overview

The peer-to-peer lending industry is highly regulated. Prosper Funding, PMI and the Prosper Funding Borrower Loans made and the Prosper Funding Notes issued through the platform are subject to extensive and complex rules and regulations. Prosper Funding and PMIWe also are subject to licensing and examination by various federal, state and local government authorities. These authorities impose obligations and restrictions on Prosper Funding and PMI’sour activities, WebBank’s activities and the Prosper Funding Borrower Loans madeacquired and Prosper Funding Notes issued through the platform.our marketplace. In particular, these rules may limit the fees that may be assessed on the Prosper Funding Borrower Loans, require extensive disclosure to, and consents from, applicants and borrowers, prohibit discrimination and impose multiple qualification and licensing obligations on platformmarketplace activities. Failure to comply with these requirements may result in, among other things, revocation of required licenses or registration,registrations, loss of approved status, voiding of loan contracts, indemnification liabilityliabilities to contract counterparties, class action lawsuits, administrative enforcement actions and civil and criminal liability.liabilities. While compliance with such requirements is at times complicated by Prosper Funding and PMI’sour novel business model, Prosper Funding and PMIwe believe theywe are in substantial compliance with these rules and regulations. These rules and regulations are subject to continuous change, however, and a material change could have an adverse effect on Prosper Funding and PMI’sour compliance efforts and ability to operate.

Regulation and Consumer Protection Laws

State and Federal Laws and Regulations

State Licensing Requirements. PMI holds consumer lendingIn most states we believe that WebBank, as originator of all Borrower Loans originated through our marketplace, satisfies any relevant licensing requirements with respect to the origination of such Borrower Loans. In addition, as needed, we seek licenses collections licenses and/or similar authorizations of various types so that we may conduct activities such as servicing and marketing in 24 states.  Prosper Funding holds a consumer lending license in 1 state.  PMIall states and Prosper Fundingthe District of Columbia, with the exceptions of Iowa, Maine, North Dakota and West Virginia. We are subject to supervision and examination by the state regulatory authorities that administer thethese state lending laws. The licensing statutes vary from state to state and variously prescribe or impose recordkeeping requirements;different requirements on us, including: restrictions on loan origination and servicing practices, including limits on finance charges and the type, amount and manner of charging fees; disclosure requirements; requirements that licensees submit to periodic examination; surety bond and minimum specified net worth requirements; periodic financial reporting requirements; notification requirements for changes in principal officers, stock ownership or corporate control; restrictions on advertising; and requirements that loan forms be submitted for review.
WebBank is a Utah-chartered industrial bank organized under Title 7, Chapter 8State Usury Laws. Section 521 of the Utah CodeDepository Institution Deregulation and has its deposits insured byMonetary Control Act of 1980 (12 U.S.C. § 1831d) (“DIDA”) and Section 85 of the Federal Deposit InsuranceNational Bank Act (“NBA”) (12 U.S.C. § 85), federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri and Marquette National Bank of Minneapolis v. First Omaha Service Corporation (“FDIC”). WebBank is subject to supervision and examination by the Utah Department of Financial Institutions and the FDIC. Applicable federal law preempts state usury limitations and allowsFDIC advisory opinion 92-47 permit FDIC-insured depository institutions, such as WebBank, to “export” the interest ratesrate permitted under the laws of the state where the bank is located, when making loans to borrowers who reside in other states, regardless of the usury limitations imposed by the state law of the borrower’s residence.state of residence unless the state has chosen to opt out of the exportation regime. WebBank is located in Utah, and Title 70C of the Utah lawCode does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through the platform. A few jurisdictionsour marketplace. Only Iowa and Puerto Rico have elected to optopted out of the exportation regime under Section 525 of DIDA and we do not operate in either jurisdiction. However, we believe that if a state in which we did operate opted out of rate exportation, judicial interpretations support the view that such opt outs only apply to loans “made” in those states.  
In May 2015, the U.S. Court of Appeals for the Second Circuit issued a decision in Madden v. Midland Funding, LLC that interpreted the scope of federal usury preemption available to state-chartered, FDIC-insured banks. Tounder the extentNBA and held that a WebBank borrowernonbank assignee of a loan isoriginated by a national bank was not entitled to the benefits of federal preemption of claims of usury. On November 10, 2015, the defendant in the Madden case filed a petition for a writ of certiorari with the United States Supreme Court for further review of the Second Circuit’s decision. On June 27, 2016, the United States Supreme Court denied the petition and refused to review the case, leaving the decision of the Second Circuit intact and binding on federal courts in Connecticut, New York and Vermont. If applied to any of the Borrower Loans originated through our marketplace, the Second Circuit’s decision could adversely impact our business.  
If a Borrower Loan made through our marketplace was deemed to be “made” in such a jurisdiction, the loan would be subject to the maximum interest rate limitusury laws of such jurisdiction.a state that has opted-out of the exportation regime or becomes bound by the Second Circuit’s or a similar judicial decision, we could become subject to fines, penalties, and possible forfeiture of amounts charged to borrowers, and we may decide not to originate Borrower Loans through our marketplace in that applicable jurisdiction, which may adversely impact our growth. For more information, see “Item 1 A. Risk Factors—If our marketplace were found to violate a state’s usury laws, we might have to alter our business model and our business could be harmed.”


State Securities Laws. We are subject to the securities laws of each state in which the registration or qualification to offer and sell the Notes and PMI Management Rights has been approved. Certain of these state laws require us to renew the registration or qualification of Notes and PMI Management Rights on an annual basis.
The Dodd-Frank Wall Street Reform and Consumer Protection Act.
On July 21, 2010, theThe Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  Thecreated many new restrictions and an expanded framework of regulatory oversight for the financial services industry.  Among other things, the Dodd-Frank Act contains a number of provisions that could substantially affect our business including:
centralized responsibility for consumer financial protections by creating the Consumer Financial Protection Bureau (the “CFPB”), a new agency responsible for administering and enforcing laws andwhich has broad authority to write regulations relating tounder federal consumer financial products and services
making it unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive or abusive act or practice, and giving the CFPB rule-making and enforcement authority to prevent unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service
Transferring rulemaking and enforcement authority to the CFPB with respect to most federal consumer lendingprotection laws, and regulations, includingsuch as the Truth-in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act, and to enforce those laws against and examine large financial institutions, such as our issuing bank, for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. We are subject to the Electronic Funds Transfer ActCFPB’s jurisdiction, including its enforcement authority and may become subject to their respective implementing regulations
supervisory authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities, and also conduct on-site examinations of our business on a periodic basis.
Truth-in-Lending Act. The federal Truth-in-Lending Act (“TILA”), and the regulation issued and administered by the CFPB implementing the TILA, Regulation Z, requires disclosurewhich implements TILA, require creditors to provide consumers with uniform, understandable information concerning certain terms and conditions of among other things,their loan and credit transactions. These rules apply to WebBank as the creditor for Borrower Loans facilitated through our marketplace, but because the transactions are carried out on our hosted website, we facilitate compliance at WebBank’s direction. For closed-end credit transactions of the type provided through our marketplace, these disclosures include providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment on consumer loans. WebBankpayment. The creditor must provide the disclosures before the Borrower Loan is closed. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our marketplace provides borrowers with a TILA disclosure form when Prosper Fundingprior to the time a Borrower Loans are originated and seeksLoan is originated. We also seek to comply with TILA’s disclosure requirements relatingrelated to credit advertising.
Equal Credit Opportunity Act. The federal Equal Credit Opportunity Act (“ECOA”) and the regulation issued and administered by the CFPB implementing the ECOA, Regulation B, prohibit discrimination in any aspect of aprohibits creditors from discriminating against credit transactionapplicants on the basis of race, color, sex, age, religion, national origin, sex, marital status, age (with certain limited exceptions), becauseor the fact that all or part of the applicant’s income derives from any public assistance program or becausethe fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act.Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from applicants and from making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as well as to a party such as Prosper Funding, PMIthat regularly implements and WebBank comply with the ECOA’s nondiscrimination requirements, and the lender agreements require lender memberscommunicates a credit decision. Investors may also be subject to comply with the ECOA in their bidding practices. Prosper Funding also requires individual group leaders who form groupscapacity as purchasers of Notes, if they are deemed to regularly participate in credit decisions. In the underwriting of Borrower Loans on our marketplace, both WebBank and we seek to comply with the ECOA in that they are prohibited from excluding individuals from membership in a group on a prohibited basis.
TheECOA’s provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide consumers with noticetimely notices of adverse action taken on credit applications, giving the consumer the principal reasons why adverse action was taken. PMIapplications. WebBank and WebBankwe provide prospective borrowers who apply for but fail to obtain a Prosper Funding Borrower Loan through the platformour marketplace but are denied credit with an adverse action notice in compliance with the ECOA’s requirements.

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applicable requirements (see also below regarding “Fair Credit Reporting Act”).
Fair Credit Reporting Act.The federal Fair Credit Reporting Act (“FCRA”), administered by the CFPB, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. In addition to requirements on credit bureaus, the FCRA requires that users of consumer credit reports have a permissible purpose to obtain a consumer credit report, on a consumer and thatrequires persons who furnishto report loan payment information to credit bureaus report such information accurately. The FCRA also hasimposes disclosure requirements foron creditors who take adverse action on credit applications based on information contained in a credit report. WebBank and PMI as its agent in relation to Prosper Funding Borrower Loan originations,we have a permissible purpose for obtaining credit reports on borrower memberspotential borrowers and theyWebBank and we also obtain explicit consent from borrowers to obtain such reports. As the servicer for the Borrower Loan, we have systems in place to report loanBorrower Loan payment and delinquency information to the credit bureaus in compliance with the FCRA. PMI and WebBank’sappropriate reporting agencies. We provide an adverse action notices containnotice to a rejected borrower on WebBank’s behalf at the disclosurestime the borrower is rejected that includes all the required disclosures. We have also implemented an identity theft prevention program as required by the FCRA.
law.  
Fair Debt Collection Practices Act. The federal Fair Debt Collection Practices Act (“FDCPA”), administered by the CFPB, provides guidelines and limitations on the conduct of third partythird-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third partythird-party debt collectors, debt collection laws of certain states including California, impose similar requirements on creditors who collect their own debts. Prosper Funding’s agreementsOur agreement with lender members and group leaders prohibit registered lender members and group leadersour investors prohibits investors from attempting to collect directly collect on the Prosper Funding Notes or Prosper Funding Borrower Loans, Loan. We use our internal collection team


and Prosper Funding has established procedures to ensure that lender members and group leaders do not attemptprofessional external debt collection agents to collect on the Prosper Funding Notes or Prosper Funding Borrower Loans themselves.
delinquent accounts. They are required to comply with all other applicable laws in collecting delinquent accounts of our borrowers.  
Servicemembers Civil Relief Act.The federal Servicemembers Civil Relief Act (“SCRA”) allows military members to suspend or postpone certain civil obligations so that the military membersmember can devote theirhis or her full attention to military duties. In accordanceThe SCRA, as well as certain state laws with the SCRA, PMI mustsimilar protections for military members, require us to adjust the interest rate of borrowers on active duty and other military personnel who qualify for and request relief. If a borrower with an outstanding Prosper Funding Borrower Loan is called to active military duty, PMI reducesqualifies for protection under the SCRA or similar state laws, we will reduce the interest rate on the Prosper Funding Borrower Loan to 6% for the duration of the borrower’s active duty. During this period, the holders of the corresponding Prosper Funding Notes (if the Prosper Fundinginvestors who have invested in such Borrower Loan was originated through the Note Channel) or the holder of the Prosper Funding Borrower Loan (if the Prosper Funding Borrower Loan was originated through the Whole Loan Channel) will not receive the difference between 6% and the Borrower Loan’s original interest rate on the Prosper Funding Notes or Prosper Funding Borrower Loan (as applicable).rate. For borrowersa borrower to obtain an interest rate reduction on a Prosper Funding Borrower Loan due to military service, PMI requireswe require the borrowersborrower to send itus a written request and a copy of the borrower’s mobilization orders. PMI doesWe do not take military service into account in assigning Prosper Ratings to listings.borrower loan requests and we do not disclose the military status of borrowers to investors.  
Military Lending Act. The federal Military Lending Act (“MLA”) provides specific protections for active duty service members and their dependents (or covered borrowers) in consumer credit transactions. Although originally enacted in 2006, the MLA applies to persons engaged in the business of extending consumer credit subject to the disclosure requirements of the TILA and Regulation Z with respect to loans made on or after October 3, 2016. The MLA prohibits creditors from imposing a Military Annual Percentage Rate (“MAPR”) greater than 36% in any consumer credit transaction involving a covered borrower. It also requires certain oral and written disclosures to be provided to covered borrowers. Additionally, the MLA prohibits creditors from requiring covered borrowers to waive rights to legal recourse, submit to arbitration, or pay a prepayment penalty or fee. Both Prosper and WebBank have ensured that the loan program complies with the MLA requirements for covered borrowers, including but not limited to the restriction on MAPR, the delivery of required disclosures and the prohibition of mandatory arbitration and waiver of legal recourse.
Other Lending Regulations.  Prosper Funding and PMI We are subject to and seek to comply with other state and federal laws and regulations applicable to consumer lending, including additional requirements relating to loan disclosure, credit discrimination, credit reporting, debt collection and unfair, deceptive or abusive business practices. These laws and regulations may be enforced by state consumer credit regulatory agencies, state attorneys general, the CFPB and private litigants, among others. Given Prosper Funding and PMI’sour novel business model and the subjective nature of some of these laws and regulations, particularly laws regulating unfair, deceptive or deceptiveabusive business practices, Prosper Funding and PMIwe may become subject to regulatory scrutiny or legal challenge with respect to theirour compliance with these requirements.

Electronic Funds Transfer Act. The federal Electronic FundsFund Transfer Act (“EFTA”), and the regulation issued and administered by the CFPB implementing the EFTA, Regulation E, placewhich implements it, provide guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts, including preauthorized electronic fundaccounts. In addition, transfers from consumers’ accounts to make loan payments.  Most transfers of funds in connection with the origination and repayment of Prosper Funding Notes and Prosper Funding Borrower Loans and bidding on the platform are doneperformed by Automated Clearing House (“ACH”)ACH electronic transfers of fundsare subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (“NACHA”). Most transfers of funds in connection with the origination and repayment of the Borrower Loans are performed by ACH. We obtain necessary electronic authorization from borrowers and investors for such transfers in compliance with such rules. Transfers of funds on the platformthrough our marketplace are done in conformity withexecuted by Wells Fargo and conform to the EFTA, and its regulations as well asand NACHA guidelines.

Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act. The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) and similar state laws, particularly the Uniform Electronic Transactions Act (“UETA”), authorize the creation of legally binding and enforceable agreements including electronic loan agreements, utilizing electronic records and electronic signatures. ESIGN imposes special requirements onand UETA require businesses that want to use electronic records or signatures in consumer transactions and requires businesses to obtain from consumers electronicthe consumer’s consent or confirmation to receive information electronically that a law requires be in writing.electronically. When a platform participantborrower or individual investor registers on the platform, PMI obtainswith our marketplace, we obtain his or her consent to transact business electronically with Prosper Funding and WebBank and maintainsmaintain electronic records in compliance with ESIGN and UETA requirements.

Privacy and Data Security Laws. The federal Gramm-Leach-Bliley Act (“GLBA”) limits the disclosure of nonpublic personal information about a consumer to nonaffiliated third parties and requires financial institutions to disclose certain privacy policies and practices with respect to its information sharing with both affiliatesaffiliated and nonaffiliated third parties.  A number of states have enactedentities as well as to safeguard personal customer information. Additional state and federal privacy and data security laws requiringrequire safeguards onto protect the privacy and security of consumers’ personally identifiable information.  Prosper Fundinginformation, require notification to affected customers in the event of a breach, and PMIrestrict certain sharing of nonpublic personal information about a consumer with affiliated entities. We have a detailed privacy policies that conform topolicy, which complies with GLBA requirements.  In addition, both Prosper Funding and PMI have policies and procedures intended tois accessible from our website. We maintain platform participants’ personal information securely, and neither entity sellswe do not sell, rent or rentsshare such information towith nonaffiliated third parties for marketing purposes.purposes unless previously agreed


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measures to safeguard the personal information of our borrowers and investors and to protect it against unauthorized access.  
OFAC and Bank Secrecy Act. PMI checksIn cooperation with WebBank, we have implemented an anti-money laundering policy and various anti-money laundering procedures to comply with applicable federal law. With respect to new borrowers and investors, we apply the customer identification and verification program rules and screen names against the list of Specially Designated Nationals maintained by the U.S. Department of the Treasury Office of Foreign Assets ControlAsset Control’s (“OFAC”). PMI has also instituted procedures pursuant to comply with the anti-money laundering requirements of the USA PATRIOT Act andamendments to the Bank Secrecy Act.
Act (“BSA”) and its implementing regulation.
State SecuritiesNew Laws and Regulations.  Prosper FundingFrom time to time, various types of federal and PMIstate legislation are subjectproposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. As a consequence of the securities lawsextensive regulation of eachcommercial lending in the United States, our business is particularly susceptible to being affected by federal and state in whichlegislation and regulations that may increase the registration or qualification to offer and sell the Securities has been approved. Certaincost of these state laws require Prosper Funding and PMI to renew their registration or qualification on an annual basis.doing business.

Foreign Laws and Regulations

Prosper Funding doesWe do not permit non-U.S. residentsbased individuals to register as membersborrowers on our marketplace and the platform and neither Prosper Funding nor PMImarketplace does not operate outside the United States. Therefore, neither Prosper Funding nor PMI arewe do not believe that our marketplace is subject to foreign laws or regulations.

States in Which Prosper Funding and PMI Currently Operate
The platform operates online only and is available to borrower members in all states except Iowa, Maine and North Dakota. Prosper Funding and PMI have registered or qualified the offer and sale of the Securities in 30 states as well as Washington D.C., and will offer the Securities in each other jurisdiction where they obtain qualification or where such registration is declared effective, subject to any applicable state suitability requirements.

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Item 1A.Risk Factors

The Securities involve a high degree of risk.  You should carefully consider the risks and uncertainties described below, before making a decision to investtogether with all of the other information in the Securities.  If anythis Annual Report on Form 10-K, when evaluating our business. Any of the following risks, actually occurs, you might lose alleither alone or part of your investment intaken together, could materially and adversely affect our business, financial condition, operating results and prospects. While we believe the Securities.  Before making an investment decision, you should carefully consider these risks. The risks and uncertainties described arebelow include all material risks currently known by us, it is possible that these may not be the only ones facing Prosper Funding and PMI.  Additional risks and uncertainties not presently known or that Prosper Funding and PMI currently deem immaterial may also affect Prosper Funding and PMI’s respective business operations.we face.

RISKS RELATED TO BORROWER DEFAULT

The Prosper Funding Notes are risky and speculative investments for suitable investors only.

YouInvestors should be aware that the Prosper Funding Notes offered through the platformour marketplace are risky and speculative investments. The Prosper Funding Notes are special, limited obligations of Prosper FundingPFL and depend entirely for payment on Prosper Funding’sPFL’s receipt of payments under the corresponding Prosper Funding Borrower Loans. Prosper Funding Notes are suitable only for lender membersinvestors of adequate financial means. If youan investor cannot afford to lose the entire amount of yoursuch investor’s investment in the Prosper Funding Notes, you purchase, youthe investor should not invest in the Prosper Funding Notes.

Payments on the Prosper Funding Notes depend entirely on payments Prosper FundingPFL receives on corresponding Prosper Funding Borrower Loans. If a borrower fails to make any payments on the corresponding Prosper Funding Borrower Loan related to your Prosper Fundinga Note, payments on your Prosper Fundingsuch Note will be correspondingly reduced.

Prosper FundingPFL will only make payments pro rataon a series of Prosper Funding Notes after it receives a borrower’s payment on the corresponding Prosper Funding Borrower Loan, net of servicing fees. Prosper FundingPFL also will retain from the funds received from the relevant borrower and otherwise available for payment on the Prosper Funding Notes any non-sufficient funds fees and the amounts of any attorneys’ fees or collection fees its or PMI’s in-house collections department or a third-party servicer or collection agency imposesimposed in connection with collection efforts. Under the terms of the Prosper Funding Notes, if Prosper FundingPFL does not receive any or all payments on the corresponding Prosper Funding Borrower Loan, payments on your Prosper Fundingthe Note will be correspondingly reduced in whole or in part. If the relevant borrower does not make a payment on a specific monthly loan payment date, no payment will be made on your Prosper Fundingthe Note on the corresponding succeeding Prosper Funding Note payment date.


Information suppliedprovided by applicantsborrowers may be incomplete, inaccurate or intentionally false, and should generally not be relied upon.
Information in loan listings regarding the purpose of the loan and an applicant’s income, occupation and employment status is supplied directly by the applicant. Not all of this self-reported information is verified by us, and it may be incomplete, inaccurate or intentionally false.  Information regardingMoreover, loan listings do not disclose the identity of applicants, and investors have no ability to obtain or verify applicant information either before or after they purchase a Note. Investors are therefore cautioned not to rely on self-reported information such as income, occupation and employment is not verified in many cases.status when making investment decisions.  If an applicant supplies false, misleading or inaccurate information, an investor may lose part or all of the purchase price paid for a Note.

Applicants supply a variety ofInvestors should be aware that all listings are posted to our marketplace without our verifying self-reported information regardingsuch as the purpose of the loan, income, occupation and employment status that is included in borrower listings.status. Neither Prosper Fundingwe nor PMI verifies the majority of this information, which may be incomplete, inaccurate or intentionally false. Applicants may misrepresent their intentions for the use of Prosper Funding Borrower Loan proceeds. Neither Prosper Funding nor WebBank nor PMI as agent of either of them, verifies any statements by applicants as to how loan proceeds are to be used nor confirmsdo we or WebBank confirm after loan funding how loan proceeds were used.  All listings are posted on the platform without Prosper Funding or PMI verifying the information provided by the applicant, including the borrower’s stated income, employment status or occupation. Lender members should not rely on an applicant’s self-reported information such as income, employment status, or occupation in making investment decisions. In the cases in which PMI selectswe select applicants for income and employment verification, the verification is normally donegenerally completed after the loan listing has been created but prior to the time the Prosper Funding Borrower Loan is funded. Fromoriginated. For the period from July 13,14, 2009 to December 31, 2013, PMI2016, we verified employment and/or income on approximately 54%61% of the Prosper Funding Borrower Loans and PMI Borrower Loans originated through the platformour marketplace on a unit basis (39,291(389,386 out of 72,957)634,147) and approximately 76%74% of originations on a dollar basis ($480,7256,037,215 out of $630,364)$8,149,236). PMIWe selected these listings based on a combination of factors, including amount of loan requested, Prosper Rating, debt-to-income ratio and stated income. Listings do not disclose the identity of applicants, and lender members have no ability to obtain or verify applicant information either before or after they purchase a Prosper Funding Note. If an applicant supplies false, misleading or inaccurate information, you may lose part or all of the purchase price you pay for a Prosper Funding Note. Under Prosper Funding’s Administration Agreement with PMI, PMI is required to perform borrower identity and financial information verification services for Prosper Funding. See “Item 1. Business—Borrower Identity and Financial Information Verification” for more information. The number or percentage of applicants whose income and employment information is verified by PMI in relation to future listings made after the date hereof may differ from the historical information supplied above. No assurance is made that such information will be verified with respect to any particular applicant or borrower.  Neither the indenture trustee norFurther, Note holders of any Prosper Funding Notes will not have any contractual or other relationship with any borrowerborrowers that would enable the indenture trustee or such holderthem to make any claim against such borrowerborrowers for fraud or breach of any representation or warranty in relation to any false, incomplete or misleading information supplied by such borrowerborrowers in relation to the relevant Prosper Funding Borrower Loan or Prosper Funding Note.

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The Prosper Funding Borrower Loans are not secured by any collateral or guaranteed or insured by any third party, and youinvestors must rely on Prosper Funding, PMIus or a third-party collection agency to pursue collection against any borrower.

Prosper Funding Borrower Loans are unsecured obligations of borrower members.borrowers. They are not secured by any collateral, and they are not guaranteed or insured by Prosper Funding,PFL, PMI or any third party, or backed by any governmental authority in any way. Prosper FundingWe and its designated servicer andour third-party collection agencies will, therefore, be limited in theirour ability to collect on Prosper Funding Borrower Loans. Moreover, Prosper Funding Borrower Loans are obligations of borrowers to Prosper FundingPFL as successor to WebBank, not obligations to the holders of Prosper Funding Notes. Holders ofAlthough payments on the Prosper Funding Notes are dependent on the borrowers’ payments on the corresponding Borrower Loans, Note holders will have no recourse to the borrowers and no ability to pursue borrowers to collect payments under Prosper Funding Borrower Loans. Holders of the Prosper Funding Notes may look only to Prosper FundingPFL for payment of the Prosper Funding Notes. Furthermore, if a borrower fails to make any payments on the Prosper Funding Borrower Loan, the holders of the Prosper Funding Notes corresponding to that Prosper Funding Borrower Loan will not receive any payments on their Prosper Funding Notes. The holders of such Prosper Funding Notes will not be able to pursue collection against the borrower and will not be able to obtain the identity of the borrower in order to contact the borrower about the defaulted Prosper Funding Borrower Loan.

The maximum debt-to-income ratio for applicants is 50%.

DTI is a measurement of a borrower’s ability to take on additional debt. While there is an upper limit of 50% on the DTI ratio for eligible borrowers on the platform, borrowers with higher debt-to- income ratios may represent a greater risk of default than borrowers with lower debt-to-income ratios. Prosper Funding Note that the measure of DTI for eligibility decisions does not include the amount of the requested Prosper Funding Borrower Loan, whereas the measure of DTI presented in a listing includes the amount of the requested Prosper Funding Borrower Loan.

The credit information of an applicant may be inaccurate or may not accurately reflect the applicant’s creditworthiness, which may cause youan investor to lose all or part of the price you paid for a Prosper Funding Note.

PMI obtainsWe obtain applicant credit information from consumer reporting agencies, and assignsassign Prosper Ratings to loan listings based in part on the applicant’s credit score. A credit score that forms a part of the Prosper Rating assigned to a listing may not reflect the applicant’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data. Similarly, the credit data taken from the applicant’s credit report and displayed in listings may also be based on outdated, incomplete or inaccurate consumer reporting data. Neither Prosper Funding nor PMI verifiesWe do not verify the information obtained from the applicant’s credit report. Moreover, lender membersinvestors do not, and will not, have access to financial statements of applicants or to other detailed financial information about applicants.

The Prosper Rating may not accurately set forth the risks of investing in the Prosper Funding Notes, and no assurances can be provided that actualloss rates for the Prosper Funding Notes will come within the estimated loss rates indicated by the Prosper Rating.Rating, and investors have limited rights to cause Prosper to repurchase the Notes.
The Prosper Rating assigned to a loan listing may not accurately reflect the risks of investing in the Notes, and is not a recommendation by us to buy, sell or hold a Note.  For example, the Prosper Rating for a listing could be inaccurate because the applicant’s credit report contained incorrect information. Similarly, although most of the information provided by applicants that is relevant to the Prosper Rating is verified by us before calculating the Prosper Rating, we do not verify all such information.  For example, we do not verify the income information on all applications. Further, the Prosper Rating does not reflect PFL’s credit


risk as a debtor (such credit risk exists even though, as the debtor on the Notes, PFL’s only obligation is to pay to the Note holders their pro rata shares of collections received on the related Borrower Loans net of applicable fees).  In addition, no assurances can be provided that actual loss rates for the Notes will fall within the expected loss rates indicated by the Prosper Rating. The interest rates on the Notes might not adequately compensate Note investors for these additional risks.
If PMI includeswe include in a listing a Prosper Rating that is different from the Prosper Rating calculated by PMIus or calculatescalculate the Prosper Rating for a listing incorrectly, and such error materially and adversely affects a holder'sholder’s interest in the related Prosper Funding Note, Prosper FundingPFL will indemnify the holder or repurchase the Prosper Funding Note. Prosper FundingPFL will not, however, have any indemnity or repurchase obligation under the Amended and Restated Indenture, the Prosper Funding Notes, the lender memberinvestor registration agreement or any other agreement associated with the Note Channel as a result of any other inaccuracy with respect to a listing’s Prosper Score or Prosper Rating.  For example, the Prosper Rating for a listing could be inaccurate because the applicant’s credit report contained incorrect information. Similarly, the Prosper Rating does not reflect the substantial risk associated with the facts that (i) neither Prosper Funding nor PMI verifies much of the applicant information on which the Prosper Rating is based and (ii) much of such information is provided directly by the applicants themselves, who remain anonymous to potential Prosper Funding Note purchasers. In addition, the Prosper Rating does not reflect Prosper Funding’s credit risk as a debtor (such credit risk exists even though, as the debtor on the Prosper Funding Notes, Prosper Funding’s only obligation is to pay to the Prosper Funding Note holders their pro rata shares of collections received on the related Prosper Funding Borrower Loans net of applicable fees). If Prosper Funding repurchases any Prosper Funding Notes, PMI will concurrentlyPFL’s contractual repurchase the related PMI Management Right for zero consideration. Prosper Funding’s repurchase obligations under the Amended and Restated Indenture, the Prosper Funding Notes, the lender member agreement or any other agreement associated with the Note Channel, and PMI’s concurrent repurchase of the related PMI Management Rights, do not affect youra Note holder’s rights under federal or state securities laws. A Prosper Rating is not a recommendation by Prosper Funding or PMI to buy, sell or hold a Prosper Funding Note. In addition, no assurances can be provided that actual loss rates for the Prosper Funding Notes will fall within the expected loss rates indicated by the Prosper Rating. The interest rates on the Prosper Funding Notes might not adequately compensate Prosper Funding Note purchasers for these additional risks. See “Item 1. Business—Prosper Funding Note Repurchase and Indemnification Obligations” for more information.

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Lender membersInvestors who use the Quick Invest toolor Auto Invest tools may face additional risk of funding Prosper Funding Borrower Loans that have been erroneously selected by Quick Invest.

the tool.
Since it was first implemented by PMI in July 2011 through December 31, 2013,2016, the Quick Invest tool has experienced programming errors that affected 8,630 Prosper Funding Notes and PMI Notes out of the 3,489,413 Prosper Funding8,905,428 Notes and PMI Notes purchased. OfThe Auto Invest tool was first implemented on June 2, 2016. Since such time through December 31, 2016, the Auto Invest tool has experienced programming errors that affected Prosper Funding2 Notes and PMI Notes, 2,053 Prosper Funding Notes and PMI Notes purchased by 600 lender members were affected by the erroneous selection by Quick Invest of all possible search criteria; 2,517 Prosper Funding Notes and PMI Notes purchased by 28 lender members were affected by the erroneous use of inactive searches to purchase Prosper Funding Notes and PMI Notes; 96 Prosper Funding Notes and PMI Notes purchased by 23 lender members were affected by an error that resulted in a search identifying every listing’s Prosper Score as the best rating, regardlessout of the actual Prosper Score; 1,209 Prosper Funding515,168 Notes and PMI Notes purchased by 160 lender members were affected by an error that resulted in lender members who had multiple searches with overlapping criteria bidding on the same listing more than once even though the lender had also selected an option that was supposed to preclude them from investing in the same listing more than once; 168 Prosper Funding Notes and PMI Notes purchased by 42 lender members were affected by a server failure that resulted in Quick Invest bidding on the same listing more than once; and 2,587 Prosper Funding Notes and PMI Notes purchased by 458 lender members were affected by an Auto Quick Invest refactor that queued orders too quickly and resulted in multiple orders being executed.

purchased.
In the event of any errors in Quick Invest or Auto Invest that cause a lender memberan investor to purchase a Prosper Funding Note from Prosper FundingPFL that such lenderinvestor would not otherwise have purchased or that differs materially from the Prosper Funding Note such lenderinvestor would have purchased had there been no error, Prosper FundingPFL will either repurchase the Prosper Funding Note, indemnify the lenderinvestor against losses suffered on that Prosper Funding Note or cure such error. See “Item 1A. Risk Factors—"Risk Factors - Risks Related to Prosper FundingPFL and PMI, the PlatformOur Marketplace and Prosper Funding and PMI’sOur Ability to Service the Prosper Funding Notes”Notes" for more information.

Some borrowers may use the platformour marketplace to defraud lender members,investors, which could adversely affect yourinvestors’ ability to recoup yourtheir investment.

PMI usesWe perform identity and fraud checks with external databases to authenticate each borrower’s identity. There is a risk, however, that these checks could fail and fraud may occur. In addition, applicants may misrepresent their intentions regarding loan purpose or other information contained in listings, and neither Prosper Funding nor PMI verifieswe do not verify the majority of this information. While Prosper Funding will indemnify you or repurchase Prosper Funding NotesExcept in certain limited circumstances (including, e.g., a material payment default on the Prosper Funding Borrower Loan resulting from verifiable identity theft), it iswe are not obligated to indemnify you or repurchase a Prosper Funding Note or Borrower Loan from youan investor if yourthe investment is not realized in whole or in part due to fraud (other than verifiable identity theft) in connection with a loan listing, or due to false or inaccurate statements or omissions of fact in a listing, whether in credit data, a borrower member’sborrower’s representations, similar indicia of borrower intent and ability to repay the Prosper Funding Borrower Loan. If Prosper Funding repurchasesPFL does repurchase a Prosper Funding Note or Borrower Loan, the repurchase price will be equal to the Prosper Funding Note’s or Borrower Loan’s outstanding principal balance and will not include accrued interest.  If Prosper Funding repurchases any Prosper Funding Notes,Further, at the time of such repurchase of a Note, PMI will also concurrently repurchase the related PMI Management Rights for zero consideration.  See “Item 1. Business—Prosper Funding Note Repurchase and Indemnification Obligations” for more information.

The fact that Prosper Funding haswe have the exclusive right and ability to investigate claims of identity theft in the origination of Prosper Funding Borrower Loans creates a significant conflict of interest between Prosper Fundingus and the lender members.our investors.

Prosper Funding hasWe have the exclusive right to investigate claims of identity theft and determine, in itsour sole discretion, whether verifiable identity theft has occurred.  VerifiableSuch a determination of verifiable identity theft triggersmay trigger an obligation by Prosper FundingPFL to either repurchase the related Prosper Funding Notes or Borrower Loans or indemnify the applicable Prosper Funding Note holders.  As Prosper Funding is the sole entity with the ability to investigate and determine verifiableThe denial of a claim under PFL’s identity theft which triggersguarantee would save PFL from its indemnification or repurchase or indemnification obligation, a conflict of interest exists. Lender membersobligation.  Because investors rely solely on Prosper Fundingus to investigate incidents that might require itPFL to indemnify the applicable Prosper Funding Note holders or repurchase the related Prosper Funding Notes. The denialNotes or Borrower Loans, a conflict of a claim under Prosper Funding’s identity theft guarantee would save Prosper Funding from its indemnification or repurchase obligation. See “Item 1. Business—Prosper Funding Note Repurchaseinterest exists between us and Indemnification Obligations” for more informationsuch investors.

Prosper Funding PFLdoes not have significant historical performance data about performance on the Prosper Funding Borrower Loans. Loss rates on the Prosper Funding Borrower Loans may increase and prior to investing you should consider the risk of non-payment and default.

Prosper Funding is in the early stages of its development and has a limited operating history. It did not offer Prosper Funding Borrower Loans through the platform prior to February 1, 2013. PMI began offering PMI Borrower Loans through the platform in February of 2006, but the performance of PMI Borrower Loans may not be indicative of the future performance of Prosper Funding Borrower Loans. Due to Prosper Funding’s limited operational history, it does not have significant historical data regarding the performance of the Prosper Funding Borrower Loans, and it does not yet know what the long-term loan loss experience will be. The estimated loss rates displayed on the websiteloan listings and used to determine the Prosper RatingRatings have been developed from the loss histories on Prosper Funding Borrower Loans as well as PMI’s loss histories on PMI Borrower Loans. Future Prosper Fundingof all Borrower Loans originated through the platformour marketplace.  However, future Borrower Loans originated


through our marketplace may default more often than similar Prosper Funding Borrower Loans and PMI Borrower Loans have defaulted in the past, which increases the risk of investing in the Prosper Funding Notes.

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If payments on the Borrower Loan corresponding Prosper Funding Borrower Loans relating to your Prosper Funding Notesan investor’s Note become more than 30 days overdue, it is likely yousuch investor will notbe unlikely to receive the full principal and interest payments that you expect to receivewere expected on your Prosper Funding Notes,the Note, and yousuch investor may not recover yourthe original purchase price.price on the Note.

PMIWe may refer Prosper Funding Borrower Loans that become past due to a third party collection agency for collection or itwe may collect on such Prosper Funding Borrower Loans directly. If a borrower fails to make a required payment on a Prosper Funding Borrower Loan within 30 days of the due date, PMIwe will pursue reasonable collection efforts in respect of the Prosper Funding Borrower Loan. Referral of aLoan, including referring the delinquent Prosper Funding Borrower Loan to a collection agency within five business days after it becomes thirty30 days past due will be considered reasonable collection efforts.due.  If payment amounts on a delinquent Prosper Funding Borrower Loan are received from a borrower after the loan has been referred to PMI’sour in-house collections department or an outside collection agency, PMIwe or that collection agency may retain a percentage of that payment as a fee before any principal or interest becomes payable to you.an investor. Collection fees may be up to 40% of recovered amounts, in addition to any legal fees and transaction fees associated with accepting payments incurred in the collection effort.

For some non-performing Prosper Funding Borrower Loans, PMIwe may not be able to recover any of the unpaid loan balance and, as a result, a lender memberan investor who has purchased a corresponding Prosper Funding Note may receive little, if any, of the unpaid principal and interest payable under the Prosper Funding Note.  YouIn all cases, investors must rely on theour collection efforts of PMI or the applicable collection agency to which such Prosper Funding Borrower Loans are referred. Youreferred, and are not permitted to collect or attempt to collectcollection of payments on the Prosper Funding Borrower Loans in any manner.

Late payment performance is an early indicator of charge off probability. Of all Prosper Funding Borrower Loans and PMI Borrower Loans originated between July 13, 2009 and December 31, 2013, 11.1% have been greater than 30 days past due at any time and 9.9% have been greater than 60 days past due at any time. As of December 31, 2013, 7,752 or 10.7% of all Prosper Funding Borrower Loans and PMI Borrower Loans originated between July 13, 2009 and December 31, 2013 have been referred to a collection agency for collection proceedings. The average recovery on such Prosper Funding Borrower Loans and PMI Borrower Loans through December 31, 2013, is $481 (not in thousands), net of collection fees. In addition, of the 7,752 Prosper Funding Borrower Loans and PMI Borrower Loans referred to a collection agency, a total of 5,718 or 73.8% of such loans have been charged off.

Loss rates on the Prosper Funding Borrower Loans may increase as a result of economic conditions beyond Prosper Funding or PMI’sour control and beyond the control of the borrower member. borrower.

Prosper Funding Borrower Loan loss rates may be significantly affected by economic downturns or general economic conditions beyond Prosper Funding or PMI’sour control and beyond the control of individual borrowers. In particular, loss rates on Prosper Funding Borrower Loans may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets and other factors.

In the unlikely event that Prosper Funding receives payments on the Prosper Funding Borrower Loans relating to your Prosper Funding Notes after the final maturity date, you will not receive payments on your Prosper Funding Notes after maturity.

Each Prosper Funding Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding Prosper Funding Borrower Loan remain due and payable to Prosper Funding upon the initial maturity date, in which case the maturity of the Prosper Funding Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding Prosper Funding Borrower Loan still due and owing to Prosper Funding on the final maturity date, Prosper Funding will have no further obligation to make payments on the related Prosper Funding Notes, even if it receives payments on the corresponding Prosper Funding Borrower Loan after such date.

The Prosper Funding Borrower Loans do not restrict borrowers from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrowers during the term of the Prosper Funding Borrower Loan, which may impair your ability toreduce the likelihood that an investor will receive the full principal and interest payments that you expectsuch investor expects to receive on a Prosper Funding Note.

If a borrower incurs additional debt after the date of the Prosper Funding Borrower Loan,a loan listing is posted, the additional debt may impair the ability of that borrower to make payments on his or her Prosper Funding Borrower Loan and, your ability toas such, reduce the likelihood that an investor will receive the principal and interest payments that you expectsuch investor expects to receive on a corresponding Prosper Funding Note. In addition,Moreover, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower. To the extent that the borrower has or incurs other indebtedness and cannot pay all of his or her indebtedness, the borrower may choose to make payments to other creditors, rather than to Prosper Funding.

PFL.
To the extent borrowers incur other indebtedness that is secured, such as a mortgage, a home equity line or an auto loan, the ability of the secured creditors to exercise remedies against the assets of the borrower may impair the borrower’s ability to repay the Prosper Funding Borrower Loan on which your Prosper Fundingan investor’s Note is dependent for payment. Borrowers may also choose to repay obligations under secured indebtedness or other unsecured indebtedness before repaying Prosper Funding Borrower Loans because there is no collateral securing the Prosper Funding Borrower Loans. A lender memberAn investor will not be notified if a borrower incurs additional debt after the date a loan listing is posted.

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A borrower may request that his or her bank “chargeback” a payment on a Prosper Funding Borrower Loan upon which a Prosper Funding Note is dependent for payment and request a refund on that payment, resulting in a delinquency on the payment and a possible negative cash balance in your lender member account.

A borrower chargeback is a process by which a borrower who has made a payment on a Prosper Funding Borrower Loan has his or her bank cancel the payment or request a refund of that payment. PMI withholds payments to lender members up to six business days after a related borrower payment is initiated. If the chargeback occurs six or more days after the initiation of payment, you must rely on PMI to contest the chargeback if it deems it appropriate. If a borrower successfully processes a chargeback six or more days after initiation of payment, such payment will be deducted from your lender member account, and if you have withdrawn funds in the interim, a negative cash balance may result. Amounts received on Prosper Funding Borrower Loans corresponding to your Prosper Funding Notes payments and deposited into your lender member account are subject to set-off against any negative balance or shortfall in your lender member account. See “Item 1. Business—Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.

Peer-to-peerMarketplace lending is a new lending method and the platformour marketplace has a limited operating history. Borrowers may not view or treat their obligations to Prosper FundingPFL as having the same significance as loans from traditional lending sources, such as bank loans.

sources.
The investment return on the Prosper Funding Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding Prosper Funding Borrower Loan. Borrowers may not view peer-to-peermarketplace lending obligations originated on the platformthrough our marketplace as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions.circumstances. If a borrower neglects his or her payment obligations on a Prosper Funding Borrower Loan upon which payment of your Prosper Fundingan investor’s Note is dependent


or chooses not to repay his or her Prosper Funding Borrower Loan entirely, yousuch investor may not be able to recover any portion of yourthe investment in a Prosper Funding Note.

The platform may fail to comply with applicable law, which could limit Prosper Funding and PMI’s ability to collect on Prosper Funding Borrower Loans.

The Prosper Funding Borrower Loans are subject to federal and state consumer protection laws. The platform may not always be, and may not always have been, in compliance with these laws. Failure to comply with the laws and regulatory requirements applicable to the platform may, among other things, limit Prosper Funding’s, PMI’s or a collection agency’s ability to collect all or part of the principal of or interest on Prosper Funding Borrower Loans. See “Item 1. Government Regulation—Regulation and Consumer Protection Laws” for more information.

PMI regularly reviews the requirements of these laws and takes measures aimed at ensuring that the Prosper Funding Borrower Loans originated on the platform meet the requirements of all applicable laws. However, determining compliance with all applicable laws is a complex matter and it is possible that PMI’s determination may be inaccurate or incorrect. Also, changes in law, either due to court decisions, regulatory interpretations or rulings, or new legislation, may adversely affect the collectability of a Prosper Funding Borrower Loan.

In general,the Prosper Funding Borrower Loans do not contain any cross-default or similar provisions. If a borrower defaults on any of his or her other debt obligations, Prosper Funding and PMI’sour ability to collect on the Prosper Funding Borrower Loan on which your Prosper Funding Notes arean investor’s Note is dependent for payment may be substantially impaired.

The Prosper Funding Borrower Loans do not contain cross-default provisions. A cross-default provision makes a default under certain debt of a borrower an automatic default on other debt of that borrower. Because the Prosper Funding Borrower Loans do not contain cross-default provisions, a Prosper Funding Borrower Loan will not be placed automatically in default upon that borrower’s default on any of the borrower’s other debt obligations. If a borrower defaults on debt obligations owed to a third party and continues to satisfy the payment obligations under the Prosper Funding Borrower Loan, the third party may seize the borrower’s assets or pursue other legal action against the borrower before the borrower defaults on the Prosper Funding Borrower Loan.Loan, which may affect our ability to collect from the borrower when or if the Borrower Loan becomes delinquent.

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Borrowersmay seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of your Prosper Fundingan investor’s Notes.

Borrowers may seek protection under federal bankruptcy law or similar laws. If a borrower files for bankruptcy (or becomes the subject of an involuntary petition), a stay will go into effect that will automatically put any pending collection actions on the Prosper Funding Borrower Loan on hold and prevent further collection action absent bankruptcy court approval. If Prosper Funding or PMI receiveswe receive notice that a borrower has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, PMIwe will put the Borrower’s Loanborrower’s account into “bankruptcy status.” When this occurs, PMI terminateswe terminate automatic monthly ACH debits on Prosper Funding Borrower Loans and neither Prosper Funding nor PMIwe will not undertake collection activity without bankruptcy court approval. Whether any payment will ultimately be made or received on a Prosper Funding Borrower Loan after a bankruptcy status is declared depends on the borrower’s particular financial situation. In most cases, however, unsecured creditors such as Prosper FundingPFL receive nothing, or only a fraction of their outstanding debt. See “Item 1. Business—Loan Servicingdebt and, Collection” for more information.as a result, an investor who has purchased a corresponding Note may receive none or very little of the unpaid principal and interest payable on the Note.

Federal law entitles borrowers who enter active military service to an interest rate cap and certain other rights that may inhibit the ability to collect on Prosper Funding Borrower Loans and reduce the amount of interest paid on the corresponding Prosper Funding Notes.

Federal law provides borrowers on active military service with rights that may delay or impair PMI’sour ability to collect on a Prosper Funding Borrower Loan corresponding to your Prosper Fundingan investor’s Note. The Servicemembers Civil Relief Act (“SCRA”) requiresand other similar state laws require that the interest rate on preexisting debts, such as Prosper Funding Borrower Loans, be set at no more than 6% while the qualified service member or reservist is on active duty. A holder of a Prosper Funding Note that is dependent on such a Prosper Funding Borrower Loan for payment will not receive the difference between 6% and the original stated interest rate for the Prosper Funding Borrower Loan during any such period. The SCRA law also permits courts to stay proceedings and the execution of judgments against service members and reservists on active duty, which may delay recovery on any Prosper Funding Borrower Loans in default, and, accordingly, payments to investors on the corresponding Prosper Funding Notes.
Beginning October 3, 2016, the Military Lending Act (“MLA”) prohibits requiring covered borrowers, which include active military servicemembers and their dependents, to waive the right to legal recourse or to submit to arbitration. This may present a greater risk of litigation costs related to covered borrowers.
If there are any amounts under such a Prosper Funding Borrower Loan still due and owing to Prosper FundingPFL after the final maturity of the investors’ corresponding Prosper Funding Notes, Prosper FundingPFL will have no further obligation to make payments to the investors on the Prosper Fundingsuch Notes, even if it receives payments on the Prosper Funding Borrower Loan after the final maturity of the Prosper Fundingsuch Notes. PMI doesWe do not take military service into account in assigning a Prosper Rating to loan listings. In addition, as part of the borrower registration process, PMI doeswe do not request borrower membersborrowers to confirm if they are qualified service members or reservists within the meaning of the SCRA.SCRA or the MLA. See “Item 1. Government Regulation—Regulation and Consumer Protection Laws—Servicemembers Civil Relief Act”Regulation” for more information.

From July 13, 2009 throughAs of December 31, 2013, only eight Prosper Funding Borrower Loans and PMI2016, seventy-six Borrower Loans, with an aggregate principal amounta total outstanding balance of $54, have been$668 thousand are subject to the SCRA.


The death ofa borrower may substantially impair youran investor’s ability to recoup the full purchase price of Prosper Funding Notesa Note or to receive the interest payments that you expectsuch investor expects to receive on the Prosper Funding Notes.

Note.
If a borrower dies while his or her Prosper Funding Borrower Loan is still outstanding, generally, PMIwe will seek to work with the executor of the borrower’s estate to obtain repayment of the loan. However, the borrower’s estate may not contain sufficient assets to repay the loan, or the related executor or trustee may prioritize repayment of other creditors. In addition, if a borrower dies near the end of the term of his or her Prosper Funding Borrower Loan, it is unlikely that any further payments will be made on the corresponding Prosper Funding Notes because the time required for the probate of the borrower’s estate will probably extend beyond the final maturity date of the Prosper Funding Notes.

RISKS INHERENT IN INVESTING IN THE PROSPER FUNDING NOTES

The Prosper Funding Notes are special, limited obligations of Prosper FundingPFL only and are not directly secured by any collateral or guaranteed or insured by PMI or any third party.

The Prosper Funding Notes will not represent an obligation of borrowers, PMI or any other party except Prosper Funding,PFL, and are special, limited obligations of Prosper Funding.PFL. The Prosper Funding Notes are not guaranteed or insured by PMI, any governmental agency or instrumentality, or any third party. Although Prosper FundingPFL has granted the indenture trustee, for the benefit of the Prosper Funding Note holders, a security interest in the Prosper Funding Borrower Loans corresponding to the Prosper Funding Notes, the payments and proceeds that Prosper FundingPFL receives on such Prosper Funding Borrower Loans, the bank account in which such Prosper Funding Borrower Loan payments are deposited, and the FBO Funding account,accounts in which investors’ funding amounts are deposited, the Prosper Funding Note holders do not themselves have a direct security interest in the Prosper Funding Borrower Loans or the right to payment thereunder. If an event of default under the Amended and Restated Indenture were to occur, the Prosper Funding Note holders would be dependent on the indenture trustee’s ability to realize on the collateral and make payments on the Prosper Funding Notes in the manner contemplated by the Amended and Restated Indenture. In addition, although Prosper FundingPFL will take all actions that it believes are required under applicable law to perfect the security interest of the indenture trustee in the collateral, if its analysis of the required actions is incorrect or if it fails timely to take any required action, the indenture trustee’s security interest may not be effective and holders of the Prosper Funding Notes could be required to share the collateral (and any proceeds thereof) with Prosper Funding’sPFL’s other creditors, or, if a bankruptcy court were to order the substantive consolidation of PMI and Prosper FundingPFL (as described below), PMI’s creditors.

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Prosper Funding PFLis not obligated to repurchase Notes or indemnify a Prosper Funding Note holder or repurchase any Prosper Funding Notesholders except in limited circumstances.

Prosper FundingPFL is only obligated to repurchase Prosper Funding Notes or indemnify holders of Prosper Funding Notes in limited circumstances. These circumstances include if (i) a material payment default under the corresponding Prosper Funding Borrower Loan occurs as a result of verifiable identify theft ortheft; (ii) PMI includeswe include a Prosper Rating in a listing that is different from the Prosper Rating we calculated, by PMI or calculateswe calculate the Prosper Rating incorrectly. Prosper Fundingincorrectly; or (iii) if any errors in Quick Invest or Auto Invest cause an investor to purchase a Note from PFL that such investor would not otherwise have purchased or that differs materially from the Note, in which cases PFL also has the option to cure such error.  PFL is not required to repurchase Prosper Funding Notes or indemnify holders of Prosper Funding Notes, however, if the Note holder’s investment is not realized in whole or in part due to fraud other than identity theft, or due to other false or inaccurate statements or omissions of fact in a loan listing, whether in credit data, borrower representations or similar indicia of borrower intent and ability to repay the loan. NorFurther, PFL is Prosper Funding under anyno obligation to repurchase a Prosper Funding Note or indemnify any holder of Prosper Funding Notes if a correctly-determined Prosper Rating fails to accurately predict the actual losses on a Prosper Funding Borrower Loan.

Prosper Funding PFLmight incur indemnification and repurchase obligations that exceed its projections, in which case it may not have sufficient capital to meet its indemnification and repurchase obligations.

Prosper FundingPFL believes its fee income will be sufficient to meet its reasonably anticipated indemnification and repurchase obligations.  In determining its expected capital needs with respect to indemnification and repurchase obligations, Prosper Funding reviewedPFL considers the history of such obligations incurred by PMI. From the inception of the platform in November 2005 through December 31, 2013, approximately $801,000 of Prosper Funding Borrower Loansit and PMI Borrower Loans were originated through the platform and Prosper Funding and PMI repurchased  or made indemnification payments on such Prosper Funding Borrower Loans and PMI Borrower Loans equal to approximately $724. As of December 31, 2013, approximately $581 in Prosper Funding Borrower Loans receivable were indemnified. Prosper Funding believes this approach to estimating its future repurchase and indemnification obligations gives it a reasonable basis to conclude that it will be adequately capitalized to meet such obligations.PMI.  Nonetheless, there can be no assurance that if itPFL is obligated to repurchase a Prosper Funding Note or indemnify a Prosper Funding Note holder, that it will be able to meet its repurchase or indemnification obligations. If Prosper FundingPFL is unable to meet its indemnification and repurchase obligations youwith respect to a Note, the investor in such Note may lose all of yoursuch investor’s investment in the Prosper Funding Note.

If you decide to invest through the platform and concentrate your investment in a single Prosper Funding Note, you may increase your risk of borrower defaults.

Your expected return on your investment in the Prosper Funding Notes depends on the performance of the borrowers under the corresponding Prosper Funding Borrower Loans. There are a wide range of Prosper Ratings and listings on the platform and Prosper Funding expects some borrowers to default on their loans. If you decide to invest through the platform and concentrate your investment in a single Prosper Funding Note, your entire return will depend on the performance of a single Prosper Funding Borrower Loan. For example, if you plan to purchase $200 (not in thousands) of Prosper Funding Notes, and choose to invest the entire $200 (not in thousands) in a single Prosper Funding Note instead of in eight $25 (not in thousands) Prosper Funding Notes corresponding to the Prosper Funding Borrower Loans of eight different borrowers, your entire $200 (not in thousands)  investment will depend on the performance of a single Prosper Funding Borrower Loan. It may be desirable to diversify your portfolio in order to reduce the risk that you could lose your entire investment due to a single default, or a small number of defaults. However, diversification does not eliminate the risk that you may lose some, or all, of your investment in the Prosper Funding Notes.

The platformOurmarketplace allows a borrower member to prepay a Prosper Funding Borrower Loan at any time without penalty. Prosper Funding Borrower Loan prepayments will extinguish or limit youran investor’s ability to receive additional interest payments on a Prosper Funding Note.

Prosper Funding Borrower Loan prepayment occurs when a borrower decides to pay some or all of the principal amount on a Prosper Funding Borrower Loan earlier than originally scheduled. Borrowers may decide to prepay all or a portion of the remaining principal


amount due under a Prosper Funding Borrower Loan at any time without penalty. In the event of a prepayment of the entire remaining unpaid principal amount of a Prosper Funding Borrower Loan, on which your Prosper Fundingeach of the holders of the Notes are dependent for payment, youcorresponding to the Borrower Loan will receive yourhis or her share of such prepayment but further interest will not accrue on such Prosper Funding Borrower Loan or on your Prosper Fundingsuch Note after the date on which the payment is made. If the borrower prepays a portion of the remaining unpaid principal balance, the term of the Prosper Funding Borrower Loan will not change, but interest will cease to accrue on the prepaid portion, and youportion. If a borrower prepays a Borrower Loan in whole or in part, an investor will not receive all of the interest payments that yousuch investor originally expected to receive on your Prosper Funding Notes.the Note corresponding to such Borrower Loan. In addition, yousuch investor may not be able to find a similar rate of return on another investment at the time at which the Prosper Funding Borrower Loan is prepaid. Prepayments are subject to Prosper Funding’sPFL’s servicing fee, even if the prepayment occurs immediately after issuance of your Prosper Fundinga Note.

Prevailing interest rates may change during the term of your Prosper Fundingthe Notes. If this occurs, youinvestors may receive less value from yourthe purchase of the Prosper Funding Note Notes in comparison to other ways youthey may invest yourtheir money. Additionally, borrowers may prepay their Prosper Funding Borrower Loans due to changes in interest rates, and youinvestors may not be able to redeploy the amounts you receivereceived from prepayments in a way that offers you the return you expected to receive from the Prosper Funding Notes.

The Prosper Funding Borrower Loans on which the Prosper Funding Notes are dependent for payment bear fixed, not floating, rates of interest. If prevailing interest rates increase, the interest rates on Prosper Funding Notes youinvestors purchase might be less than the rate of return youthey could earn if youthey had invested the purchase price in a different investment.

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PMI Wemay not set appropriate interest rates for Prosper Funding Borrower Loans.

If PMI setsWe set interest rates for all Borrower Loans based on Prosper FundingRatings, as well as additional factors such as Borrower Loan terms, the economic environment and competitive conditions. If we set interest rates for Borrower Loans too low, lender membersinvestors may not be compensated appropriately for the level of risk that they are assuming in purchasing a Prosper Funding Note,Notes, while setting the interest rate too high may increase the risk of non-payment. In either case, a failure by us to set rates appropriately may adversely impact the ability of lender membersinvestors to receive returns on their Prosper Funding Notes that are commensurate with the risks they have assumed in acquiring such Prosper Funding Notes.

The PMI Management Rights attached to the Prosper Funding Notes will not comprise collateral for the Prosper Funding Notes nor generate any funds that will be payable to the holders of Prosper Funding Notes.

There are no payment obligations on the part of PMI or any third party under or in relation to the PMI Management Rights that are in any way related to borrower obligations in relation to the Prosper Funding Borrower Loans or in any way related to Prosper Funding’s payment obligations in relation to the Prosper Funding Notes. The PMI Management Rights attached to the Prosper Funding Notes will not comprise collateral for the Prosper Funding Notes nor guarantees of any Prosper Funding Borrower Loans or Prosper Funding Notes, nor generate any funds or proceeds that will be payable to Prosper Funding, the indenture trustee or holders of Prosper Funding Notes in relation to any Prosper Funding Borrower Loans or Prosper Funding Notes. Holders of Prosper Funding Notes will have no recourse to PMI or its assets in relation to payments on Prosper Funding Borrower Loans or Prosper Funding Notes. If Prosper Funding repurchases any Prosper Funding Notes, PMI will concurrently repurchase the related PMI Management Right for zero consideration. Prosper Funding’s repurchase obligations under the Amended and Restated Indenture, the Prosper Funding Notes, the lender member agreement or any other agreement associated with the Note Channel, and PMI’s concurrent repurchase of the related PMI Management Rights, do not affect your rights under federal or state securities laws.

Holders of the PMI Management Rights, collectively through the indenture trustee, have a limited contractual ability to enforce PMI’s obligations under the Administration Agreement.  As a result, you will have a limited contractual ability to require that PMI perform its obligations under the Administration Agreement.
Pursuant to the Administration Agreement, PMI provides three kinds of services to Prosper Funding: (i) Loan Platform Administration Services (managing the operation of the platform), (ii) Corporate Administration Services (providing back-office services to Prosper Funding, such as maintaining books and records, making periodic regulatory filings, performing limited cash management functions, etc.), and (iii) Loan and Note Servicing Services (servicing the Prosper Funding Borrower Loans and Prosper Funding Notes originated through the platform). Holders of PMI Management Rights do not have the contractual right, individually, to enforce PMI’s obligations under the Administration Agreement. Holders representing at least 25% of the outstanding Prosper Funding Notes, collectively, have the contractual right to cause the indenture trustee to take action as a third-party beneficiary of the Administration Agreement to enforce PMI’s platform administration and corporate administration obligations under the Administration Agreement. Holders representing at least 25% of the combined total of the outstanding Prosper Funding Notes and the PMI Note, collectively, have the contractual right to cause the indenture trustee to take action as a third-party beneficiary of the Administration Agreement to enforce PMI’s loan servicing obligations under the Administration Agreement. All such collective contractual rights are subject to certain conditions set forth in the Amended and Restated Indenture. Those conditions include, for example, that the holders indemnify the trustee for taking such action. If PMI fails to adequately perform Loan and Note Servicing Services under the Administration Agreement, and if Prosper Funding is unable to timely replace PMI as the servicer of the Prosper Funding Notes, your ability to receive principal and interest payments on your Prosper Funding Notes may be substantially impaired, even if your portfolio of Prosper Funding Notes is well diversified and the Prosper Funding Borrower Loans are paying on schedule. In addition, although Prosper Funding has a back- up provider in place for PMI as Loan and Note Servicer under the Administration Agreement, Prosper Funding does not have a back-up provider for the Loan Platform Administration Services or the Corporate Administration Services that PMI is obligated to provide. The failure of PMI to adequately perform those services could adversely affect your ability to benefit from those services. PMI's obligations to provide services under the Administration Agreement may be terminated by PMI or by Prosper Funding under certain circumstances.

Notwithstanding the limitations on the ability of holders of PMI Management Rights to contractually enforce PMI’s obligations under the Administration Agreement, holders of PMI Management Rights will have rights under the federal securities laws that are not limited, contractually or otherwise.

The Securities will not be listed on any securities exchange will not be transferable except through the Note Trader platform, and can be held only by Prosper Funding’s lender members.  YouPFL’s investors. Further, no trading platform for the transfer of Notes exists and there can be no assurance a trading platform for the transfer of Notes will develop in the future. Therefore, investors should be prepared to hold the Securities youNotes they purchase until they mature.

maturity.
The SecuritiesNotes and PMI Management Rights will not be listed on any securities exchange.  All Securitiesexchange and all Notes and PMI Management Rights must be held by Prosper Funding’s lender members.  The Securities will notPFL's investors. Further, in connection with Prosper’s termination of its relationship with FOLIOfn Investments, Inc. on October 31, 2016, as of 5:30 p.m. (PST) on October 27, 2016, a trading platform for the transfer of Notes and PMI Management Rights no longer exists. While we may, in our sole discretion, permit the establishment of another platform on which a secondary market may be transferable except throughmade with respect to the Note Trader platform andNotes, there can be no assurance that a markettrading platform for Securitiesthe Notes and PMI Management Rights will continue to develop onin the Note Trader platform, or that the Note Trader platform will continue in operation.future. Therefore, lender membersnote purchasers must be prepared to hold their SecuritiesNotes and PMI Management Rights to maturity.  See “Item 1. Business—Note Trader Platform” for more information.

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If the Note Trader platform fails to develop, or if the Note Trader platform develops but you cannot find a purchaser for the Prosper Funding Notes that you wish to sell, you will be forced to hold the Prosper Funding Notes for their remaining term.

Prosper Funding and PMI cannot guarantee that the Note Trader platform will continue to develop.  A Prosper Funding Note offered for sale on the Note Trader platform must be purchased in its entirety by a single lender member, and Prosper Funding Notes with a high outstanding principal balance may be more difficult to sell due to the smaller number of lender members with the ability to purchase such Prosper Funding Notes.

If you choose to post your Prosper Funding Notes for sale on the Note Trader platform, you may not realize the expected return on your investment due to changes in the creditworthiness of the borrower under the corresponding Prosper Funding Borrower Loan.

The ability to sell your Prosper Funding Note on the Note Trader platform does not guarantee that you will be able to find a lender member willing to buy the Prosper Funding Note at a price acceptable to you, or at all. If the borrower becomes delinquent in payments under the corresponding Prosper Funding Borrower Loan upon which your Prosper Funding Note is dependent for payment, your ability to sell the Prosper Funding Note on the Note Trader platform will be substantially impaired. You may have to offer the Prosper Funding Note for sale at a substantial discount, and there is no guarantee that you will receive the expected value of the Prosper Funding Note or any value at all. Additionally, lender members may be less willing to bid for and purchase your Prosper Funding Note if prevailing interest rates have changed or other investing activities have proven more attractive while you have held the Prosper Funding Note.

You do not earn interest on funds held in the FBO Funding account.

Your lender member account represents an interest in a FBO Funding account that does not earn interest.  See “Item 1. Business—Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.

The U.S. federal income tax consequences of an investment in the Prosper Funding Notes are uncertain.

There are no statutory provisions, regulations, published rulings or judicial decisions that directly address the characterization of the Prosper Funding Notes or instruments similar to the Prosper Funding Notes for U.S. federal income tax purposes. However, although the matter is not free from doubt because payments on the Prosper Funding Notes are dependent on payments on the corresponding Prosper Funding Borrower Loan, Prosper Funding intends to treatPFL treats the Prosper Funding Notes as its debt instruments that have original issue discount (“OID”) for U.S. federal income tax purposes. Where required, Prosper FundingPFL intends to file information returns with the U.S. Internal Revenue Service (“IRS”) in accordance with such treatment unless there is a change or clarification in the law, by regulation or otherwise, that would require a different characterization of the Prosper Funding Notes. YouInvestors should be aware, however, that the IRS is not bound by Prosper Funding’sPFL’s characterization of the Prosper Funding Notes and the IRS or a court may take a different position with respect to the Prosper Funding Notes’ proper characterization. For example, the IRS could determine that, in substance, each lender memberinvestor owns a proportionate interest in the corresponding Prosper Funding Borrower Loan for U.S. federal income tax purposes or, for example, the IRS could instead treat the Prosper Funding Notes as a different financial instrument (including an equity interest or a derivative financial instrument). Any different characterization could significantly affect the amount, timing, and character of income, gain or loss recognized in respect of a Prosper Funding Note. For example, if the Prosper Funding Notes are treated as Prosper Funding’sPFL’s equity, (i) Prosper FundingPFL would be subject to U.S. federal income tax on income, including interest, accrued on the corresponding Prosper Funding Borrower Loans but would not be entitled to deduct interest or OID on the Prosper Funding Notes, and (ii) payments on the Prosper Funding Notes would be treated by the Note holder for U.S. federal income tax purposes as dividends (that may be ineligible for reduced rates of U.S. federal income taxation or the dividends-received deduction)


to the extent of Prosper Funding’sPFL’s earnings and profits as computed for U.S. federal income tax purposes. A different characterization may significantly reduce the amount available to pay interest on the Prosper Funding Notes. YouInvestors are strongly advised to consult yourtheir own tax advisor regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership, and disposition of the Prosper Funding Notes (including any possible differing treatments of the Prosper Funding Notes).

Prosper Funding’s PFL’s ability to pay an investor principal and interest on a Prosper Funding Note may be affected by its ability to match the timing of its income and deductions for U.S. federal income tax purposes.

YouInvestors should be aware that Prosper Funding’sPFL’s ability to pay principal and interest on a Prosper Funding Note may be affected by its ability, for U.S. federal income tax purposes, to match the timing of income it receives from a corresponding Prosper Funding Borrower Loan that it holds and the timing of deductions that it may be entitled to in respect of payments made on the Prosper Funding Notes that it issues. For example, if the Prosper Funding Notes are treated as contingent payment debt instruments for U.S. federal income tax purposes but the corresponding Prosper Funding Borrower Loans are not, there could be a potential mismatch in the timing of Prosper Funding’sPFL’s income and deductions for U.S. federal income tax purposes, and Prosper Funding’sPFL’s resulting tax liabilities could affect its ability to make payments on the Prosper Funding Notes.

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ParticipationOur participation in the funding of Prosper Funding Borrower Loans could be viewed as creating a conflict of interest.

As is the practice with other peer-to peermarketplace lending companies, including Prosper Funding and PMI’s competitor, LendingClub, from time to time, Prosper Funding or PMIwe may fund portions of qualified loan requests on the platformin our marketplace and hold any Prosper Funding Notes purchased as a result of such funding for itsour own individual account.accounts. Even though Prosper Funding and PMIwe will participate in Prosper Fundingfunding Borrower Loans on the platformlisted in our marketplace under the same terms and conditions and through the use of the same information that is made available to other potential lender members on the platform,investors in our marketplace, such participation may be perceived as involving a conflict of interest. For example, Prosper Funding or PMI’sour funding of a BorrowBorrower Loan may cause the loan to fund, and in some cases, fund faster, than it would fund in the absence of Prosper Funding or PMI’sour participation, which could benefit Prosper Fundingus to the extent that it ensures that PMIone or the other of us generates the revenue associated with the loan.

During the year ended December 31, 2013, PMI and Prosper Funding had2016, we purchased Prosper Funding Notes and PMI$2,417,000 in Notes for investments in the aggregate amount of approximately $204. In addition, as of December 31, 2013, Prosper Funding and PMI’s respective executive officers, directors, and 5% shareholders had purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in the aggregate amount of $5,989. The Prosper Funding Notes, PMI Notes and PMI Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other lender members of Prosper Funding or PMI. Of the total aggregate amount of Prosper Funding Notes, PMI Notes and PMI Borrower Loans purchased by Prosper Funding and PMI’s respective executive officers, directors and affiliates as of December 31, 2013, approximately 14% of principal has been charged off, compared to approximately 12% of principal charged off for all Prosper Funding Notes, PMI Notes and PMI Borrower Loans originated as of December 31, 2013.investment.  

RISKS RELATED TO PROSPER FUNDINGPFL AND PMI, THE PLATFORMOUR MARKETPLACE AND PROSPER FUNDING AND PMI’SOUR ABILITY TO SERVICE THE PROSPER FUNDING NOTES

Arrangements for back-up servicing are limited. If PMI fails to maintain operations or the Administration Agreement is rejectedor terminated (in bankruptcy or otherwise), youinvestors may experience a delay and increased cost in respect of yourtheir expected principal and interest payments on your Prosper Funding Notes, and Prosper FundingPFL may be unable to collect and process repayments from borrowers.

If PMI were to become subject to a bankruptcy proceeding, PMI may have the right to assume or reject the Administration Agreement between Prosper Funding and PMI (or the loan servicing provisions thereof) because a bankruptcy court may disallow termination of the Administration Agreement (or the loan servicing provisions thereof). If PMI elected to continue to perform under the Administration Agreement (or the loan servicing provisions thereof) without expressly assuming it or elected to assume the Administration Agreement (or the loan servicing provisions thereof), PMI would continue to perform its servicing obligations with respect to the Prosper Funding Borrower Loans and the Prosper Funding Notes. If PMI were to continue as servicer during the pendency of its bankruptcy proceeding, depending on the facts and circumstances at the time, Prosper Funding would determine whether the creation of new Prosper Funding Borrower Loans would continue to be facilitated and new Prosper Funding Notes issued through the platform. If PMI elected to reject the Administration Agreement (or the loan servicing provisions thereof), or if PMI was in default in performing its obligations thereunder, and PMI was unable to cure such default, the loan servicing provisions of the Administration Agreement (and likely also the other provisions thereof) would be terminated. If the loan servicing provisions of the Administration Agreement are terminated for any reason Prosper Funding(whether as a result of PMI’s bankruptcy, non-performance or otherwise), PFL would attempt to transfer the loan servicing obligations on the Prosper Funding Borrower Loans and Prosper Funding Notes to a third party pursuant to its contractual agreements with lender members.investors.
Prosper FundingPFL has entered into a back-up servicing agreement with a loan servicing company that is willing and able to transition servicing responsibilities from PMI. There can be no assurance, however, that this back-up servicer will be able to adequately perform the servicing of the outstanding Prosper Funding Borrower Loans and Prosper Funding Notes. If this back-up servicer assumes the servicing of the Prosper Funding Borrower Loans and Prosper Funding Notes, the back-up servicer may impose additional servicing fees (up to the maximums we have negotiated), reducing the amounts available for payments on the Prosper Funding Notes. Additionally, transferring these servicing obligations to the back-up servicer particularly if such transfer is made when PMI is in bankruptcy and already defaulting in performance of its obligations under the Administration Agreement, may result in delays in the processing of collections on Prosper Funding Borrower Loans and information with respect to amounts owed on Prosper Funding Borrower Loans or, if the platform becomes inoperable, may prevent the back-up servicer from servicing the Prosper Funding Borrower Loans and making principal and interest payments on the Prosper Funding Notes.Loans. If the back-up servicer is not able to service the Prosper Funding Borrower Loans and Prosper Funding Notes effectively, yourinvestors’ ability to receive principal and interest payments on your Prosper Fundingtheir Notes may be substantially impaired, even if yourtheir portfolio of Prosper Funding Notes is well diversified and the corresponding Prosper Funding Borrower Loans are paying on schedule.
In addition, it is unlikely that the back-up servicer would be able to perform functions other than servicing the outstanding Prosper Funding Borrower Loans and Prosper Funding Notes. For instance, the back-up servicer likely would not be able to facilitateNotes, such as facilitating the creation of new Prosper Funding Borrower Loans through the platform, manage Prosper Funding’sour marketplace, or managing PFL’s marketing efforts or maintain the relationship with FOLIOfn Investments, Inc. necessary to ensure continued operation of the Note Trader Platform. Prosper Fundingefforts. PFL believes that it could find one or more other parties who could perform these and any other functions necessary to fully operate the platformour marketplace in the absence of PMI. However, it could take some time to find anotherthis process, and any related onboarding of such party or parties, who could perform the necessary functions and it couldmay take such party or parties additional time to become comfortable with the operation of the platform.

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Moreover, PMI owns and has not transferred to Prosper Funding ownership of the computer hardware that it uses to host and maintain the website or agreements with third parties relating to the hosting and maintenance of the website. Although PMI’s retention of such hardware and agreements should not bear on a bankruptcy court’s analysis of the legal separateness of PMI and Prosper Funding (or their respective assets and liabilities), the cessation of or substantial reduction of the day-to-day operations of PMI (because of or during its bankruptcy or otherwise) would materially impair and delay the ability of Prosper Funding or a back-up service provider to retrieve data and information in the possession of PMI and to operate the platform or elements thereof relevant to Prosper Funding Borrower Loan and Prosper Funding Note servicing.

some time.
Any such delay or impairment that did not affect existing Prosper Funding Note holders, because Prosper FundingPFL or its back-up servicer proves able to continue servicing outstanding Prosper Funding Borrower Loans and Prosper Funding Notes, could nonetheless delay Prosper Funding’sPFL’s ability to facilitate the creation


origination of new Prosper Funding Borrower Loans and issue new Prosper Funding Notes through the platform,our marketplace, which could adversely affect Prosper Funding’sPFL’s finances and user relationships.
A decline in economic conditions may adversely affect our customers, which may negatively impact our business and results of operations.
As a lending marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
A relatively small number of investors provide the funding commitments for a large percentage of all Borrower Loans originated through our marketplace.
A relatively small number of investors provide the funding commitments for a large percentage of all Borrower Loans originated through our marketplace.  If these investors cease or significantly decrease their investment in Borrower Loans through our marketplace and PFL is unable to attract sufficient investor purchase commitments from new and existing investors, then our business and results of operations may be adversely affected.
Our business could be adversely affected by a weakening market for securities backed by consumer assets.
PFL is involved in the securitization market through its business of selling loans to investors who, in turn, sell asset backed securities based on accumulated loan portfolios.  If the market for asset backed securities based on consumer assets weakens, investors may cease or significantly decrease their funding of Borrower Loans through our marketplace and if PFL has been unable to attract sufficient investor purchase commitments from new and existing investors, then our business and results of operations may be adversely affected.
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
The consumer lending market is competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants, we expect competition to persist and intensify in the future, which could harm our ability to increase volume in our marketplace.
Prosper’s principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other marketplace lending platforms, including LendingClub. Competition could result in reduced volumes, reduced fees or the failure of our marketplace to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, in the future Prosper may experience new competition, including from companies possessing large, existing customer bases, substantial financial resources and established distribution channels. If any of these companies or any major financial institution decided to compete with our marketplace lending business, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.
Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their marketplaces and distribution channels.  Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have. These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns. Our industry is driven by constant innovation. If we are unable to compete with such companies and meet the need for innovation, the use of our marketplace could stagnate or substantially decline.
Although Prosper FundingPFL has been organized in a manner that is intended to minimize the likelihood that it will become subject to a bankruptcy proceeding, if this were to occur, the rights of the Note holders of the Prosper Funding Notes could be uncertain, and payments on the Prosper Funding Notes may be limited,suspended or stopped. The recovery, if any, of a holder onof a Prosper Funding Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Prosper Funding Note.


Although Prosper FundingPFL has been organized and is operated in a manner that is intended to minimize the likelihood that it will become subject to a bankruptcy or similar proceeding, if this were to occur, the recovery, if any, of a holder of a Prosper Funding Note may be substantially delayed in time (for example, due to the imposition of a stay on payments by the bankruptcy court) and may be substantially less in amount than the principal and interest due and to become due on the Prosper Funding Note even if a Prosper Funding Note holder’s portfolio of Prosper Funding Notes is well diversified and the Prosper Funding Borrower Loans are paying on schedule. For example, Prosper Funding has structured its limited liability company agreement, and agreed to covenants in the Amended and Restated Indenture, that limit its activities in a manner that is intended to limit the possibility that it would voluntarily file for or could be required to file for bankruptcy. Among other things, Prosper Funding must receive the affirmative vote of its independent board members to file for bankruptcy. There is no guarantee, however, that its fee income from license fees and loan servicing fees will be sufficient to fund its contingent and other liabilities described above or that it will not enter into transactions that cause it to face solvency issues that ultimately could cause it to file for bankruptcy. Further, although Prosper FundingPFL has granted the indenture trustee, for the benefit of the Prosper Funding Note holders, a security interest in all of the Prosper Funding Borrower Loans, in all payments and proceeds it receives on the corresponding Prosper Funding Borrower Loans and in the bank account in which the Prosper Funding Borrower Loan payments are deposited, the holders of the Prosper Funding Notes would still be subject to the following risks associated with Prosper Funding’sPFL’s insolvency, bankruptcy or a similar proceeding.

The commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent PFL from making regular payments on the Notes, even if the funds to make such payments are available. Because the indenture trustee would be required to enforce its security interest in the Borrower Loans in a bankruptcy or similar proceeding, the indenture trustee’s ability to make payments under the Notes would be delayed, which may effectively reduce the value of any recovery that a holder of a Note may receive (and no such recovery can be assured) by the time any recovery is available.
If Prosper Funding PFL becomes subject to a bankruptcy or similar proceeding, borrowers may delay payments or cease making payments at all.

Borrowers may delay or suspend making payments to Prosper FundingPFL because of the uncertainties occasioned by its becoming subject to a bankruptcy or similar proceeding, even if the borrowers have no legal right to do so, and such delay would reduce, at least for a time, the funds that might otherwise be available to pay the Prosper Funding Notes corresponding to those Prosper Funding Borrower Loans. In addition, the commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent Prosper Funding from making regular payments on the Prosper Funding Notes, even if the funds to make such payments are available. Because the indenture trustee would be required to enforce its security interest in the Prosper Funding Borrower Loans in a bankruptcy or similar proceeding, the indenture trustee’s ability to make payments under the Prosper Funding Notes would be delayed, which may effectively reduce the value of any recovery that a holder of a Prosper Funding Note may receive (and no such recovery can be assured) by the time any recovery is available.

If Prosper FundingPFL becomes subject to a bankruptcy or similar proceeding, interest accruing on the Notes upon and following such bankruptcy or similar proceeding may not be paid.

In a bankruptcy or similar proceeding for Prosper Funding,PFL, interest accruing on the Prosper Funding Notes during the proceedings may not be part of the allowed claim of a holder of a Prosper Funding Note. If the Note holder of a Prosper Funding Note receives a recovery on the Prosper Funding Note (and no such recovery can be assured), any such recovery may be based on, and limited to, the Note holder’s claim of the holder of the Prosper Funding Note for principal and for interest accrued up to the date of the bankruptcy or similar proceeding, but not thereafter. Because a bankruptcy or similar proceeding may take months or years to complete, a claim based on principal and on interest only up to the start of the bankruptcy or similar proceeding may be substantially less than a claim based on principal and on interest through the end of the bankruptcy or similar proceeding.
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If Prosper FundingPFL becomes subject to a bankruptcy or similar proceeding, a holder of a Prosper Funding Note may not have any priority right to payment fromthe corresponding Prosper Funding Borrower Loan, may not have any right to payment from funds in the deposit account, and may not have any ability to access funds in an FBOthe investors’ funding accounts (the “FBO Funding account.

accounts”).
If Prosper FundingPFL failed to perfect the security interest properly, youinvestors may be required to share the proceeds of the Prosper Funding Borrower LoanLoans upon which your Prosper Funding Note istheir Notes are dependent for payment with Prosper Funding’sPFL’s other creditors, including holders of other Prosper Funding Notes PMI Note or Prosper Funding Borrower Loans. To the extent that proceeds of the corresponding Prosper Funding Borrower LoanLoans would be shared with Prosper Funding’sPFL’s other creditors, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before any distribution is made to youinvestors on your Prosper Funding Note.
the corresponding Notes.
If a payment is made on a Prosper Funding Borrower Loan corresponding to a Prosper Funding Note before Prosper Funding’sPFL’s bankruptcy or similar proceeding is commenced, and those funds are held in the deposit account Prosper FundingPFL maintains with Wells Fargo to collect borrower payments and have not been used by Prosper FundingPFL to make payments on the Prosper Funding Note as of the date the bankruptcy or similar proceeding is commenced, there can be no assurance that Prosper FundingPFL will or will be able to use such funds to make payments on the Prosper Fundingsuch Note. Other creditors of Prosper FundingPFL (including holders of other Prosper Funding Notes PMI Note or Prosper Funding Borrower Loans) may be deemed to have rights to such funds or interests in the deposit account and monies credited thereto that are equal to or greater than the rights of the holder of the Prosper Fundingsuch Note. See “Item 1. Business—Loan Servicing and Collection” for more information.

Although Prosper FundingPFL believes that amounts funded by lender membersinvestors into the FBO Funding accounts should not be subject to claims of its creditors other than the lender membersinvestors for whose benefit the funds are held, the legal title to the FBO Funding accounts, and the attendant right to administer the FBO Funding accounts, would be property of Prosper Funding’sPFL’s bankruptcy estate. As a result, if Prosper FundingPFL were to file for bankruptcy protection, the legal right to administer the funds in the FBO Funding accounts would vest with the bankruptcy trustee or debtor in possession. In that case, while neither Prosper FundingPFL nor its creditors should be able to reach those funds, the indenture trustee or the lender membersinvestors may have to seek a bankruptcy court order lifting the automatic stay and permitting them to withdraw their funds. Lender membersInvestors may suffer delays in accessing their funds in the FBO Funding accounts as a result. Moreover, United StatesU.S. Bankruptcy Courts have broad powers at law and in equity and, if Prosper FundingPFL has failed to properly segregate or handle lender members’ investors’


funds, a bankruptcy court could determine that some or all of such funds were beneficially owned by Prosper FundingPFL and should therefore that they becamebe made available to Prosper Funding’sPFL’s creditors generally. See “Item 1. Business—Loan Servicing and Collection”” for more information.

In a bankruptcy or similar proceeding for Prosper Funding, theof PFL, a holder of a Prosper Funding Note may be delayed or prevented from enforcing Prosper Funding’sPFL’s repurchase obligations.

obligations with respect to such Note.
In a bankruptcy or similar proceeding for Prosper Funding,of PFL, any right of a Note holder of a Prosper Funding Note to require Prosper FundingPFL to repurchase the Prosper Funding Note or indemnify thesuch Note holder of the Prosper Funding Note under the circumstances set forth in the lender memberinvestor registration agreement or Prosper Fundingthe Note might not be enforceable, and such holder’s claim for such repurchase may be treated less favorably than a general unsecured obligation of Prosper Funding. For a discussion of the restrictions Prosper Funding has imposed upon itself and the formalities it has adopted under its organizational documents to minimize the likelihood of its becoming subject to a bankruptcy or similar proceeding, see “Item 1. Business—Information about Prosper Funding and Prosper Marketplace, Inc.”PFL.

Although Prosper FundingPFL has been organized in a manner that is intended to prevent it from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if Prosper FundingPFL were substantively consolidated in this manner, the rights of the holders of the Prosper Funding Notes could be uncertain, and payments on the Prosper Funding Notes may be limited, suspended or stopped. The recovery, if any, of a holder on a Prosper Funding Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Prosper Funding Note.

Although Prosper FundingPFL has been organized and is operated in a manner that is intended to prevent it from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if PMI became subject to a bankruptcy or similar proceeding and Prosper FundingPFL were substantively consolidated with PMI, the risks described in the immediately preceding risk factors regarding (i) payment delays, (ii) uncollectability of interest accrued during the bankruptcy proceeding, (iii) being subordinated to the interests of Prosper Funding’sPFL’s other creditors, and (iv) the indenture trustee’s inability to access funds in the deposit account or the FBO Funding accounts, would all be present and, in addition, the same considerations would apply in relation to the claims of creditors of PMI, including that such creditors of PMI may be determined to have perfected security interests or unsecured claims that take precedence over or are at least equal in priority to those of creditors of Prosper FundingPFL (including holders of Prosper Funding Notes).

In the event of a bankruptcy or similar proceeding of PMI, the ability of PFL or its back-up servicer to collect on Borrower Loans and operate our marketplace may be impaired to the detriment of the Note holders.
In addition, inthe event of a bankruptcy or similar proceeding of PMI, (i) the implementation of back-up servicing arrangements may be delayed or prevented, and (ii) PMI’s ability to transfer its servicing obligations to a back-up servicer, or to transfer its other corporate and platformmarketplace administration services and marketing services to third parties may be limited and subject to the approval of the bankruptcy court or other presiding authority. The bankruptcy process may delay or prevent the implementation of back-up servicing, which may impair the collection of Prosper Fundingon Borrower Loans to the detriment of holders of the Prosper Funding Notes.

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For a discussion of the restrictions Prosper Funding has imposed upon itself and the formalities it has adopted under its organizational documents and agreed to in the Amended and Restated Indenture to prevent its being substantively consolidated with PMI in the event of PMI’s bankruptcy, see “Item 1. Business—Information about Prosper Funding and Prosper Marketplace, Inc.”

PMI owns and did not transfer to Prosper Funding ownership ofPFL the computer hardware that it uses to host and maintain the website or agreements with third parties relating to the hosting and maintenance of the website. Although PMI’s retention of such hardware and agreements should not bear on a bankruptcy court’s analysis of the legal separateness of PMI and Prosper FundingPFL (or their respective assets and liabilities), the cessation of or substantial reduction of the day-to-day operations of PMI (because of or during its bankruptcy or otherwise) would materially impair and delay the ability of Prosper FundingPFL or a back-up service provider to retrieve data and information in the possession of PMI and to operate the platformour marketplace or elements thereof relevant to Prosper Funding Borrower Loan and Prosper Funding Note servicing.
PMI, in its capacity as servicer, has the authority to waive or modify the terms of a Prosper Funding Borrower Loan without the consent of the Prosper Funding Note holders.

Pursuant to the Administration Agreement, PMI is obligated to use commercially reasonable efforts to service and collect on the Prosper Funding Borrower Loans in accordance with industry standards. Subject to that obligation, the Administration Agreement grants PMI the authority to (i) waive or modify any non-material term of a Prosper Funding Borrower Loan, or(ii) consent to the postponement of strict compliance with any such term, orand (iii) in any manner grant a non-material indulgence to any borrower. In addition, if a Prosper Funding Borrower Loan is in default,
or PMI determines a default is reasonably foreseeable or PMI determinesthat such action is consistent with its servicing obligation, the Administration Agreement grants PMI the authority to waive or modify a material term of a Prosper Funding Borrower Loan, to accept payment of an amount less than the principal balance in final satisfaction of a Prosper Funding Borrower Loan and to grant any indulgence to a borrower, providedthat PMI has reasonably and prudently determined that such action will not be materially adverse to the interests of the


relevant Prosper Funding Note holders. If PMI approves a modification to the terms of any Prosper Funding Borrower Loan, it must promptly notify the corresponding Prosper Funding Note holders by e-mail of the material terms of such modification and the effect such modification will have on their Prosper Funding Notes.

PMI faces a contingent liability for securities law violations in respect of PMI Borrower Loans sold to its lender members from inception until October 16, 2008.  This contingent liability may impair its ability to perform its obligations under the Administration Agreement.

PMI Borrower Loans sold to PMI’s lender members through PMI’s platform from November 2005 until October 16, 2008 may be viewed as involving an offering of securities that was not registered or qualified under federal or state securities laws. See Item 3. "Legal Proceedings" For more information.
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As a result of PMI’s prior operations, a lender member who holds a PMI Borrower Loan originated on the platform prior to October 15, 2008 may be entitled to rescind her purchase and be paid the unpaid principal amount of her PMI Borrower Loan, plus statutory interest. PMI has not recorded an accrued loss contingency in respect of this contingent liability, although it intends to continue to monitor the situation. Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act is one year from the violation; however, the statute of limitations periods under state laws may extend for a longer period of time. Under the Administration Agreement, PMI is generally responsible for overseeing the operation of the platform on Prosper Funding’s behalf. If a significant number of PMI’s former lender members sought rescission, PMI’s ability to perform its obligations under the Administration Agreement may be adversely affected and, in such event, Prosper Funding’s ability to continue to make payments on the Prosper Funding Notes could be materially impaired.
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PMI has incurred operating losses since inception and may continue to incur net losses in the future, which could adversely affect PFL’s .
ability to make payments on the Notes.
PMI has incurred operating losses since its inception and it may continue to incur net losses in the future. For the twelve months ended December 31, 20132016 and 20122015, PMI had negative cash outflows from operations of $62.7 million and in flows from operations of $24,826 and $16,162,$5.4 million, respectively. Additionally, from its inception through December 31, 2013,2016, PMI had an accumulated deficit of $104,080.

$265.6 million.
PMI has financed its operations to date primarily with proceeds from the sale of equity securities. At December 31, 2013, PMI2016, Prosper had approximately $18,339 in$22.3 million unrestricted cash and cash equivalents and short term investments.$32.8 million available for sale investments at fair value. PMI is dependent upon raising additional capital or debt financing to fund its current operating plan. PMI’s failure to obtain sufficient debt and equity financing and, ultimately, to achieve profitable operations and positive cash flow from operations could adversely affect its ability to perform its obligations under the Administration Agreement and, in such event, Prosper Funding’sPFL’s ability to continue to make payments on the Prosper Funding Notes could be materially impaired.
Prosper FundingAlthough our business has grown, we may be unable to manage our growth effectively and PMI both have limited operating histories.  As online companies inmeet the early stages of development, Prosper Fundingdemands that such growth places on our facilities, employees and PMI face increased risks, uncertainties, expenses and difficulties.

infrastructure.  
As the number of borrowers, lender membersinvestors and Prosper Funding Borrower Loans originated on the platformthrough our marketplace increases, PMI will need to increase its facilities, personnel and infrastructure in order to accommodate the anticipated greatercontinue performing effectively its obligations on it under the Administration Agreement asand to accommodate the result of the anticipated greatereffects that such growth will have on our servicing obligations and demands on the platform.marketplace needs. PMI must constantly add new hardware and update its software and the platform,our marketplace, expand customer support services, and add new employees to maintain the operations of the platformour marketplace as well as to satisfy its servicing obligations on the Prosper Funding Borrower Loans and the Prosper Funding Notes and its other obligations under the Administration Agreement. If PMI is unable to increase the capacity of the platformour marketplace and maintain the necessary infrastructure to perform its duties under the Administration Agreement, Prosper Funding,PFL, or one or more other third-party service providers engaged by Prosper Funding,PFL, will have to perform the duties otherwise performed by PMI, and youinvestors may experience delays in receipt of payments on your Prosper Fundingtheir Notes and periodic downtime of the platform.our marketplace.

Prosper Funding is a new company and with PFL hasa limited operating history.

Prosper FundingPFL is a recently formed limited purpose vehicle with a limited operating history. On February 1, 2013, PMI made an additional capital contribution to Prosper Funding in excess of $3,000. Under the Administration Agreement, Prosper Funding is entitled to receivePFL receives a license fee from PMI for granting PMI a non-exclusive, worldwide license to access and use the platform. The license fee is payable on the last business day of each month and shall equal the product of $150.00 (not in thousands) and the number of borrower listings posted on the platform on any given month, provided that on the last business day of each calendar year during the term of the license on or after 2013, PMI is obligated pay Prosper Funding an additional amount equal to zero or the difference, if positive, between $2,500 and the aggregate amounts paid through such date in respect of such monthly license fee amounts already paid through such date during such calendar year.our marketplace. In addition, Prosper Funding will earnPFL earns servicing fees in relation to the servicing of the Prosper Funding Borrower Loans and Prosper Funding Notes that it will retainretains from collections on the Prosper Funding Borrower Loans. The licensing fees and servicing fees received by Prosper Funding are projected to substantially exceed the fees it will pay to PMI for services rendered by PMI under the Administration Agreement and its other current obligations pursuant to its agreements with other third parties. Prosper FundingPFL believes this fee income will beis sufficient to cover its reasonably anticipated obligations. While Prosper FundingPFL believes that it will beis adequately capitalized to meet its foreseeable obligations, and that its fee income will beis sufficient to meet its ongoing operating costs, its financial resources will beare limited and could prove to be insufficient. In addition, Prosper FundingPFL has no employees and will relyrelies on PMI, as servicer, or other third-party service providers, to perform most of its day-to-day operations. While Prosper Funding generally expects the platform to present the same risks it presented when PMI operated the platform, theThe lack of Prosper Funding’sPFL’s own employees, its limited operating history, and capitalization that is less than that of PMI could make it more difficult for Prosper FundingPFL to operate at a level that will be sustainable. Absent the services to be provided to Prosper Funding by PMI pursuant to the Administration Agreement, Prosper Funding’s risk management process, ability to predict loss rates and the general operation of the platform would have a thinner margin for error than does PMI.

The market in which Prosper Funding participates is competitive and, if it does not compete effectively, its operating results could be harmed.

The consumer lending market is competitive and rapidly changing.  With the introduction of new technologies and the influx of new entrants, Prosper Funding expects competition to persist and intensify in the future, which could harm Prosper Funding’s ability to increase volume on the platform.

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Prosper Funding’s principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other peer-to-peer lending platforms, including LendingClub.  Competition could result in reduced volumes, reduced fees or the failure of the platform to achieve or maintain more widespread market acceptance, any of which could harm Prosper Funding’s business.  In addition, in the future Prosper Funding may experience new competition including companies possessing large, existing customer bases, substantial financial resources and established distribution channels.  If any of these companies or any major financial institution decided to enter the peer-to-peer lending business, acquire one of Prosper Funding’s existing competitors or form a strategic alliance with one of Prosper Funding’s competitors, Prosper Funding’s ability to compete effectively could be significantly compromised and its operating results could be harmed.

Most of Prosper Funding’s current or potential competitors have significantly more financial, technical, marketing and other resources than Prosper Funding does and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels.  Prosper Funding’s potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than Prosper Funding has.  These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns.  Prosper Funding’s industry is driven by constant innovation.  If Prosper Funding is unable to compete with such companies and meet the need for innovation, the use of the platform could stagnate or substantially decline.

If Prosper FundingPFL fails to promote and maintain its brand in a cost-effective manner, it may lose market share and its revenue may decrease.

If PFL fails to successfully promote and maintain its brand, it may lose its existing users to competitors or be unable to attract new users, which would cause its revenue to decrease and may impair its ability to maintain our marketplace.  To succeed, Prosper FundingPFL must increase transaction volumes on the platformin our marketplace by attracting a large number of borrowerborrowers and lender membersinvestors in a cost-effective manner, many of whom have not previously participated in peer-to-peermarketplace lending. If Prosper FundingPFL is not able to attract qualified borrowers andor sufficient lender memberinvestor purchase commitments, it will not be able to increase its transaction volumes. Prosper FundingPFL believes that developing and maintaining awareness of its brand in a cost-effective manner is critical to achieving widespread acceptance of the platformour marketplace and attracting new borrowerborrowers and lender members.investors. Furthermore, it believes that the importance of brand recognition will increase as competition in the peer-to-peermarketplace lending industry increases. Successful promotion of itsPFL’s brand will depend largely on the effectiveness of marketing efforts and the memberuser experience on the platform. Theseour marketplace. There can be no guarantee, however, that PFL’s brand promotion activities may notwill yield increased revenues. If Prosper Funding fails to successfully promote and maintain its brand, it may lose its existing members to competitorsrevenues or be unable to attract new members, which would cause its revenue to decrease and may impair its ability to maintain the platform.prevent PFL’s revenues from decreasing.

Prosper Funding and PMI are subject to extensive federal, state and local regulation that could adversely impact their ability to service the Prosper Funding Notes.

Prosper Funding and PMI are subject to extensive federal, state and local regulation, non-compliance with which could have a negative impact on their ability to service the Prosper Funding Notes, provide a trading market for the Prosper Funding Notes, or maintain the platform.

Additionally, PMI holds lending licenses, collections licenses or similar authorizations in 24 states, all of which have the authority to supervise and examine PMI’s activities. Prosper Funding holds a consumer lending license in 1 state, which has the authority to supervise and examine Prosper Funding’s activities.  Because Prosper Funding currently relies on PMI, pursuant to the Administration Agreement, to oversee the operation of the platform on its behalf, if PMI does not comply with applicable laws, PMI could lose one or more of these licenses or authorizations, which may have an adverse effect on Prosper Funding’s ability to continue to perform its servicing obligations or maintain the platform. See “Item 1. Government Regulation—Regulation and Consumer Protection Laws” for more information.

The Federal Fair Debt Collection Practices Act and similar state debt collection laws regulate debt collection practices by “debt collectors” and prohibit debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans. While Prosper Funding obligates the collection agencies it uses to comply with applicable law in collecting Prosper Funding Borrower Loans (and PMI has sought and will seek to comply with such law when it undertakes direct collection activity in relation to Prosper Funding Borrower Loans and PMI Borrower Loans), it is possible that improper collection practices may occur that could adversely affect the collectability of particular Prosper Funding Borrower Loans originated through the platform or could result in financial penalties or operating restrictions being imposed on Prosper Funding or PMI that adversely affect their ability to operate or perform their respective payment and other obligations.

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The proprietary technology that makes operation of the platformour marketplace possible is not protected by any patents. It may be difficult and costly for Prosper FundingPFL to protect its intellectual property rights in relation thereto, or to continue to develop or obtain new technologies, which could adversely affect its ability to operate competitively.
On February 1, 2013, PMI transferred ownership of the platform,marketplace, including the proprietary technology and all of the rights related to the operation of the platform,marketplace, to Prosper Funding.  Prosper Funding’sPFL.  PFL’s ability to maintain the platformour marketplace depends, in part, upon this proprietary technology. Both Prosper Funding and PMIWe intend to vigorously protect our proprietary interests in such technology. Despite theirour best efforts, however, Prosper Funding or PMIwe may not protect the proprietary technology effectively, which would allow competitors to duplicate theirour products and adversely affect Prosper Funding and PMI’sour ability to compete. A third party may attempt to reverse engineer or otherwise obtain and use the proprietary technology without Prosper Funding’sPFL’s consent. In addition, the platformour marketplace may infringe upon claims of third-party patents and Prosper FundingPFL or PMI may face intellectual property challenges from such other parties. Prosper FundingPFL or PMI may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. Furthermore, the technology may become obsolete, and there is no guarantee that Prosper FundingPFL will be able to successfully develop, obtain or use new technologies to adapt the platformour marketplace to compete with other peer-to-peermarketplace lending platforms.companies. If Prosper FundingPFL cannot protect the proprietary technology embodied in and used by the platformour marketplace from intellectual property challenges, or if the platformour marketplace becomes obsolete, itsPFL’s ability to maintain the platformour marketplace and perform its servicing obligations could be adversely affected and, in such event, its ability to continue to make payments on the Prosper Funding Notes could be materially impaired.

Prosper FundingPFL relies on a third-party commercial bank to process transactions. If Prosper FundingPFL is unable to continue utilizing these services, its business and ability to service the Prosper Funding Notes may be adversely affected.

Because Prosper FundingPFL is not a bank, it cannot belong to or directly access the Automated Clearing House (ACH) payment network. As a result, it currently relies on an FDIC-insured depository institution to process its transactions. If Prosper FundingPFL cannot continue to obtain such services from this institution or elsewhere, or if it cannot transition to another processor quickly, its ability to process payments will suffer and lender members’investors’ ability to receive principal and interest payments on the Prosper Funding Notes will be delayed or impaired.

If the security of Prosper Funding’s lender members’ and borrower members’ confidential information stored in Prosper Funding or PMI’s our systems is are breached or otherwise subjected to unauthorized access, members’PFL’s users’ secure information may be stolen, Prosper Funding and PMI’sour reputations may be harmed, and theywe may be exposed to liability.

As with any entity with a significant Internet presence, Prosper Funding, PMIwe and the third party that PMI useswe use for website hosting occasionally have experienced cyber-attacks, attempts to breach theirour systems and other similar incidents, none of which have been successful. The platformOur marketplace stores Prosper Funding’s lender members’ and borrower members’PFL’s users’ bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause members’users’ secure information to be stolen and used for criminal purposes. Security breaches or unauthorized access to secure information could also expose Prosper Funding or PMIus to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in the relevant software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any lender members’investor or borrower members’borrowers’ data, Prosper Funding’sPFL’s relationships with its membersusers will be severely damaged, and it (or PMI) could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, Prosper Funding, PMIwe and PMI’sour third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause Prosper Funding’s membersusers to lose confidence in the effectiveness of itsPFL’s and PMI’s data security measures. Any security breach, whether actual or perceived, would harm Prosper Funding and PMI’sour reputations, and Prosper FundingPFL could lose members.users.

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Any significant disruption in service on the platformin our marketplace or in PMI’s computer systems could adversely affect PMI’s ability to perform its obligations under the Administration Agreement.
PMI’s ability to perform its obligations under the Administration Agreement could be materially and adversely affected by events outside of its control.  The satisfactory performance, reliability and availability of PMI’s technology and its underlying network infrastructure are important to Prosper Funding and PMI’s respective operations, level of customer service, reputation and ability to attract new members and retain existing members.  PMI’s system hardware is hosted in athree hosting facility locatedfacilities in San Francisco, California, ownedthe western United States.  The hosting and operated by Digital Realty Trust.  PMI also maintains an off-site backup system located in Las Vegas, Nevada.  Digital Realty Trust doescolocation providers do not guarantee that access to the platformour marketplace or to PMI’s own systems will be uninterrupted, error-free or secure. The operation of the platformour marketplace and PMI’s operation of its own systems depend on Digital Realty Trust’sthe hosting and colocation providers' ability to protect the relevant systems in Digital Realty Trust’stheir facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity or other environmental concerns, computer viruses or other attempts to do harm, them, criminal acts and similar events. If PMI’s arrangement with Digital Realty Trust isthe hosting and colocation providers are terminated, or there is a lapse of service or damage to Digital Realty Trust’stheir facilities, PMI could experience interruptions in providing its services under the Administration Agreement, Prosper FundingPFL could experience interruptions in the operations of the platform,our marketplace, and both could experience delays and additional expense in arranging new facilities. Any interruptions or delays in PMI’s performance of its services or in


the functioning of and accessibility of the platform,our marketplace, whether as a result of Digital Realty Trusta hosting and colocation provider or other third-party error, PMI’s error, natural disasters or security breaches, whether accidental or willful, could harm Prosper Funding’sPFL’s relationships with its membersusers and its reputation. Additionally, in the event of damage or interruption, PMI’s insurance policies may not be sufficient for PMI to adequately compensate Prosper FundingPFL for any losses that it may incur.    PMI’s disaster recovery plan has not been tested under actual disaster conditions, and PMI may not have sufficient capacity to recover all data and services in the event of an outage at the Digital Realty Trust facility.  These factors could prevent PMI from processing or posting payments on the Prosper Funding Borrower Loans or the Prosper Funding Notes, damage Prosper Funding’s brand and reputation, divert the attention of PMI’s employees, reduce Prosper Funding’s revenue, subject PMI or Prosper Funding to liability and cause members to abandon the platform, any of which could adversely affect PMI and Prosper Funding’s respective businesses, financial condition and results of operations.

The platformOur marketplace may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.

The platformOur marketplace may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. If a “hacker” were able to infiltrate the platform, membersour marketplace, users would be subject to the increased risk of fraud or borrower identity theft and may experience losses on, or delays in the recoupment of amounts owed on, a fraudulently induced purchase of a Prosper Funding Note. Additionally, if a hacker were able to access Prosper Funding or PMI’sour secure files, he or she might be able to gain access to members’users’ personal information. While Prosper Funding and PMIwe have taken steps to prevent such activity from affecting the platform,our marketplace, if theythese measures are unable to prevent such activity,unsuccessful, the value of yourinvestors’ investment in the Prosper Funding Notes could be adversely affected.

Competition for PMI’s employees is intense, and PMI may not be able to attract and retain the highly skilled employees it needs to perform under the Administration Agreement.

Competition for highly skilled technical and financial personnel is extremely intense. PMI may not be able to hire and retain these personnel at compensation levels consistent with its existing compensation and salary structure. Many of the companies with which PMI competes for experienced employees have greater resources than PMI has and may be able to offer more attractive terms of employment.

In addition, PMI invests significant time and expense in training its employees, which increases their value to competitors who may seek to recruit them. If PMI fails to retain its employees, it could incur significant expenses in hiring and training their replacements and the quality of itsour services and itsour ability to serve borrower and lender membersinvestors could diminish, resulting in a material adverse effect on itsPMI’s ability to perform its obligations under the Administration Agreement and, in such event, Prosper Funding’sPFL’s ability to continue to make payments on the Prosper Funding Notes could be materially impaired.

PMI’s growth could strain its personnel resources and infrastructure, and if PMI is unable to implement appropriate controls and procedures to manage its growth, this may adversely affect its ability to perform under the Administration Agreement.

PMI’s growth in headcount and operations since its inception has placed, and will continue to place, to the extent that PMI is able to sustain such growth, a significant strain on its management and its administrative, operational and financial reporting infrastructure.

PMI’s success will depend in part on the ability of its senior management to effectively to manage the growth it achieves. To do so, PMI must continue to hire, train and manage new employees as needed. If PMI’s new hires perform poorly, or if PMI is unsuccessful in hiring, training, managing and integrating new employees, or if PMI is not successful in retaining its existing employees, itsPMI’s ability to perform under the Administration Agreement may be impaired. To manage the expected growth of PMI’s operations and personnel, PMI will need to continue to improve its operational and financial controls and update its reporting procedures and systems. The addition of new employees and the system development that PMI anticipates will be necessary to manage its growth will increase PMI’s cost base, which will make it more difficult for PMI to offset any future revenue shortfalls by reducing expenses in the short term. If PMI fails to successfully manage its growth, it will be unable to execute its business plan and its ability to perform under the Administration Agreement may be impaired.

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Purchasers of Prosper FundingInvestors in Notes will have no control over Prosper Funding or PMIus and will not be able to influence theirour corporate matters.

Prosper FundingPFL is not offering and will not offer its equity interests in its company. Lender membersinterests. Investors who purchase Prosper Funding Notes offered through the platformour marketplace will have no equity interest in Prosper Funding or ineither of PMI and PFL and no ability to vote on or influence theirour decisions. As a result, PMI, which owns all of Prosper Funding’sPFL’s outstanding equity interests, will continue to have sole control over Prosper Funding’sPFL’s governance matters, subject to the presence of Prosper Funding’sPFL’s independent directors, whose consent will be required before Prosper FundingPFL can take certain extraordinary actions, and subject to the limitations specified in Prosper Funding’sPFL’s organizational documents and the Amended and Restated Indenture. See “Item 1. Business—Information About Prosper Funding and Prosper Marketplace, Inc.” for more information.

Individuals who make misrepresentations or omissions in violation of the securities laws of the State of Washington when posting comments on the platform may be subject to sellers’ liability under the Securities Act of Washington.

Prosper Funding permits its members and loan applicants to post certain comments on the platform. Individuals who make misrepresentations or omissions in violation of section 21.20.010 of the Securities Act of Washington when posting such comments may be subject to sellers’ liability under the Securities Act of Washington. Neither Prosper Funding nor PMI monitors the comments posted on the platform for statements that might violate the securities laws of the State of Washington.

Events beyond Prosper Funding and PMI’sour control may damage theirour ability to maintain adequate records, maintain the platformour marketplace or perform the servicing obligations. If such events result in a system failure, yourinvestors’ ability to receive principal and interest payments on the Prosper Funding Notes would be substantially harmed.


If a catastrophic event resulted in a platformmarketplace outage and physical data loss Prosper Funding’sand/or affected our electronic data storage and back-up storage systems, PFL’s ability (and PMI’s ability as servicer under the Administration Agreement) to perform its servicing obligations would be materially and adversely affected. Such events include, but are not limited to, fires, earthquakes, terrorist attacks, natural disasters, computer viruses and telecommunications failures. In addition, PMI is responsible for storing back-up records related to the operation of the platform in offsite facilities located in San Francisco, California and Las Vegas, Nevada.  If PMI’s electronic data storage and back-up data storage system are affected by such events, Prosper Funding’s ability (and PMI’s ability as servicer under the Administration Agreement) to perform its servicing obligations could be materially and adversely affected.  In the event of any platformmarketplace outage or physical data loss described in this paragraph, Prosper FundingPFL cannot guarantee that youinvestors would be able to recoup yourtheir investment in the Prosper Funding Notes.

PMI completed its first two acquisitions in 2015, and in the future PMI may continue to enter into acquisitions that may be difficult to integrate, fail to achieve their strategic objectives, disrupt our business or divert management attention.
Prosper Funding is an “emerging growth company” underPMI completed its first two acquisitions in 2015, and in the JOBS Actfuture PMI may continue to enter into acquisitions of 2012,businesses, technologies and products that it intends to complement its existing business, solutions, services and technologies. PMI cannot be certain ifprovide assurance that the reduced reporting requirements applicable to emerging growth companiesacquisitions it has made or will make the Prosper Funding Notes less attractive to investors.

Prosper Funding is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Actfuture will provide it with the benefits or achieve the results anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of 2012 (the “JOBS Act”)risks, including: difficulties assimilating and as such, it is eligible for certain exemptionsretaining the management and other personnel, culture and operations of the acquired businesses; potential disruption of ongoing business and distraction of management; difficulties in maintaining acceptable standards, controls, procedures and policies, including integrating financial reporting and operating systems, particularly with respect to foreign and/or public subsidiaries; potential loss of existing or acquired strategic operating partners, users and customers following an acquisition; difficulties in integrating acquired technologies and products into our solutions and services; and unexpected costs and expenses resulting from reporting requirementsthe acquisition, and potential unknown liabilities associated with acquired businesses.
In addition, acquisitions may result in the incurrence of debt, acquisition-related costs and expenses, restructuring charges and write-offs. Acquisitions may also result in goodwill and other intangible assets that are applicablesubject to other public companiesimpairment tests, which could result in future impairment charges.
PMI may enter into negotiations for acquisitions that are not “emergingultimately consummated. Those negotiations could result in diversion of management time and significant out-of-pocket costs. If PMI fails to evaluate and execute acquisitions successfully, PMI may not be able to achieve its anticipated level of growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act and exemptions from the requirements of holding a nonbinding advisory vote on executive compensationits business and shareholder approval of any golden parachute payments not previously approved. Prosper Funding will remain an emerging growth company until the earliest of: (i) the first fiscal year after it has revenue in excess of $1,000,000, (ii) the beginning of the sixth fiscal year after its first registered sale of common equity securities in an initial public offering, (iii) the date upon which it has issued in excess of $1,000,000 of non-convertible debt during the previous three-year period, or (iv) the date on which it wouldoperating results could be deemed a “large accelerated filer” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Prosper Funding cannot predict if investors will find the Prosper Funding Notes less attractive because it may rely on these exemptions.adversely affected.

Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, Prosper Funding has elected to “opt out” of this extended transition period, and as a result, it will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-“emerging growth companies.” Its decision to opt out of the extended transition period is irrevocable.

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RISKS RELATING TO COMPLIANCE AND REGULATION

The platform represents a novel approach to borrowing and lending that may fail to comply with federal and state securities laws, borrower protection laws, such as state lending laws, federal consumer protection laws, such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, and the state counterparts to such consumer protection laws.  Borrowers may dispute the enforceability of their obligations under borrower or consumer protection laws after collection actions have commenced, or otherwise seek damages under these laws.  Lender members may attempt to rescind their Prosper Funding Note purchases under securities laws.  Compliance with such regulatory regimes is also costly and burdensome.

The platformOur marketplace represents a novel program that must comply with regulatory regimes applicable to consumer credit transactions as well as with regulatory regimes applicable to securities transactions. The novelty of the platformour marketplace means compliance with various aspects of such laws is untested. Certain state laws generally regulate interest rates and other charges and require certain disclosures, and also require licensing for certain activities. In addition, other state laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of Prosper Funding Borrower Loans on the platform.  The platform isin our marketplace. Our marketplace may also be subject to other laws, such as:

the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;
·the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;
the federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act;
the federal Fair Credit Reporting Act, which regulates the use, reporting and disclosure of information related to each applicant’s credit history;
the federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;
state counterparts to the above consumer protection laws;

·the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act;

·the Federal Fair Credit Reporting Act, which regulates the use and reporting of information related to each applicant’s credit history;
state and federal securities laws, which require that any non-exempt offers and sales of the Notes be registered;

Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;
·the Federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;
the federal Gramm-Leach-Bliley Act, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information, and other privacy laws and regulations;

the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection;
·state counterparts to the above consumer protection laws; and
the federal Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties;

the federal Military Lending Act, which provides specific protections for active duty service members and their dependents (or covered borrowers) in consumer credit transactions;
·state and federal securities laws, which require that any non-exempt offers and sales of the Securities be registered.
the federal Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide disclosure requirements, guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts;

the federal Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures; and
Prosper Fundingthe federal Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and PMIrecord-keeping policies and procedures.
We may not always be in compliance with these laws. Borrowers may make counterclaims regarding the enforceability of their obligations under borrower or consumer protection laws after collection actions have commenced, or otherwise seek damages under these laws. Lender membersInvestors may attempt to rescind their Prosper Funding Note purchases under securities laws, and Prosper FundingPFL or PMI’s failure to comply with such laws could also result in civil or criminal liability.  For example, in 2010 and 2011 PMI failed to timely renew its applications to offer and sell PMI Notes in several states, resulting in $76 in penalties in five states, and the repurchase of $22 of PMI Notes from Florida residents pursuant to a rescission offer. Compliance with these requirements is also costly, time-consuming and limits operational flexibility. See “Item 1. Business – Government Regulation—Regulation and Consumer Protection Laws”Regulation” for more information.
If our marketplace was found to violate a state's usury laws, we may have to alter our business model and our business could be harmed.
The interest rates that are charged to borrowers and that form the basis of payments to investors through our marketplace are based upon the ability under federal law of the issuing bank that originates the loan to export the interest rates of the state where it is located. WebBank, the bank that issues loans through our marketplace, exports the interest rates of Utah, which allows parties to generally agree by contract to any interest rate. The interest rates offered by WebBank through our marketplace for Borrower Loans as of December 31, 2016 range from 5.32% to 33.04%, which equate to interest rates for Note investors that range from 4.32% to 32.04%. Some states where borrowers are located, including Utah, have no statutory interest rate limitations on personal loans, while other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our marketplace. If a borrower were to successfully bring claims against us for state usury law violations, and the rate on that borrower's loan was greater than that allowed under applicable state law, we could be subject to fines and penalties. Further, if the current structure under which WebBank makes loans through our marketplace were successfully challenged, we may have to substantially modify our business operations and may be required to maintain state-specific licenses and only provide a limited


range of interest rates for Borrower Loans, all of which may substantially reduce our operating efficiency and attractiveness to investors and possibly result in a decline in our operating results.
In addition, it is possible that state usury laws may impose liability that could affect an assignee's (i.e., PFL's and/or an investor who purchases Borrower Loans from PFL) ability to continue to charge to borrowers the interest rates that they agreed to pay at origination of their Borrower Loans. In particular, one recent judicial decision by the Court of Appeals for the Second Circuit, Madden v. Midland Funding, LLC (786 F.3d 246 (2d Cir. 2015)), concluded that the debt buyer of a charged off credit card account could not rely on the National Bank Act's preemption of state interest rate limits for interest at rates imposed by the debt buyer after chargeoff.  The decision has created some uncertainty as to whether non-bank entities purchasing loans originated by a bank may rely on federal preemption of state usury laws, and the decision may create an increased risk of litigation by plaintiffs challenging our ability to collect interest in accordance with the terms of Borrower Loans. Although the Madden decision specifically addressed preemption under the National Bank Act, such decision could support future challenges to federal preemption for other institutions, including an FDIC-insured, state chartered industrial bank like WebBank.
On November 10, 2015, the defendant in the Madden case filed a petition for a writ of certiorari with the United States Supreme Court for further review of the Second Circuit’s decision. On June 27, 2016, the United States Supreme Court denied the petition and refused to review the case, leaving the decision of the Second Circuit intact and binding on federal courts in Connecticut, New York and Vermont. Although there can be no assurances as to the outcome of any potential litigation, or the possible impact of the litigation on our marketplace, we believe the Madden case addressed facts that are not presented by our marketplace lending platform and thus would not apply to Borrower Loans. Nevertheless, we and our counsel are monitoring the matter closely and, as developments warrant, we, of course, will consider any necessary changes to our marketplace required to avoid the impact of this case on our business model. Because of investor demand, the maximum APRs offered through our marketplace may be lower in some states than others.
The Consumer Financial Protection Bureau is a new agency, and there continues to be uncertainty as to how the agency’s actions or the actions of any other new agency could impact our business or that of our issuing bank.
The Consumer Financial Protection Bureau (“CFPB”), which commenced operations in July 2011, has broad authority over the businesses in which we engage. This includes authority to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine large financial institutions for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including our business and the loan products we facilitate. This system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus.  On March 7, 2016, the CFPB issued a bulletin that provides an overview of marketplace lending, outlines tips for consumers and announces that it is accepting complaints from consumers.
We are subject to the CFPB’s jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit. The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system or otherwise that we were engaging in activities that pose risks to consumers.
There continues to be uncertainty as to how the CFPB’s strategies and priorities, including in both its examination and enforcement processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected loan products and services, making them less attractive and restricting our ability to offer them.
Although we have committed resources to enhancing our compliance programs, actions by the CFPB or other regulators against us, our issuing bank or our competitors that discourage the use of the marketplace model or suggest to consumers the desirability of other loan products or services could result in reputational harm and a loss of borrowers or investors. Our compliance costs and litigation exposure could increase materially if the CFPB or other regulators enact new regulations, change regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing regulations in a manner different or stricter than have been previously interpreted.


Noncompliance with laws and regulations may impair PMI’sour ability to facilitate the origination of or service Prosper Funding Borrower Loans.
Generally, failure to comply with applicable laws and regulatory requirements may, among other things, limit Prosper Funding’s, PMI’sour or a third party collection agency’s ability to collect all or part of the principal amount of or interest on the Prosper Funding Borrower Loans on which the Prosper Funding Notes are dependent for payment. In addition, non-compliance could subject Prosper Funding or PMIus to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm Prosper Funding’sPFL’s business and ability to maintain the platformour marketplace and may result in borrowers rescinding their Prosper Funding Borrower Loans.
Where applicable, Prosper Funding and PMIwe seek to comply with state lending, servicing and similar statutes. InWe are continually evaluating the need for licensing in various jurisdiction and there is a risk that, at any given time, we will not have necessary licenses required to operate in all U.S. jurisdictions with licensing or other requirements that Prosper Funding and PMI believe may be applicable to the platform, Prosper Funding and PMI have obtained any necessary licenses or comply with the relevant requirements. Nevertheless, if Prosper Funding or PMIjurisdictions.  If we are found to not comply with applicable laws, Prosper Funding or PMIwe could lose one or more of theirour licenses or face other sanctions, which may have an adverse effect on PMI’sour ability to continue to facilitate the origination of Prosper Funding Borrower Loans through the platform,our marketplace, and on Prosper Funding or PMI’sour ability to perform servicing obligations or make the platformour marketplace available to borrowers in particular states, which may impair yourinvestors’ ability to receive the payments of principal and interest on your Prosper Fundingthe Notes that youthey expect to receive. SeeFor more information about the laws and regulations applicable to us and our marketplace, see “Item 1. Business – Government Regulation—Regulation and Consumer Protection Laws—State and Federal Laws and Regulations” for more information.Regulation.”

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Prosper Funding and PMIWe rely on agreements with WebBank pursuant to which WebBank originatesoriginate loans to qualified borrower members on a uniform basisborrowers throughout the United States and sellssell and assignsassign those loans to Prosper Funding.PFL. If Prosper Funding and PMI’sour relationships with WebBank were to end, Prosper Fundingwe may need to rely on individual state lending licenses to originate Prosper Funding Borrower Loans.

Prosper Funding Borrower Loan requests take the form of an application to WebBank submitted through the platform.our marketplace. WebBank currently makes all loans to borrowers through the platform,our marketplace, which allows the platformour marketplace to be available to borrowers on a uniform basis throughout the United States. If Prosper Funding and PMI’s relationshipour relationships with WebBank were to end or if WebBank were to cease operations, Prosper Fundingone or both of PMI and PFL may need to rely on individual state lending licenses to originate Prosper Funding Borrower Loans. Because Prosper Fundingneither of us currently possesses only oneall required licenses to lend in every state, lending license, itwe might be forced to limit the rates of interest charged on Prosper Funding Borrower Loans in some states and itwe might not be able to originate loans in some states altogether. ItWe also may face increased costs and compliance burdens if the agreements with WebBank are terminated.

Several lawsuits have sought to recharacterize certain loan marketers and other originators as lenders. If litigation or a regulatory enforcement action on similar theories were successful against Prosper Fundingone or both of PMI Prosper Fundingand PFL, Borrower Loans originated through the platformour marketplace could be subject to state consumer protection laws and licensing requirements in a greater number of states.

Several lawsuits in the lending industry primarily involving high-interest “payday loan” marketers have brought under scrutiny the association between high-interest “payday loan” marketersthose firms and out-of-state banks. These lawsuits assert that paydaythe loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to recharacterizere-characterize the loan marketer as the lender for purposes of state consumer protection law and usury restrictions. Similar civil actions have been brought in the context of gift cards.  Prosper Fundingcards and PMIretail purchase finance. Although we believe that theirour activities are generally distinguishable from the activities involved in these cases.cases, a court or regulatory authority could disagree.

Nevertheless, if Prosper Funding or PMI were recharacterized asAdditional state consumer protection laws would be applicable to the lender of Prosper Funding Borrower Loans suchfacilitated through our marketplace if we were re-characterized as a recharacterizationlender, and the Borrower Loans could render those loansbe voidable or unenforceable in whole or in part.unenforceable. In addition, Prosper Funding and PMIwe could be subject to claims by borrowers, as well as enforcement actions by regulators. Even if Prosper Funding or PMIwe were not required to cease doing business with residents of certain states or to change theirour business practices to comply with applicable laws and regulations, theywe could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on them. To date, no actions have been taken or threatened against Prosper Funding or PMI on the theory that either has engaged in unauthorized lending. However, such actions could have a material adverse effect on Prosper Funding or PMI’s businesses.us.

As Internet commerce develops, federal and state governments may draft and propose new laws to regulate Internet commerce, which may negatively affect Prosper Funding and PMI’sour businesses.

As Internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely. Prosper Funding and PMI’sOur businesses could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to peer-to-peermarketplace lending. The cost to comply with such laws or regulations could be significant and would increase Prosper Funding and PMI’sour operating expenses, and Prosper Funding and PMIwe may be unable to pass along those costs to Prosper Funding’s membersPFL’s users in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the


Internet. These taxes could discourage the use of the Internet as a means of consumer lending, which would adversely affect the viability of the platform.our marketplace.
If Prosper Funding one or both of PMI and PFL is required to register under the Investment Company Act, theireither of our ability to conduct business could be materially adversely affected.
The Investment Company Act of 1940, or the “Investment Company Act,” contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. Prosper FundingPFL and PMI believe each has conducted its business in a manner that does not result in being characterized as an investment company. If, however, Prosper FundingPFL is deemed to be an investment company under the Investment Company Act, it may be required to institute burdensome compliance requirements and its activities may be restricted, which would materially adversely affect its business, financial condition and results of operations. Any determination that PMI is an investment company under the Investment Company Act similarly could impair its ability to perform its obligations under the Administration Agreement and thereby impair Prosper Funding’sPFL’s ability to make payments on the Prosper Funding Notes. If Prosper FundingPFL or PMI were deemed to be an investment company, Prosper FundingPFL or PMI may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on their businesses.

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If Prosper Funding or PMI and PFL is required to register under the Investment Advisers Act, theireither of our ability to conduct business could be materially adversely affected.

The Investment Advisers Act of 1940, or the “Investment Advisers Act,” contains substantive legal requirements that regulate the manner in which “investment advisers” are permitted to conduct their business activities. Prosper FundingPFL believes that its business consists of providing a platform for peer-to-peermarketplace lending for which investment adviser registration and regulation do not apply under applicable federal or state law, and does not believe that it is required to register as an investment adviser with either the SEC or any of the various states. The SEC or a state securities regulator could reach a different conclusion, however. Registration as an investment adviser could adversely affect Prosper Funding’sPFL’s method of operation and revenues. For example, the Investment Advisers Act requires that an investment adviser act in a fiduciary capacity for its clients. Among other things, this fiduciary obligation requires that an investment adviser manage a client’s portfolio in the best interests of the client, have a reasonable basis for its recommendations, fully disclose to its client any material conflicts of interest that may affect its conduct and seek best execution for transactions undertaken on behalf of its client. It could be difficult for Prosper FundingPFL to comply with this obligationthese obligations without meaningful changes to its business operations, and there is no guarantee that it could do so successfully. If Prosper FundingPFL were ever deemed to be in non-compliance with applicable investment adviser regulations, it could be subject to various penalties, including administrative or judicial proceedings that might result in censure, fine, civil penalties (including treble damages in the case of insider trading violations), the issuance of cease-and-desist orders or other adverse consequences. Similarly, any determination by regulators that PMI must register as an investment adviser could materially adversely affect PMI and impair its ability to continue to administer the platformour marketplace on Prosper Funding’sPFL’s behalf.

PMI’s previous administration of an automated bidding plan system and thePMI's administration of Quick Invest by PMI under its previous offering and by Prosper FundingPFL’s administration of Quick Invest and Auto Invest under its current offering, could create additional liability for PMI or Prosper FundingPFL and such liability could be material.

PMI’s former automated plan system allowed lender members to create their own automated bidding plans.  By creating suchQuick Invest is a plan, a lender member could have bids placed automatically on her behalf on loan listings that met loan criteria selected by her. In creating an automated bidding plan, the member could design those criteria herself, use a group of model criteria selected by PMI, or customize one of those groups of model criteria as she saw fit.   Each automated bidding plan consisted of a group of loan criteria, such as loan amount, minimum yield percentage, Prosper Rating, income and employment characteristics, and debt-to-income ratio. That group of criteria was divided into sub-groups, each of which were referred to as a “slice.”  The specific loans on which the lender member bid through her automated bidding plan were determined by the criteria in each of her plan slices.  If a loan listing was posted that satisfied all of the criteria in any one of her plan slices, a bid would automatically be placed on the listing on her behalf.

On July 6, 2011, PMI replaced the former automated plan system with a new loan search tool called Quick Invest. Under Quick Invest, lender members are no longer ablethat allows investors to create automated plans and instead must identify Prosper Funding Notes that meet their investment criteria. A lenderAn investor using Quick Invest is asked to indicate (i) the Prosper Rating or Ratings he or she wishes to use as search criteria, (ii) the total amount he or she wishes to invest, and (iii) the amount he or she wishes to invest per Prosper Funding Note. Quick Invest then compiles a basket of Prosper Funding Notes for his or her consideration that meet his or her search criteria. If the pool of Prosper Funding Notes that meet her criteria exceeds the total amount she wishes to invest, Quick Invest selects Prosper Funding Notes from the pool based on how far the listings corresponding to the Prosper Funding Notes have progressed through the loan verification process, i.e., Prosper Funding Notes from the pool that correspond to listings for which the loan verification process has been completed will be selected first. If the pool of Prosper Funding Notes that meet the lender member’s criteria and for which the loan verification process has been completed still exceeds the amount she wishes to invest, Quick Invest selects Prosper Funding Notes from that pool based on the principle of first in, first out, i.e., the Prosper Funding Notes from the pool with the corresponding listings that were posted on the website earliest will be selected first. If the member’sinvestor's search criteria include multiple Prosper Ratings, Quick Invest divides his or her basket into equal portions, one portion representing each Prosper Rating selected. To the extent available Prosper Funding Notes with these Prosper Ratings are insufficient to fill the lender’s order, the lender member is advised of this shortfall and given an opportunity either to reduce the size of her order or to modify her search criteria to make her search more expansive. The Auto Quick Invest feature allows lender membersinvestors (i) to have Quick Invest searches run on their designated criteria automatically each time new listings are posted on the platform,to our marketplace, and (ii) to place bids on any Prosper Funding Notes identified by each such search. See “Item 1. Business—How
Auto Invest is an automated loan search tool that makes it easier for investors to Bidbuild their desired portfolio of Notes by automatically investing any available funds in an investor’s account in Notes that match the investor’s specified investment criteria and allocation targets. An investor using Auto Invest is asked to Purchaseselect (i) a loan allocation target, or a target mix of loans based on Prosper Funding Notes—Quick Invest”Ratings, and (ii) the amount he or she wishes to invest per Note. The investor has the option of selecting a target from Prosper’s series of preset loan allocations based on the recent historical loan inventory on the marketplace, any of which may be customized by changing the individual allocation targets for more information.each Prosper Rating, or he or she can create a custom loan allocation target across Prosper Ratings based on his or her specific risk tolerance. If he or she wishes, the investor can further customize his or her investment criteria by applying additional filters, such as loan term and employment status. The investor can also set aside a percentage of his or her portfolio as a cash reserve that will not be invested by Auto Invest. Investors may update their target allocations, cash reserve and other investment criteria, and pause and restart Auto Invest, at any time. Once the investor


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Notes in any particular order may not match the investor’s individual loan allocation targets, but over time Auto Invest will place orders so that the aggregate holdings in the investor’s portfolio will approximate, to the extent possible, the allocation specified in his or her investment criteria.
Since the Prosper Funding Notes purchased through Auto Invest and Quick Invest are the same as Prosper Funding Notes purchased manually, they present the same risks of non-payment as all Prosper Funding Notes that may be purchased through the platform.our marketplace. For example, there is a risk that a Prosper Funding Borrower Loan or PMI Borrower Loan identified through an automated planAuto Invest or Quick Invest may become delinquent or default, and the estimated return and estimated loss for that loan individually, or the estimated loss or return for the planallocation target or the order or basket of Prosper Funding Notes or PMI Notes selected by Auto Invest or Quick Invest as a whole, may not accurately reflect the actual return or loss on such loan. If this were to occur, an investor who purchases a lender member who purchased a PMI Note from PFL through an automated planAuto Invest or Quick Invest could pursue a claim against PMIPFL in connection with its representations regarding the performance of the PMI Borrower Loans bid upon through the planAuto Invest or Quick Invest, and a lender member who purchases a Prosper Funding Note from Prosper Funding through Quick Invest could pursue a claim against Prosper Funding in connection with its representations regarding the performance of the Prosper Funding Borrower Loans bid upon through Quick Invest. A lender memberrespectively. An investor could pursue such a claim under various antifraud theories under federal and state securities law. In addition, the SEC or a lender member may take the position that the plans created pursuant to the automated bidding plan model involved the offer
PMI and sale of a separate security. Since PMI did not register the automated bidding plans as separate securities, such a claim, if successful, could give lender members who invested in PMI Notes through such plans a rescission right under state or federal law and possibly subject PMI to civil fines or criminal penalties under federal or state law. If such a theory were sustained, PMI could be liable for sales through automated bidding plans that took place prior to July 6, 2011. To date, no actions have been taken or threatened against PMI on this theory. However, such actions could have a material adverse effect on PMI’s business.

Prosper Funding and PMI may face liability under state and federal securities law for statements in this Annual Report and in other communications that could be deemed to be an offer to the extent that such statements are deemed to be false or misleading.

Loan listings and other borrower information available on Prosper Funding’s website as well as in sales and listing reports are statements made in connection with the purchase and sale of securities that are subject to the antifraud provisions of the Exchange Act and the Securities Act.  In general, these liability provisions provide a purchaser of the Securities with a right to bring a claim against Prosper Funding or PMI for damages arising from any untrue statement of material fact or failure to state a material fact necessary to make any statements made not misleading.  Even though Prosper Funding and PMI have advised you of what they believe to be the material risks associated with an investment in the Securities, the SEC or a court could determine that they have not advised you of all of the material facts regarding an investment in the Securities, which could give you the right to rescind your investment and obtain damages, and could subject Prosper Funding and PMI to civil fines or criminal penalties in addition to any such rescission rights or damages.

ThePFL’s activities of Prosper Funding and PMI in connection with the offer and sale of securities on the platformour marketplace could result in potential violations of federal securities law and result in material liability to Prosper FundingPFL and PMI.

Prosper FundingPFL and PMI’s respective businesses are subject to federal and state securities laws that may limit the kinds of activities in which Prosper FundingPFL and PMI may engage and the manner in which they engage in such activities. For example, changes to the manner in which Prosper FundingPFL offers and sells Prosper Funding Notes or other securities on the platformthrough our marketplace could be viewed by the SEC or a state securities regulator as involving the creation or sale of new, unregistered securities. In such circumstances, the failure to register such securities could subject Prosper Funding and PMIPFL to liability and the amount of such liability could be meaningful. In addition, PMI previously entered into a settlement with the SEC and consented to the entry of a Cease and Desist order that requires PMI to cease and desist from committing or causing any violations or any future violations of the securities laws. Failure to comply with that order could result in material civil or criminal liability, which could materially adversely affect PMI’s business and Prosper Funding’sPFL’s offering of Prosper Funding Notes.

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Item 1B.
Unresolved Staff Comments

Not applicable.

Item 2.
Properties
Our corporate headquarters, including our principal administrative, marketing, technical support and engineering functions, is located in San Francisco, California, where we lease approximately 77,000 square feet of office space under leases that will expire February 28, 2023. We also have entered into leases for approximately 99,000 square feet of office space located in Arizona, Utah and Delaware. We believe that our facilities are adequate to meet our current needs and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.
Item 3.Legal Proceedings
Neither PMI nor PFL is currently subject to any material legal proceedings. 
PFL and PMI (collectively, "Prosper") and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis. On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment


by Prosper and the issuance of a warrant to purchase shares of Series E-1 Preferred Stock representing 7% of Prosper’s capitalization on a fully diluted basis as of the date of the issuance of the warrant for $0.01 per share.
On April 21, 2009, PMI and the North American Securities Administrators Association (“NASAA”) reached agreement on the terms of a model consent order between PMI and the states in which PMI, under its initial platform structure, offered promissory notes for sale directly to investor members prior to November 2008. The informationconsent order involves payment by PMI of up to an aggregate of $1 million in penalties, which have been allocated among the states based on PMI’s promissory note sale transaction volume in each state prior to November 2008. A state that enters into a consent order receives its portion of the $1 million in exchange for its agreement to terminate, or refrain from initiating, any investigation of PMI’s promissory note sale activities prior to November 2008. Penalties are paid promptly after a state enters into a consent order. NASAA has recommended that each state enter into a consent order; however, no state is obliged to do so, and there is no deadline by which a state must make its decision. PMI is not required to pay any portion of the penalty to those states that do not elect to enter into a consent order. If a state does not enter into a consent order, it is free to pursue its own remedies against PMI, subject to any applicable statute of limitations. As of December 31, 2016, PMI has entered into consent orders with 34 states and the District of the Columbia and has paid an aggregate of $0.78 million in penalties in connection therewith.
On November 26, 2008, plaintiffs filed a class action lawsuit against PMI and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California (the “Superior Court”). The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that PMI offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit sought rescission damages against PMI and the other named defendants, as well as treble damages against PMI and the award of attorneys’ fees, experts’ fees and costs, and pre-judgment and post-judgment interest. On July 19, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation pending before the Superior Court, entered into a Stipulation and Agreement of Compromise, Settlement, and Release (the “Settlement”) setting forth an agreement to settle all claims related thereto. In connection with the Settlement, PMI agreed to pay the plaintiffs an aggregate amount of $10 million, payable in four lump sum payments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. On April 16, 2014, the Superior Court granted final approval of the Settlement.  Subject to satisfaction of the conditions set forth in Itemthe Settlement, the defendants will be released by the plaintiffs from all claims concerning or arising out of the offering of promissory notes on the platform from January 1, under2006 through October 14, 2008.  The reserve for the caption “Item 1. Business—Information About Prosper Funding and Prosper Marketplace, Inc. —Facilities”class action settlement liability is incorporated herein by reference.$3.0 million on PMI’s consolidated balance sheet as of December 31, 2016.  
Item 3. 
Legal Proceedings

The information set forth in Item 1 under the caption “Item 1. Business—Information About Prosper Funding and Prosper Marketplace, Inc. —Legal Proceedings” is incorporated herein by reference.

Item 4.
Mine Safety Disclosures

Not applicable.

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Part II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information; Holders of Record

On July 13, 2009, PMI commenced a continuousThere is no established public offeringtrading market for PMI's or PFL's common equity. As of up to $500,000 in principal amount of the PMI Notes pursuant to a registration statement on Form S-1 (Registration Statement No. 333- 147019). The offering was a continuous offering and was declared effective by the SEC on July 10, 2009. From July 13, 2009 to January 31, 2013, PMI sold $273,961 in principal amount of PMI Notes at 100% of their principal amount. The PMI Notes were offered only through the website, and there were no underwriters or underwriting discounts. During the period from July 13, 2009 to January 31, 2013, PMI incurred estimated expenses of approximately $4,862 in connection with the offering, none of which were paid by PMI to its directors, officers, persons owning 10% or more of any class of PMI's equity securities or affiliates. As set forth in the prospectus for such offering, PMI used the proceeds of each series of PMI Notes to fund a corresponding PMI Borrower Loan designated by the lender members purchasing such series of PMI Notes. None of the proceeds from the PMI Notes were paid by PMI to its directors, officers, affiliates or persons owning 10% or more of any class of PMI’s equity securities.

PMI does not have publicly traded equity securities. At December 31, 2013,2016, there were approximately 234312 holders of record of PMI’s common stock. As of December 31, 2016, PMI owns 100 % of PFL's membership interests.
Dividend Policy
PMI has not paid cash dividends since inception, and does not anticipate paying cash dividends in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 in Part III of this Annual Report for information about securities authorized for issuance under our equity compensation plans.
Recent Sales of Unregistered Securities
In December 2016, PMI issued a warrant to purchase 20,267,135 shares of PMI's Series E-1 convertible preferred stock. Please see PMI's Form 8-K filed on December 22, 2016 for details regarding the sale.
During the year ended December 31, 2013,2016, PMI granted warrants to acquire 2,460issued 52,566 shares of PMI’s common stock atupon the exercise of warrants for an aggregate exercise price per share of $0.10 per share.$0.38. These securities were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2)4(a)(2) of the Securities Act and Regulation D promulgated thereunder relative to sales by an issuer not involving a public offering.
New Securities Resulting from the Modification of Outstanding Securities
On February 16, 2016, PMI amended and restated its certificate of incorporation to, among other things, effect a 5-for-1 forward stock split.
Issuer Purchases of Equity Securities
Period (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Approximate Dollar Value of Shares that May Yet by Purchased Under the Plans or Programs
October 1 to October 31 —
 $—
 —
 $—
November 1 to November 31 —
 —
 —
 —
December 1 to December 31 385,230
 0.02
 —
 —
Total 385,230
 $0.02
 —
 $—
The above share and per share amounts reflect the 5-for-1 forward stock split that PMI effected on February 16, 2016.

During
Item 6.Selected Financial Data
Prosper Marketplace, Inc.
The following selected historical consolidated financial data of Prosper Marketplace Inc. should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements, and the related notes under Item 15 “Exhibits, Financial Statements Schedules” of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The consolidated statements of operations data for the years ended December 31, 2016, 2015 and 2014, and the consolidated balance sheet data as of December 31, 2016 and 2015, are derived from our audited consolidated financial statements appearing under Item 15 “Exhibits, Financial Statements Schedules” of this Annual Report on Form 10-K. The consolidated statement of operations data for the year ended December 31, 2013 PMI issued 820 sharesthe consolidated balance sheet data as of common stock uponDecember 31, 2014 and 2013 are derived from audited consolidated financial statements not included in this report. The consolidated statement of operations data for the exerciseyear ended December 31, 2012 the consolidated balance sheet data as of warrants for an aggregate exercise priceDecember 31, 2012 are derived from unaudited consolidated financial statements not included in this Report. Our historical results are not necessarily indicative of $8.20.  These securities were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder relative to sales by an issuer not involving a public offering.future results.
 Year Ended December 31,
 20162015201420132012
 (dollar amounts in thousands, except per share information)
Revenues     
Operating Revenues     
Transaction Fees, Net$95,130
$161,708
$68,229
$15,330
$6,272
Servicing Fees, Net28,903
17,238
4,552
259
—
Gain (Loss) on Sale of Borrower Loans3,637
14,151
3,227
(193)—
Other Revenues5,245
7,687
1,828
1,130
385
Total Operating Revenues132,915
200,784
77,836
16,526
6,657
Interest Income     
Interest Income on Borrower Loans44,649
41,606
42,087
34,995
24,068
Interest Expense on Notes(41,187)(38,174)(38,734)(33,321)(23,027)
Net Interest Income3,462
3,432
3,353
1,674
1,041
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net(372)59
128
181
(32)
Total Net Revenues136,005
204,275
81,317
18,381
7,666
Expenses     
Origination and Servicing33,944
31,139
14,098
6,384
3,568
Sales and Marketing70,146
112,284
41,971
16,731
6,842
General and Administrative102,735
86,480
27,917
22,273
13,310
Restructuring Charges17,027
—
—
—
—
Other Expenses, Net30,348
—
—
—
—
Total Expenses254,200
229,903
83,986
45,388
23,720
Net Loss Before Taxes(118,195)(25,628)(2,669)(27,007)(16,054)
Income Tax Expense546
340
—


Net Loss(118,741)(25,968)(2,669)(27,007)(16,054)
Excess Return to Preferred Shareholders on Repurchase—
—
(14,892)—

Net Loss Applicable to Common Shareholders$(118,741)$(25,968)$(17,561)$(27,007)$(16,054)
Net Loss Per Share – Basic and Diluted$(1.85)$(0.47)$(0.39)$(0.82)$(1.10)
Weighted-Average Shares - Basic and Diluted64,196,537
55,547,408
44,484,005
32,984,135
14,628,055

On February 1, 2013, Prosper Funding and PMI commenced a continuous public offering pursuant to a registration statement on Form S-1 (Registration Statement Nos. 333-179941 and 333-179941-01).  The offering covers the issuance by Prosper Funding of up to $500,000 in principal amount of Prosper Funding Notes.  Each Prosper Funding Note comes attached with a PMI Management Right issued by PMI. The offering is a continuous offering and was declared effective by the SEC on December 27, 2012. From February 1, 2013 to December 31, 2013, Prosper Funding sold $621,578 in principal amount of Prosper Funding Notes at 100% of their principal amount. The Prosper Funding Notes were offered only through the website, and there were no underwriters or underwriting discounts. During the period from February 1, 2013 to December 31, 2013, Prosper Funding incurred estimated expenses of approximately $4,862 in connection with the offering, none of which were paid by Prosper Funding to its directors, officers, affiliates or persons owning 10% or more of Prosper Funding’s equity interests. As set forth
Stock-based compensation included in the prospectus for the offering, Prosper Funding is using the proceedsconsolidated statements of each series of Prosper Funding Notes issued to fund a corresponding Borrower Loan through the platform.  None of the proceeds from the Prosper Funding Notes were paid by Prosper Funding to its directors, officers, affiliates or persons owning 10% or more of Prosper Funding’s equity interests.operations data above was as follows (dollar amounts are in thousands):
 Year Ended December 31,
 20162015201420132012
      
Origination and Servicing$2,004
$1,231
$104
$16
$54
Sales and Marketing2,914
2,561
767
24
17
General and Administrative14,824
9,219
1,150
182
282
Restructuring45
—
—
—
—
     Total stock based compensation$19,742
$13,011
$2,021
$222
$353
 As of December 31,
 20162015201420132012
      
Consolidated Balance Sheet Data:     
Cash and cash equivalents$22,337
$66,295
$50,557
$18,339
$3,300
Restricted cash163,907
151,223
81,300
49,824
22,552
Available for sale investments, at fair value32,769
73,187
—
—
 
Borrower loans, at fair value315,627
297,273
273,243
233,105
163,861
Total assets623,846
685,624
440,158
310,259
191,663
Notes at fair value316,236
297,405
273,783
234,218
164,840
Total liabilities512,781
477,056
364,387
285,929
185,651
Total convertible preferred stock and stockholders' deficit111,065
208,568
75,771
24,330
6,012

Item 6.7.
Selected Financial Data


Not applicable.
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Table of Contents
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

PROSPER MARKETPLACE, INC.
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with PMI'sProsper’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K. Management’s Discussion and Analysis has been revised to include the effects of the restatement.  The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and Prosper’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K.
Overview
Prosper is a pioneer of online marketplace lending that connects borrowers and investors. Our goal is to enable borrowers to access credit at affordable rates and provide investors with attractive risk-adjusted rates of return.


We believe our online marketplace model has key advantages relative to traditional bank lending, including (i) an innovative marketplace model that efficiently connects qualified supply and demand of capital, (ii) online operations that substantially reduce the need for physical infrastructure and improve convenience, and (iii) data and technology driven automation that increases efficiency and improves the borrower and investor experience. We do not operate physical branches or incur expenses related to that infrastructure; instead, we use data and technology to drive automation and efficiency in our operation. As part of operating our marketplace, we verify the identity of borrowers and assess borrowers’ credit risk profile using a combination of public and proprietary data. Our proprietary technology automates several loan origination and servicing functions, including the borrower application process, data gathering, credit scoring, loan funding, investing and servicing, regulatory compliance and fraud detection.
During the year ended December 31, 2016, our marketplace facilitated $2.2 billion in Borrower Loan originations, of which $2.0 billion were originated through our Whole Loan Channel, representing 90% of the total Borrower Loans originated through our marketplace during this period. During the quarter ended December 31, 2016, our marketplace facilitated $0.5 billion in Borrower Loan originations, of which $0.4 billion were originated through our Whole Loan Channel, representing 88% of the total Borrower Loans originated through our marketplace during this period. From inception through December 31, 2016, our marketplace has facilitated $8.3 billion in Borrower Loan originations, of which $7.1 billion were originated through our Whole Loan Channel, representing 85% of the total Borrower Loans originated through our marketplace during this period.
As a credit marketplace, we believe our customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact our customers’ ability or desire to participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
As discussed below, we saw reduced demand from investors who purchase Borrower Loans through the Whole Loan Channel during much of 2016. As a result, we experienced a decline in transaction fee revenue during 2016. Prosper expects a decrease in transaction fee revenue in the first quarter of 2017 from the first quarter of 2016. Transaction fee revenue reached its lowest point for the year in July 2016, with transaction fee revenue increasing month over month in August and September 2016 and in the fourth quarter of 2016. We expect transaction fee revenue to increase in the first quarter of 2017 from the fourth quarter of 2016, and for the year ended December 31, 2017 over the year ended December 31, 2016. We incurred certain atypical expenses during 2016 which resulted in a significant increase in our expenses for the year. As described in Note 15 to our consolidated financial statements, Prosper began a restructuring of its operations during the second quarter of 2016, which resulted in increased expenses during the year ended December 31, 2016 from the year ended December 31, 2015. Additionally, in the fourth quarter of 2016, Prosper negotiated a termination of a contract with Colchis Capital Management, L.P., which resulted in an expense of $30.7 million.
Results of Operations
Overview
The following table summarizes our net loss for the years ended December 31, 2016, 2015 and 2014 (dollar amounts in thousands):
 
Year Ended
December 31,
 2016 2015 % Change 2015 2014 % Change
Total Revenue$136,005
 $204,275
 (33)% $204,275
 $81,317
 151%
Total Expenses254,200
 229,903
 11 % 229,903
 83,986
 174%
Net Loss Before Taxes(118,195) (25,628) 361 % (25,628) (2,669) 860%
Income Tax Expense546
 340
 61 % 340
 —
 100%
Net Loss$(118,741) $(25,968) 357 % $(25,968) (2,669) 873%
Total revenues for the year ended December 31, 2016 decreased approximately $68.3 million, a 33% decrease from the year ended December 31, 2015, primarily due to reduced loan volume, which decreased 42%. Total expenses for the year ended December 31, 2016 increased $24.3 million, a 11% increase from the year ended December 31, 2015, primarily due to


restructuring charges of $17.0 million and a $30.7 million expense resulting from the termination of a contract with Colchis Capital Management, L.P. These expenses were partially offset by cost reductions made in the second half of 2016. Net loss for the year ended December 31, 2016 increased $92.8 million, a 357% increase from the year ended December 31, 2015, primarily due to the lower revenues and increased expenses experienced in 2016.
Total revenues for the year ended December 31, 2015 increased approximately $123 million, a 151% increase from the year ended December 31, 2014, primarily due to higher loan volume in 2015, which increased 133% from 2014. Total expenses for the year ended December 31, 2015 increased $146 million, a 174% increase from the year ended December 31, 2014. This increase was primarily due to higher variable marketing expenses and business development expenses which increased by approximately $32 million and $25 million, respectively, from the year ended December 31, 2014 and were spent to generate the increased revenues experienced in 2015. The increased expenses for 2015 also resulted from higher compensation costs as we added more staff to support our business growth, additional facilities-related expenses incurred in connection with our move into our new headquarters and expansion into Phoenix and Utah, and higher marketing and origination expenses required to support our increased origination volume. We also incurred $6.2 million in additional compensation costs as a result of purchasing common stock from certain employees at a price above the fair market value of such common stock. Net loss for the year ended December 31, 2015 increased $23.3 million, an 873% increase from the year ended December 31, 2014, primarily due to the increased expenses discussed above.
Origination Volume
From inception through December 31, 2016, a total of 661,686 Borrower Loans, totaling $8.3 billion, were originated through our marketplace.
During the fourth quarter of 2016, 33,008 Borrower Loans totaling $452.4 million were originated through the marketplace, compared to 86,767 Borrower Loans totaling $1.1 billion during the fourth quarter of 2015. This represented a “unit” or loan, decrease of 62% and a dollar decrease of 60%. As compared to the origination volume for the third quarter of 2016, where 22,963 Borrower Loans were originated through the marketplace, which represented a "unit" or loan increase of 44% and a dollar increase of 45% over the fourth quarter of 2016. During the year ended December 31, 2016, 161,297 Borrower Loans totaling $2.2 billion were originated through our marketplace as compared to 275,789 Borrower Loans totaling $3.7 billion originated during the year ended December 31, 2015 which represented a unit decrease of 42% and a dollar decrease of 41%.
The decrease in originations we experienced during the year ended December 31, 2016 were primarily driven by a number of our largest investors pausing or significantly reducing their purchases of Borrower Loans beginning in the second quarter of the year. We believe these investors have paused or reduced their investment activity because of an increase in their cost of capital; negative actions and publicity at competitors; and our limited use of investor rebates, which have become more prevalent in the industry.
Prosper is taking a number of actions aimed at increasing the amount of capital committed to make purchases through its marketplace. On February 27, 2017, Prosper signed an agreement with a consortium of investors for the purchase of up to $5.0 billion of loans over two years (for more details please see note 23 to our consolidated financial statements). There is no assurance that these actions will result in significant additional long term capital available in the marketplace.
The origination increases experienced during the year ended December 31, 2015, were the result of strong demand from whole loan investors to purchase whole loans and our ability to successfully attract more borrowers to the platform through our increased marketing activities.
Results of Operations
Revenues
The following table summarizes our revenue for the years ended December 31, 2016, 2015 and 2014 (dollar amounts in thousands):


 
Year Ended
December 31,
 2016 2015 % Change 2015 2014 % Change
Operating Revenues 
  
  
      
Transaction Fees, Net$95,130
 $161,708
 (41)% $161,708
 68,229
 137 %
Servicing Fees, Net28,903
 17,238
 68 % 17,238
 4,552
 279 %
Gain on Sale of Borrower Loans3,637
 14,151
 (74)% 14,151
 3,227
 339 %
Other Revenues5,245
 7,687
 (32)% 7,687
 1,828
 321 %
Total Operating Revenues132,915
 200,784
 (34)% 200,784
 77,836
 158 %
Interest Income 
  
 

 

  
  
Interest Income on Borrower Loans44,649
 41,606
 7 % 41,606
 42,087
 (1)%
Interest Expense on Notes(41,187) (38,174) 8 % (38,174) (38,734) (1)%
Net Interest Income3,462
 3,432
 1 % 3,432
 3,353
 2 %
Change in Fair Value of Borrower Loans, Loans Held for Investment and Notes, Net(372) 59
 (731)% 59
 128
 (54)%
Total Revenues136,005
 204,275
 (33)% 204,275
 81,317
 151 %
Transaction Fees
Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace. Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank. Prosper’s fee is determined by the term and credit grade of the Borrower Loans that Prosper facilitates on its marketplace and WebBank originates.  We record the transaction fee revenue net of any fees paid by us to WebBank.  
Transaction fees decreased by 41% for the year ended December 31, 2016 compared to the year ended December 31, 2015, primarily due to lower origination volume through our marketplace, as described above. The average transaction fee for the year ended December 31, 2016 was 4.35%, a slight increase from 4.34% for the year ended December 31, 2015.
Transaction fees increased by 137% for the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to higher origination volume through our marketplace during the year ended December 31, 2015.
Servicing Fees
We earn a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates us for the costs we incur in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. The servicing fee is generally set at 1% to 1.075% per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. The increase in servicing fees for 2016 and 2015 was due to the increase in Borrower Loans being serviced as a result of the cumulative growth in sales of Borrower Loans sold through the Whole Loan Channel over the past three years.  
Gain on Sale of Borrower Loans
Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel. The decrease in 2016 compared to 2015 was due to the reduced volume of loans originated through the platform, as described above, and the related sales and rebates in the amount of $5.9 million that were given to investors in 2016 to encourage whole loan purchases. No rebates were given to investors in 2015.
The increase in 2015 compared to 2014 was due to an increase in the volume of Borrower Loan sales in 2015.


Other Revenues
Other revenues consist primarily of credit referral fees, where partner companies pay Prosper an agreed upon amount for referrals of customers from our website. The decrease in other revenue for 2016 compared to 2015was primarily the result of decreased traffic to existing partners. As described below, Prosper decreased its sales and marketing efforts during the year, which resulted in less traffic to the marketplace and as a result less referrals to our existing partners.  
The increase in other revenues in 2015 compared to 2014 was due to the addition of new credit referral partners, as well as increased traffic to existing partners.
Interest Income on Borrower Loans and Interest Expense on Notes
Prosper recognizes interest income on Borrower Loans originated through the Note Channel using the accrual method based on the stated interest rate to the extent we believe it to be collectable. We record interest expense on the corresponding Notes based on the contractual interest rates. The interest rate charged on the Borrower Loans is generally 1% higher than the corresponding interest rate on the Note to compensate us for servicing the Borrower Loans.
Overall, the increase in net interest income for 2016 compared to 2015 was primarily driven by the increase in volume of Borrower Loans originated through the Note Channel.
Overall, net interest income for 2015 compared to 2014 did not change significantly as the underlying Borrower Loans and Notes balances did not increase significantly and the average interest rate on the Borrower Loans and Notes held on Prosper’s Balance Sheet decreased due to a change in the composition of these Borrower Loans and Notes.  
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, net
The fair value of Borrower Loans, loans held for sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The main assumptions used to value such Borrower Loans, loans held for sale and Notes include prepayment rates derived from historical prepayment rates for each credit grade, default rates derived from historical performance, recovery rates and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. Loans held for sale are primarily comprised of Borrower Loans held for short durations and are valued using the same approach as the Borrower Loans held at fair value.
The following table summarizes the fair value adjustments for the years ended December 31, 2016, 2015 and 2014, respectively (dollar amounts in thousands):
 Year ended December 31,
 2016 2015 2014
Borrower Loans$(25,934) $(21,594) $(15,868)
Loans Held for Sale(7) (121) 73
Notes25,569
 21,774
 16,391
Total$(372) $59
 $596
Expenses
The following table summarizes our expenses for the years ended December 31, 2016, 2015 and 2014 (dollar amounts in thousands):


 Year ended December 31,
 2016 2015 % Change 2015 2014 % Change
Expenses 
  
  
      
Origination and Servicing$33,944
 $31,139
 9 % 31,139
 14,098
 121%
Sales and Marketing70,146
 112,284
 (38)% 112,284
 41,971
 168%
General and Administrative - Research and Development26,214
 18,014
 46 % 18,014
 5,981
 201%
General and Administrative - Other76,521
 68,466
 12 % 68,466
 21,935
 212%
Restructuring Charges17,027
 —
 100 % —
 —
 —%
Other30,348
 —
 100 % —
 —
 —%
Total Expenses$254,200
 $229,903
 11 % 229,903
 83,985
 174%
As of December 31, 2016, 2015 and 2014, we had 355, 619 and 229 full-time employees, respectively.  The following table reflects full-time employees as of December 31, 2016, 2015 and 2014 by department.
 December 31,
 2016 2015 2014
Origination and Servicing151
 221
 99
Sales and Marketing28
 115
 15
General and Administrative - Research and Development78
 133
 65
General and Administrative - Other98
 150
 50
Total Headcount355
 619
 229
Origination and Servicing
Origination and servicing costs consist primarily of salaries, benefits and stock-based compensation expense related to our credit, collections, customer support and payment processing employees and vendor costs associated with facilitating and servicing Borrower Loans. The increase in 2016 compared to 2015 of 9% was primarily due to an increase in personnel related expenses of $2.0 million, as in the first half of the period Prosper expanded its verification and customer support teams to support the larger number of loans that were serviced and to support an anticipated future increase in loan application and processing volumes. Additionally, Prosper incurred an additional $1.0 million in costs relating to data services for the Prosper Daily application and $0.9 million in increased amortization costs for internal use software. These increases were offset by a $1.8 million decrease in outsourced customer support costs during the period. The increase in 2015 compared to 2014 of 121% was primarily due to an increase in personnel related expenses as we expanded our verification and customer support teams to support the increased loan application and processing volume and an increase in consumer reporting agency and loan processing costs which was also driven by higher loan volumes.
Sales and Marketing
Sales and Marketing costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, and direct mail marketing, as well as the compensation expenses such as wages, benefits and stock based compensation for the employees who support these activities. For the year ended December 31, 2016 compared to the year ended December 31, 2015, the decrease of 38% in expenses was largely due to decreased variable costs and a decrease in personnel as Prosper slowed its marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium due to decreases in investor demand through the Whole Loan Channel. These decreases included a $9.2 million or 18% decrease in direct mailing costs as Prosper reduced the volume of its direct mail campaigns, a $25.8 million or 75% decrease in partnership costs as Prosper significantly reduced partnership activities and negotiated lower rates with existing partners and a $2.2 million or 42% decrease in online marketing costs as Prosper significantly reduced its efforts in this area. Compensation costs decreased during the year ended December 31, 2016 by $1.2 million or 10%. These reductions are not as large as the decrease in activity-based spending as Prosper increased sales and marketing headcount during the first four months of 2016 before making significant reductions in such headcount during the restructuring in May 2016.


For the year ended December 31, 2015 compared to the year ended December 31, 2014, the increase of 168% was largely due to increased costs related to generating the continuing growth in originations through our marketplace including a $22 million or 156% increase in affiliate marketing costs as we increased the number and volume of partners, a $29 million or 145% increase in direct mailing costs as we increased the volume of our direct mail campaigns, a $4.3 million or 438% increase in online marketing costs as we significantly expanded our efforts in this area and a $9.7 million or 435% increase in compensation costs due to the hiring of 100 additional employees in this department in 2015.  
General and Administrative – Research and Development
Research and development costs consist primarily of salaries, benefits and stock-based compensation expense related to our engineering and product development employees and related vendor costs. The increase in 2016 compared to 2015 of 46% was primarily due to an increase in personnel-related expenses as we expanded our engineering and product development teams to support our continued investment in our marketplace. The increase for stock based compensation costs was due to large grants to new employees who were granted options in late 2015 and due to additional expense as a result of the stock option reprice that occurred in May 2016, these increased the stock based compensation expense for these employees by $4.0 million or 156%. Salaries and wages for these employees increased 25% or $3.3 million, this was the result of increased employee levels for the first four months of 2016 before the restructuring that occurred in May of 2016 that significantly lowered the employee levels. The total increase in costs for the year ended December 31, 2016 is not as large as the total investment in research and development activities as a portion of these costs are capitalized as internal use software projects, which are amortized in origination and servicing.   Prosper capitalized internal-use software and website development costs in the amount of $6.3 million and $7.3 million for the years ended December 31, 2016 and 2015, respectively.  The increase in 2015 compared to 2014 of 201% was primarily due to an increase in personnel-related expenses as we expanded our engineering and product development teams to support our continued investment in our marketplace.
General and Administrative – Other
General and administrative other expenses consist primarily of salaries, benefits and stock-based compensation expense related to our accounting and finance, legal, human resources and facilities employees, professional fees related to legal and accounting and facilities expenses. The increase in 2016 compared to 2015 of 12% was primarily due to an increase in personnel related expenses as Prosper had higher headcount levels in 2016 before the restructuring took place on May 3, 2016 and an increase in facilities expenses as Prosper obtained additional space to support the increased headcount. These headcount levels were subsequently reduced as part of the restructuring that occurred in May 2016. The increase in 2015 compared to 2014 of 212% was primarily due to an increase in personnel-related expenses as we increased our headcount to support our growth and increased facilities expenses as we obtained additional space to support our increase in headcount in 2015.
Restructuring Charges
Restructuring costs consist of personnel and facilities related costs related to the strategic restructuring of the business that Prosper announced on May 3, 2016. This restructuring included the termination of employees in our Phoenix, Arizona and San Francisco, California locations and the closing of our Salt Lake City, Utah location. Personnel costs include employee severance and benefits for the termination of 167 employees. Facilities charges include estimated losses on the sublease and lease termination costs for properties in Phoenix, Salt Lake City and San Francisco. Additionally, in the fourth quarter of 2016, Prosper incurred additional restructuring expenses when it closed its office in Tel Aviv, Israel and ceased the use of leased office space in Delaware. The closure of the Tel Aviv office included the termination of 31 employees. Prosper did not incur restructuring costs in 2015 or 2014.
Other
Other expenses consist of interest income, contract termination costs and changes in the fair value of the Convertible Preferred Stock Warrant Liability. In November 2016 Prosper negotiated the termination of a contract with Colchis Capital Management, L.P. ("Colchis"). In exchange for termination of the contract Prosper agreed to pay Colchis $9 million and issue a warrant to purchase shares of a new series of preferred stock representing 7% of Prosper's capitalization as of the date of issuance for $0.01 per share. The fair value of the warrants at the time of contract termination was $21.7 million. The total of the cash payment and the fair value of the warrants issued is recorded in Other Expenses.



Quarterly Results of Operations
The following table sets forth our unaudited consolidated statement of operations data for each of the eight quarters ended December 31, 2016. The unaudited quarterly statement of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the unaudited quarterly statement of operations data. Our historical results are not necessarily indicative of our future operating results. The following quarterly consolidated financial data should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (dollar amounts in thousands, except per share information):
Quarters EndedDecember 31, 2016September 30, 2016June 30, 2016March 31, 2016
Revenues    
Operating Revenues    
Transaction Fees, Net$19,944
$14,086
$19,276
$41,824
Servicing Fees, Net7,004
7,079
7,676
7,144
Gain (Loss) on Sale of Borrower Loans(228)761
(687)3,791
Other Revenues683
973
816
2,773
Total Operating Revenues27,403
22,899
27,081
55,532
Interest Income    
Interest Income on Borrower Loans10,939
11,735
11,192
10,783
Interest Expense on Notes(10,731)(10,636)(10,098)(9,722)
Net Interest Income208
1,099
1,094
1,061
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net(245)(47)(2)(78)
Total Net Revenues27,366
23,951
28,173
56,515
Expenses    
Origination and Servicing7,029
7,633
8,833
10,449
Sales and Marketing15,732
9,391
12,303
32,720
General and Administrative18,851
24,740
28,499
30,645
Restructuring Charges, Net3,436
(470)14,061
—
Other Expenses, Net30,348
—
—
—
Total Expenses75,396
41,294
63,696
73,814
Net Loss Before Taxes(48,030)(17,343)(35,523)(17,299)
Income Tax Expense202
74
105
165
Net Loss Applicable to Common Shareholders$(48,232)$(17,417)$(35,628)$(17,464)
Net Loss Per Share – Basic and Diluted$(0.71)$(0.27)$(0.56)$(0.29)
Weighted-Average Shares - Basic and Diluted67,713,630
65,393,175
63,270,058
60,357,488



Quarters EndedDecember 31, 2015September 30, 2015June 30, 2015March 31, 2015
Revenues    
Operating Revenues    
Transaction Fees, Net$49,724
$46,842
$39,800
$25,342
Servicing Fees, Net6,442
4,652
3,575
2,569
Gain on Sale of Borrower Loans4,270
4,263
3,696
1,922
Other Revenues2,752
2,229
1,630
1,076
Total Operating Revenues63,188
57,986
48,701
30,909
Interest Income    
Interest Income on Borrower Loans10,685
10,280
10,165
10,476
Interest Expense on Notes(9,613)(9,550)(9,448)(9,563)
Net Interest Income1,072
730
717
913
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net152
(87)95
(101)
Total Net Revenues64,412
58,629
49,513
31,721
Expenses    
Origination and Servicing8,804
8,357
7,126
6,852
Sales and Marketing35,290
31,844
26,580
18,570
General and Administrative28,910
22,236
21,832
13,502
Other Expenses, Net—
—
—
—
Total Expenses73,004
62,437
55,538
38,924
Net Loss Before Taxes(8,592)(3,808)(6,025)(7,203)
Income Tax Expense56
35
176
73
Net Loss Applicable to Common Shareholders$(8,648)$(3,843)$(6,201)$(7,276)
Net Loss Per Share – Basic and Diluted$(0.15)$(0.07)$(0.11)$(0.14)
Weighted-Average Shares - Basic and Diluted57,922,593
55,907,765
55,612,485
52,766,255

Liquidity and Capital Resources (in thousands):
 
For the Year Ended
December 31,
 2016 2015 2014
Net Loss$(118,741) $(25,968) $(2,669)
Net cash provided by (used in) operating activities(62,667) 5,444
 (4,651)
Net cash used in investing activities(21,542) (174,213) (71,606)
Net cash provided by financing activities40,251
 184,507
 108,475
      
Net Increase (decrease) in cash and cash equivalents(43,958) 15,738
 32,218
Cash and cash equivalents at the beginning of the period66,295
 50,557
 18,339
Cash and cash equivalents at the end of the period$22,337
 $66,295
 $50,557
Net cash decreased for the year ended December 31, 2016, primarily due to the $54.4 million loss, net of non-cash items, $10.0 million for purchase of Property and Equipment, an additional $7.2 million for investing activity restricted cash which includes $5.5 million in additional collateral for WebBank, a $5 million payment for the BillGuard contingent liability and a $3 million scheduled payment to reduce our settlement liability. These decreases are offset by net proceeds from available for sale securities being converted to cash of $40.3 million. Net cash used in investing primarily represents acquisitions of Borrower


Loans (excluding acquisition of Borrower Loans sold to unrelated third parties, which is included in cash flow from operations along with the corresponding proceeds from sale of Borrower Loans), offset by repayment of Borrower Loans and $40.3 million of available for sale securities that have been converted into cash. Net cash provided by financing activities primarily represents proceeds from the issuance of Notes, partially offset by payments on Notes. In the year ended December 31, 2015 cash provided by financing activities consisted primarily of $165 million raised through the issuance of Series D preferred convertible shares, which was offset by $29.2 million paid to repurchase common stock from certain employees.
Prosper also has available for sale securities that are available for its liquidity needs. The fair value of securities available for sale as of December 31, 2016 was $32.8 million. As a result the total cash, cash equivalents and available for sale investments available to Prosper at December 31, 2016 for its liquidity needs was $55.1 million. At December 31, 2016, the available for sale securities included corporate debt securities, commercial paper, US treasury securities and agency bonds. All securities were rated investment grade (defined as a rating equivalent to a Moody’s rating of “Baa3” or higher, or a Standard & Poor’s rating of “BBB-” or higher) and there were no significant unrealized losses. These securities continue to be available to meet liquidity needs.
During 2016 Prosper underwent a strategic restructuring to streamline its operations and lower Prosper’s fixed cost base. The strategic restructuring included significant headcount reductions and the closure of our Salt Lake City and Tel Aviv offices. We have terminated a number of real estate leases to reduce our spending on real estate. As we enter fiscal 2017, we will continue to implement our strategy to streamline our operations. We also expect reductions in discretionary spending and greater efficiency from variable marketing spending to result in combined annual operating expense savings. We believe we will see the benefit of this in 2017. Furthermore, in 2016 we incurred $7.3 million in severance expense, $9.0 million in lease termination expense and $30.7 million in other contract termination costs that we currently do not anticipate incurring in 2017. We believe the efforts discussed in this section will significantly reduce the amount of net cash used in operating activities in 2017. Additionally, on February 27, 2017, we signed an agreement with a consortium of investors, which we expect will increase loan originations through our platform without the use of cash rebates. For more details on this agreement please see note 23 to our consolidated financial statements.
We believe our cash and equivalents, together with available for sale investment and cash flows from operations, will be sufficient to meet our operating and capital requirements for at least the next twelve months. However, if the financial results anticipated as a result of the restructuring and cost-saving measures discussed previously in this section are not achieved, our current cash and equivalents may not be sufficient to meet our operating and capital requirements for at least the next twelve months without obtaining additional sources of liquidity which may not be available on favorable terms or at all. Our future operating and capital requirements will depend on numerous factors, including without limitation, future results of operations, ability to attract whole loan purchasers, and ability to sublease excess office space at favorable rates. If we are unable to generate positive cash flow from operations or to obtain funds from additional sources, this could have a material adverse effect on our business and financial condition.
Income Taxes
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing bases of existing assets and liabilities are expected to reverse. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against our deferred tax assets.  Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.
We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. We are required to make subjective assumptions and judgments regarding our income tax exposures. Interpretations and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of operations.
Given our history of operating losses, it is difficult to accurately forecast when and in what amounts future results will be affected by the realization, if any, of the tax benefits of future deductions for our net operating loss carry-forwards. Based on the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in prior years, we have provided a full valuation allowance against our net deferred tax assets.


Off-Balance Sheet Arrangements
As a result of retaining servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purpose entities that purchase these Borrower Loans. None of these special purpose entities are consolidated as we are not the primary beneficiary.  Other than these special purpose entities we did not have any relationships with unconsolidated entities or financial partnerships, such as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other purposes.
Contractual Obligations
As of December 31, 2016, the following table summarizes our contractual obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):
 Payments Due by Period
 TotalLess Than 1 Year1 - 3 Years3 - 5 YearsMore Than 5 Years
Operating lease obligations$59,710
$7,660
$25,448
$17,657
$8,945
WebBank purchase obligations18,559
18,559
—
—
—
Total contractual obligations$78,269
$26,219
$25,448
$17,657
$8,945
WebBank Purchase Obligations
Under our loan account program with WebBank, a Utah-charted industrial bank that serves as our primary issuing bank, WebBank retains ownership of loans facilitated through our marketplace for two business days after origination. As part of this arrangement, we have committed to purchase the loans at the conclusion of the two business days.
Critical Accounting Policies
The accounting policies discussed below reflect our most significant judgments, assumptions and estimates which we believe are critical in understanding and evaluating our reported financial results including: (i) fair value measurement of Borrower Loans and Notes; (ii) stock-based compensation expense; (iii) loan servicing assets and liabilities; (iv) consolidation of variable interest entities;  (v) valuation of goodwill and intangible assets; (vi) impairment of goodwill and intangible assets and convertible preferrred stock warrant liability. These judgments, estimates and assumptions are inherently subjective in nature and actual results may differ from these estimates and assumptions, and the differences could be material. For a full description of all accounting policies adopted by us, please see Note 2 to our consolidated financial statements.
Borrower Loans and Notes
Through the Note Channel, we issue Notes and purchase Borrower Loans from WebBank, and hold the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is conditioned upon the repayment of the associated Borrower Loan. We have elected fair value accounting for Borrower Loans originated through the Note Channel and the related Notes. The fair value election for these Borrower Loans and Notes allows for the use of the same measurement approach for both Borrower Loans and the related Notes, consistent with the borrower payment dependent design of such Notes. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans originated through the Note Channel and the related Notes to be valued using the same methodology. A specific allowance account is not recorded relating to the Borrower Loans in which we have elected the fair value option, but rather we estimate the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected payment, loss and recovery rates.


We estimate the fair values of Borrower Loans originated through the Note Channel and the related Notes using a discounted cash flow valuation methodology. The valuation methodology considers projected prepayments and uses the historical defaults, losses and recoveries on Borrower Loans to project future losses and net cash flows on such Borrower Loans.
We include in earnings the estimated unrealized fair value gains or losses during the period of Borrower Loans, and the offsetting estimated fair value gains or losses on the related Notes in the period in which such changes in fair value occurs.  
Stock-Based Compensation
Stock-based compensation includes expense associated with stock option grants and restricted stock units (“RSUs”). Stock-based compensation for stock options is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award. As a result, we estimate the amount of stock-based compensation we expect to be forfeited based on our historical experience. If actual forfeitures differ significantly from our estimates, stock-based compensation expense and our results of operations could be materially impacted.
Determining the fair value of stock-based awards at the grant date requires judgment. We use the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option-pricing model is affected by our assumptions regarding a number of variables including the fair value of our common stock, our expected common stock price volatility over the expected life of the options, expected term of the stock option, risk-free interest rates and expected dividends.
Loan Servicing Asset and Liability
We record loan servicing assets and liabilities at their estimated fair values when we sell Borrower Loans to unrelated third-party buyers. The gain or loss on a loan sale is recorded in “Gain on Sale of Borrower Loans” on the consolidated statement of operations while the fair value of the servicing rights, which is based on the degree to which the contractual loan servicing fee is above or below an estimated market loan servicing fee is recorded in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Servicing Assets” and “Other Liabilities,” respectively, on the consolidated balance sheet.
On January 1, 2015, we elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition. Prior to January 1, 2015, we measured the servicing assets and liabilities using the amortized cost method.
We use a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities which considers the contractual projected servicing fee revenue that we earn on the Borrower Loans, estimated market servicing fees to service such loans, prepayment rates, default rates and the current principal balances of the loans.
Consolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity. 
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans.   For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a potentially significant economic interest in the VIE.   In no case are we the primary beneficiary and as a result none of these entities are consolidated on our consolidated financial statements.  


Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Valuation of Goodwill and Intangible Assets
When we acquire businesses, we allocate the purchase price to the tangible assets, liabilities and identifiable intangible assets acquired. Any residual purchase price is recorded as goodwill. The allocation of the purchase price requires management to make significant estimates in determining the fair value of acquired assets and assumed liabilities, especially with respect to intangible assets. These estimates are based on information obtained from management of the acquired companies, market participant data, and historical experience. These estimates can include, but are not limited to:
the time and expenses that would be necessary to recreate the asset;
the profit margin a market participant would receive;
cash flows that an asset is expected to generate in the future; and
discount rates.
These estimates are inherently uncertain and unpredictable. A change in these estimates could impact our allocation of purchase price to the acquired assets and assumed liabilities. During the measurement period, which is not to exceed one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill based on updated estimate information or facts and circumstances existing as of the acquisition date. Following the earlier of (1) receipt of all necessary information to determine the fair value of assets acquired and liabilities assumed, or (2) the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.
Impairment of Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the underlying net tangible and intangible assets. Goodwill is evaluated for impairment annually in the third quarter, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of goodwill or a significant decrease in expected cash flows. During the periods presented no reporting units were at risk of failing step one of the impairment analysis.
Intangible assets consist of identifiable intangible assets, primarily developed technology and customer lists, resulting from our acquisitions. Acquired intangible assets are recorded at cost, net of accumulated amortization. Intangible assets are amortized on a straight-line or accelerated basis over their estimated useful lives. Long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

PROSPER FUNDING LLC
This management’s discussion and analysis of financial condition and results of operations, or MD&A, contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” in this Annual Report on Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. This discussion should be read in conjunction with Prosper Funding’s historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report on Form 10-K. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and PMI'sProsper Funding’s actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those included in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. In this MD&A, the unsecured, consumer loans originated through the platform, which are referred to elsewhere in this Annual Report as “PMI Borrower Loans” and “Prosper Funding Borrower Loans”, are referred to collectively as “Borrower Loans”, and the borrower payment dependent notes issued through the platform, which are referred to elsewhere in this Annual Report as “PMI Notes” and “Prosper Funding Notes”, are referred to collectively as “Notes”, which is consistent with the manner of presentation in the financial statements included in this Annual Report.

Overview
PMI developed and began operating the platform in 2006, which permitted borrower members to apply for Borrower Loans and lender members to purchase Notes, the proceeds of which facilitated the funding of Borrower Loans. In February 2012, PMI formed Prosper Funding to hold Borrower Loans and issue Notes. Prosper Funding has been organized to operate in a manner that is intended to minimize the likelihood that Prosper Funding would be substantively consolidated with PMI in a bankruptcy proceeding. PMI is the sole equity member of Prosper Funding. Prosper Funding commenced operations on February 1, 2013.

On February 1, 2013, PMI transferred ownership of the platform, including all of the rights related to the operation of the platform as well as all then-outstanding Borrower Loans, to Prosper Funding. Beginning February 1, 2013, all Notes issued and sold through the platform are issued, sold and serviced by Prosper Funding. At that same time, Prosper Funding assumed all of PMI’s obligations with respect to all then-outstanding Notes. Pursuant to an Administration Agreement between PMI and Prosper Funding, PMI manages all aspects of the platform on behalf of Prosper Funding. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the platform, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the making of related Borrower Loans by WebBank and the funding of such Borrower Loans by WebBank. In this Annual Report, any actions taken by PMI pursuant to the Loan Account Program Agreement or the Administration Agreement are described as actions taken by PMI, in spite of the fact that such actions are being taken by PMI on behalf of WebBank or Prosper Funding, respectively.

The platform enables borrower members to request and obtain Borrower Loans by posting listings on the platform indicating the principal amount of the desired loan. PMI assigns a Prosper Rating consisting of letter grades, based in part on the borrower’s credit score, to each member who requested a Borrower Loan. Borrower members’ Prosper Rating, credit score range, debt-to-income ratios and other credit data are displayed with their listings and are available for viewing by lender members on an anonymous basis.

Listings are allocated to one of two lender member funding channels: (i) the Note Channel allows lender members to commit to purchase Notes from Prosper Funding, the payments of which are dependent on the payments made on the corresponding Borrower Loan; and (ii) the Whole Loan Channel allows lender members to commit to purchase 100% of a Borrower Loan directly from Prosper Funding. Each time PMI posts a group of listings on the platform, it determines the relative proportions of such listings that will be allocated to the Note Channel and the Whole Loan Channel, respectively, based on PMI’s estimate of the relative overall purchase demand in each channel. PMI then uses a random allocation methodology to allocate individual listings between the two channels based on those proportions.  PMI currently posts listing on the platform twice per day on weekdays and once per day on weekends, although the frequency with which PMI posts listings may change in the future.  If a listing is not funded through the Whole Loan Channel within the first hour after its posting, the listing will be removed from the Whole Loan Channel and posted to the Note Channel for the remainder of its listing period. Such listing will include a designation indicating that the listing came from the Whole Loan Channel. The Whole Loan Channel was launched in April 2013 and is only available to certain institutional investor lender members approved by PMI that meet the definition of an accredited investor under Regulation D under the Securities Act of 1933, as amended. The Whole Loan Channel is an important and growing part of Prosper Funding’s business. Lender members who participate in the Whole Loan Channel are required to enter into loan purchase and loan servicing agreements with Prosper Funding that specify the parties’ rights and obligations with regard to the sale of Borrower Loans through the Whole Loan Channel and which name Prosper Funding as the servicer of such Borrower Loans.

All Borrower Loans are made by WebBank, an FDIC-insured, Utah-chartered industrial bank, and sold to Prosper Funding. WebBank sells the loan to Prosper Funding, without recourse to WebBank, in exchange for the principal amount of the Borrower Loan. WebBank does not have any obligation to any purchasers of Notes, or Borrower Loans. PMI verifies the identity of 100% of borrowers using a variety of methods including credit bureau data, other electronic data sources and offline documentary procedures. PMI verifies income and/or employment on a subset of borrowers based on a proprietary algorithm. The intention of the algorithm is to verify income or employment in cases where the self-reported income of the borrower is highly determinative of the borrower’s risk rating.

PMI derives operating revenue from fees paid by WebBank under the Loan Account Program Agreement. Upon funding a Borrower Loan, WebBank charges the borrower an origination fee equal to a specified percentage of the principal amount of such Borrower Loan. WebBank, in turn, pays PMI amounts equal to the origination fees as compensation for PMI’s loan origination activities on WebBank’s behalf. Prior to February 1, 2013, PMI also derived revenue from charging lender members a servicing fee on Notes, which was equal to an annualized percentage of the outstanding principal balance of the corresponding Borrower Loan, which PMI deducted from payments on the Borrower Loans.

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Since February 1, 2013, following transfer of the platform from PMI to Prosper Funding, PMI no longer earns servicing fees. Instead, PMI derives revenue from the fees it receives from Prosper Funding for the services it provides pursuant to the Administration Agreement.

PMI has a limited operating history and has incurred net losses since its inception. PMI’s net loss was $27,181 and $16,110 for the years ended December 31, 2013 and 2012, respectively. Historically, PMI earned revenues primarily from borrower origination fees, non-sufficient funds fees and lender member service fees. As of February 1, 2013, PMI began earning revenues primarily from origination fees and the fees it receives from Prosper Funding for the services it provides pursuant to the Administration Agreement. PMI has funded its operations primarily with proceeds from equity financings, which are described below under “Liquidity and Capital Resources.”

PMI’s operating plan calls for a continuation of the current strategy of increasing transaction volume on the platform to increase revenue until PMI reaches profitability and becomes cash-flow positive.  As of December 31, 2013, the platform had facilitated approximately 101,000 Borrower Loans since its launch, totaling an aggregate principal amount of approximately $801,000.

Trends and Uncertainties

The peer-to-peer lending industry remains a very innovative and unique industry, and the application of federal and state laws in areas such as securities and consumer finance to the industry is still evolving. PMI will continue to monitor this evolution actively in order to identify and respond quickly to any legislative or regulatory developments that may affect the platform.

During 2013, the platform’s origination volume increased consistently in terms of both units and total dollar amounts. PMI hopes to continue this trend of growth as the platform’s borrower and lender member bases continue to strengthen and become more familiar with the platform. Over time, PMI expects the platform’s lender member base to grow as the platform gains more exposure to potential lender members and the Notes and Borrower Loans are established as a viable investment alternatives.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of PMI’s consolidated financial condition and results of operations is based on PMI’s consolidated financial statements, which PMI has prepared in accordance with U.S. generally accepted accounting principles. The preparation of consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the related disclosures. PMI bases its estimates on historical experience and on various other assumptions that PMI believes to be reasonable under the circumstances. Actual results could differ from those estimates. PMI’s significant accounting policies which include repurchase obligation, revenue recognition, stock-based compensation, and income taxes are more fully described in Note 2 to its consolidated financial statements included elsewhere in this Annual Report.

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Critical accounting policies are those policies that PMI believes present the most complex or subjective measurements and have the most potential to impact its financial position and operating results. While all decisions regarding accounting policies are important, PMI believes that the following policies could be considered critical.

Fair Value Measurement

Following the Accounting Standards Codification (“ASC”) Topic 820 Fair Value Measurements and Disclosures, PMI determines the fair values of its financial instruments based on the fair value hierarchy established in that standard, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. PMI uses various valuation techniques depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, PMI determines fair value using assumptions that it believes a market participant would use in pricing the asset or liability.

PMI’s financial instruments consist principally of cash and cash equivalents, restricted cash, short term investments, receivables, loans held for investment, Borrower Loans and corresponding Notes, accounts payable and accrued liabilities.

The estimated fair values of cash, cash equivalents, restricted cash, accounts payable, and accrued liabilities approximate their carrying values because of their short-term nature. Short term investments, loans held for investment, Borrower Loans, and Notes are accounted for on a fair value basis. For additional information and discussion regarding PMI’s significant accounting policies surrounding fair value measurement, see Note 2, Note 5 and Note 6 to the consolidated financial statements included elsewhere in this Annual Report.

Borrower Loans and Notes

On July 13, 2009, PMI implemented the operating structure it employed through January 31, 2013 and began issuing Notes. That operating structure resulted in PMI purchasing loans from WebBank and holding the loans until maturity. PMI also issued new securities, the Notes, to the winning lender members in connection with that operating structure. PMI’s obligation to repay the Notes was conditioned upon the repayment of the associated Borrower Loan owned by PMI. As a result of those changes, PMI carried the Borrower Loans and the Notes on its balance sheet as assets and liabilities, respectively.

In conjunction with that operating structure, PMI adopted the provisions of ASC Topic 825, Financial Instruments. ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. PMI applies the provisions of ASC Topic 825 to Borrower Loans and Notes. The aggregate fair value of the Borrower Loans and Notes were reported as separate line items in the assets and liabilities sections of the balance sheet using the methods described in ASC Topic 820.

PMI determines the fair value of the Borrower Loans and Notes in accordance with the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As observable market prices are not available for the  Borrower Loans and Notes PMI held or for similar assets and liabilities, PMI believes the Borrower Loans and Notes should be considered Level 3 financial instruments under ASC Topic 820. ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Overall, if the fair value of the Borrower Loans held by PMI that were funded through the Note Channel decrease or increase due to any changes in PMI’s assumptions, there will also be a corresponding decrease or increase in the fair value of the linked Notes. As a result, the effect on PMIs earnings of adverse changes in key assumptions would be mitigated.

As PMI receives scheduled payments of principal and interest on the Borrower Loans it holds that were funded through the Note Chanel, PMI in turn makes principal and interest payments on the corresponding and Notes. These principal payments reduce the carrying value of those Borrower Loans and Notes. If PMI does not receive payments on any such Borrower Loan, PMI is not obligated to and does not make payments on the corresponding Notes. The aggregate fair value of a group of Notes corresponding to a particular Borrower Loan is approximately equal to the fair value of that Borrower Loan, less the service fee. If the fair value of the Borrower Loan decreases due to changes in PMI’s expectations regarding the likelihood of default or the amount of loss in the event of default, there will also be a corresponding decrease in the aggregate fair value of the related Notes (an unrealized aggregate gain related to the Notes and an unrealized loss related to the Borrower Loan).
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Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at December 31, 2013 for Borrower Loans and Notes are presented in the following table:
  Borrower Loans  Notes 
Discount rate assumption:  9.77%*  9.77%*
Resulting fair value from:        
100 basis point increase $222,989  $220,362 
200 basis point increase  220,363   217,756 
 
        
Resulting fair value from:        
100 basis point decrease $228,465  $225,784 
200 basis point decrease  231,282   228,560 
 
        
Default rate assumption:  7.2%*  7.2%*
Resulting fair value from:        
10% higher default rates $223,233  $220,620 
20% higher default rates  220,039   217,439 
 
        
Resulting fair value from:        
10% lower default rates $228,151  $225,477 
20% lower default rates  230,554   227,866 

* Represents weighted average assumptions considering all Prosper Ratings.
Overall, if the fair value of the Borrower Loans decrease or increase due to any changes in PMI’s assumptions, there will also be a corresponding decrease or increase in the fair value of the linked Notes. As a result, the effect on PMI’s earnings of adverse changes in key assumptions is mitigated.

As PMI receives scheduled payments of principal and interest on Borrower Loans originated through the Note Channel, it in turn makes principal and interest payments on the corresponding Notes. These principal payments reduced the carrying value of the Borrower Loans and Notes. If PMI does not receive payments on any such Borrower Loan, it is not obligated to and does not make payments on the related Notes. The aggregate fair value of a group of Notes corresponding to a particular Borrower Loan is approximately equal to the fair value of that Borrower Loan, less the service fee. If the fair value of the Borrower Loan decreases due to changes in PMI’s expectation regarding the likelihood of default of the loan or the amount of loss in the event of default, there is also a corresponding decrease in the aggregate fair value of the Notes (an unrealized aggregate gain related to the Notes and an unrealized loss related to the corresponding Borrower Loan).

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For additional information and discussion, see Note 2 and Note 6 to the consolidated financial statements included elsewhere in this Annual Report.

Results of Operations

Revenues

Origination Fees

WebBank charges borrowers an origination fee equal to a specified percentage of the aggregate principal balance of each Borrower Loan based on Prosper Rating and loan term. WebBank, in turn, pays PMI amounts equal to those fees as compensation for its marketing and underwriting activities.

Prior to April 2012, there was an origination fee of 0.50% for Borrower Loans with a Prosper Rating of AA, 3.95% for Borrower Loans with a Prosper Rating of A or B and 4.95% for Borrower Loans with a Prosper Rating of C through HR. In April 2012, this fee schedule was updated as follows to consider the term of a loan:
  Jan – Apr 2012  Apr 2012 – May 2013   
Prosper Rating  All Loans  
1 Year Loan
*
  3 Year Loan  5 Year Loan 
AA   0.50%  0.50%  1.95%  4.95%
A  3.95%  1.95%  3.95%  4.95%
B  3.95%  2.95%  4.95%  4.95%
C – HR   4.95%  3.95%  4.95%  4.95%
* In April 2013,  1 year loans were discontinued.
In May 2013, the origination fee schedule was updated as follows:

  May 2013 – December 2013 
Prosper Rating  3 Year Loan  5 Year Loan 
AA   1.00% - 1.95%  1.95% - 4.95%
A  3.95%  4.95%
B  4.95%  4.95%
C – HR   4.95%  4.95%
Origination fees for the years ended December 31, 2013 and 2012 were $16,471 and $6,918, respectively, representing an increase of $9,553, or 138%, which was primarily due to higher origination volume through the platform during 2013.

Origination Volume

From inception through December 31, 2013, a total of 1,908 Borrower Loans, totaling $800,715, were originated through the platform.

During the fourth quarter ended December 31, 2013, 14,054 Borrower Loans totaling $155,844 were originated through the platform, compared to 4,425 Borrower Loans totaling $37,027 originated during the fourth quarter of 2012. This represented a “unit” or loan, increase of 217.6% and a dollar increase of 320.9% . 33,912 Borrower Loans totaling $357,438 were originated through the platform during 2013 as compared to 19,553 Borrower Loans totaling $153,175 originated during 2012, which represented a unit increase of 73.4% and a dollar increase of 133.4%.

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For the year ended December 31, 2013, month over month unit origination through the platform grew by an average of approximately 6%, and month over month dollar origination grew by an average of approximately 11%, as compared to 6% and 9%, respectively, for the year ended December 31, 2012.

The graph below shows aggregate dollar originations through the platform dating back to July 2009:

 
In January 2013, PMI undertook an equity financing that recapitalized the company and brought in a new senior management team. In February 2013, PMI implemented a new public offering of Notes designed to provide the platform’s lender members with protection in the event of PMI’s bankruptcy. In addition, commencing in the second quarter of 2013, PMI introduced the Whole Loan Channel and also increased marketing campaigns to attract new borrowers. Lenders, liquidity and loan originations have all increased as a result of these changes. The decrease in loan originations that occurred between Q4 2012 and Q1 2013 was due to lack of liquidity.
Interest Income on Borrower Loans and Interest Expense on Notes
Loan servicing fees are accrued daily based on the current outstanding loan principal balance of Borrower Loan(s), but are not recognized until payment is received, due to uncertainty of collection of payments on Borrower Loans. PMI charges a servicing fee to holders of  Notes and Borrower Loans at an annualized rate of 1.0% of the outstanding principal balance of the applicable Borrower Loan, which PMI deducts from each payment on such Borrower Loan.
PMI’s procedures generally involve the automatic debiting of a borrower’s bank account by automated clearing house (“ACH”) transfer, although PMI also allows payment by check or bank draft. PMI charges a non-sufficient funds fee to a borrower to cover the cost PMI incurs if an automatic payment fails and is rejected by the borrower member’s bank, for example if there is an insufficient balance in the bank account or if the account has been closed or otherwise suspended. If an automatic payment fails, PMI makes up to two additional attempts to collect; however, there is no additional fee charged to the borrower if those attempts also fail. PMI retains the entire amount of the non-sufficient funds fee to cover its costs, and recognizes such fee immediately.

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PMI recognizes interest income on Borrower Loans using the accrual method based on the stated interest rate to the extent PMI believes it to be collectable. PMI records interest expense on the corresponding Notes based on the contractual interest rates to the extent PMI believes they will be collectible.

The following table summarizes interest income on Borrower Loans and interest expense on Notes for the years ended December 31, 2013 and 2012.
 December 31, 
 2013  2012 
Interest income on borrower loans$35,526 $23,101 
Interest expense on notes (33,072)  (21,889)
Net interest income$2,454  $1,212 
Overall, the increase in net interest income for the periods above was driven by the rise in the number of loans originated through the platform and serviced by PMI. As discussed above, the platform’s origination volume increased steadily during 2013 and 2012, which resulted in an increase to PMI's gross interest income and expense and ultimately PMI's net interest income for the aforementioned years.

Rebates and Promotions

PMI accounts for rebates and promotions in accordance with ASC Topic 605, Revenue Recognition. From time to time PMI offers rebates and promotions to its borrower and lender members. PMI records rebates and promotions as an offset to revenue if they are earned directly upon the origination of the loan. PMI’s rebates and promotions are generally in the form of cash back and other incentives paid to lender and borrower members.

For the years ended December 31, 2013 and 2012, PMI incurred expenses related to rebates and promotions extended to borrower and lender members of $1,534 and $1,322, respectively, which represented an increase of $212 or 16%. During 2013 and 2012, PMI increased the frequency and volume of its promotion and rebate programs as a way to incent more borrower and lender members to participate on the platform.

Cost of Revenues

Cost of Services

Cost of services consists primarily of credit bureau fees, payments which are due to strategic partners, collection expenses, and other expenses directly related to Borrower Loan funding and servicing. Cost of services expenses were $2,056 and $1,421 for the year ended December 31, 2013 and 2012, respectively, representing an increase of 45%. The primary driver for the increase was higher listing volume and an increase in strategic partnership fees under PMI’s contracts with WebBank.

Repurchase and Indemnification Obligations

Under the terms of the Notes, the Lender Registration Agreements between PMI and lender members who participate in the Note Channel, and the loan purchase agreements between PMI and lender members that participate in the Whole Loan Channel, PMI may, in certain circumstances, become obligated to repurchase a Note or Borrower Loan from a lender member or indemnify a lender member against loss on a Note. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal/state/local lending laws. These repurchase and indemnification obligations are evaluated at least once a quarter and represent an estimate based on the rate of historical loan losses as a percentage of originations (which generally occur within six to nine months of origination). The provision for the repurchase and indemnification obligations may include a judgmental management adjustment due to PMI’s limited operating history, changes in current economic conditions, the risk of new and as of yet undetected fraud schemes, changes in origination unit and dollar volumes and the lack of industry comparables. Based on the analysis of the historical provision, PMI increased the obligation by 356% to approximately $118 at December 31, 2013 from a previously recorded obligation of $26 at December 31, 2012. During 2013, PMI repurchased or provided indemnification with respect to $724 in Notes, collectively. PMI continues to devote a significant amount of attention to fraud prevention and will continue to enhance its fraud control procedures with the aim of maintaining a low level of repurchases and indemnifications.
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Other Income and Expenses

Change in Fair Value on Borrower Loans and Notes, net

Under the methods described in ASC Topic 820, Fair Value Measurements and Disclosures, PMI elected to account for unrealized gains or losses on the Borrower Loans and Notes on a fair value basis. PMI estimated the fair value of the Borrower Loans and Notes using discounted cash flow methodologies. The primary cash flow assumptions used to value the Borrower Loans and Notes include default rates derived from historical performance and discount rates applied to each Prosper Rating based on the perceived credit risk of each rating. Because PMI is obligated to pay principal and interest on any Note equal to the loan payments, if any, it received on the corresponding Borrower Loan, net of its 1.0% servicing fee, changes in the fair value of the Notes were approximately equal to changes to the fair value of the corresponding Borrower Loans, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to holders of Notes. These amounts were included as a component of other income (expense) in PMI’s consolidated statements of operations. The total fair value adjustment was $(4,856) and $5,734 for Borrower loans and Notes, respectively, resulting in a net unrealized gain of $877 for the year ended December 31, 2013. The total fair value adjustment was $4,801 and $(3,844) for Borrower Loans and Notes, respectively, resulting in a net unrealized gain of $957 for the year ended December 31, 2012.

Insurance recoveries

PMI and certain of its executive officers and directors were the subject of a class action lawsuit brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008 that alleged that PMI offered and sold unqualified and unregistered securities in violation of the California and federal securities law. During the first quarter of 2011, the Superior Court of California issued a final statement of decision finding that Greenwich Insurance Company, PMI’s D&O insurance carrier at the time the events that gave rise to the class action lawsuit occurred, had a duty to defend the suit and requiring that Greenwich pay PMI's past and future defense costs in the suit up to $2,000. During 2011, Greenwich made aggregate payments to PMI in the amount of $2,000 to reimburse PMI for the defense costs it had incurred in the class action suit. On October 2, 2012, Greenwich made an additional payment of $143 to PMI for pre-judgment interest. Please see Note 12 “Commitments and Contingencies” in the notes to PMI’s consolidated financial statements contained elsewhere in this Annual Report.

Loss on impairment of fixed assets

During 2013, PMI’s management made the decision to discontinue the development of certain of its planned software development projects and to dispose of obsolete computer software and hardware. The assets previously capitalized in prior years were deemed to be impaired in accordance with ASC Topic 360, Property, Plant, and Equipment. An impairment charge for obsolete equipment of $62 is included in operating expenses in PMI's consolidated statement of operations for the year ended December 31, 2013.

During 2012, there were no asset disposals resulting in a loss or impairment of PMI’s fixed assets.

Other Income

Other income consists primarily of credit referral fees, where partner companies pay PMI an agreed upon amount for referrals of customers from the website. Other income was $1,151 at December 31, 2013 versus $369 at December 31, 2012, which represented an increase of 212% or $782. The increase in credit referrals during these periods was due to the addition of new partners as well as increased traffic to existing partners.

Expenses

All employees of the PMI Group are employed by PMI. Compensation and benefits expense was $13,079 and $10,334 for the years ended December 31, 2013 and 2012, respectively. The increase of $2,745 or 27% was largely due to PMI’s steadily increasing its employee headcount during 2013, which in turn resulted in increased payroll costs such as salary and wages, payroll taxes, and healthcare. PMI increased its headcount across its marketing and operations teams during 2013 to respond to increased volume demands. PMI intends to continue to increase headcount as the platform’s lender and borrower member bases grow and PMI carries out its business plan; however, PMI expects its current investment in the platform and website to improve operating expense efficiency going forward. In addition, spending increased related to the use of contract labor, bonus expense, variable pay expense and overtime during 2013 over the corresponding period in 2012.

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As of December 31, 2013, PMI had 88 full-time employees compared to 74 full-time employees as of December 31, 2012.  The following table reflects full-time employees as of December 31, 2013 and 2012 by department.

  December 31, 
  2013  2012 
Sales, marketing and operations  53   37 
Engineering  24   22 
Administration  11   15 
Total Headcount  88   74 
Marketing and advertising costs consist primarily of affiliate marketing, search engine marketing, online and offline campaigns, email marketing, public relations, gift/promotional expenses, and direct mail marketing. Marketing and advertising costs were $14,851 and $5,683 for the years ended December 31, 2013 and 2012, respectively. This increase of $9,168 or 161% was largely due to increased costs related to the continuing growth in originations on the platform.
Depreciation and amortization expense was $961 and $679 for the years ended December 31, 2013 and 2012, respectively, which was an increase of $282 or 42% compared to the prior year. The increase in overall depreciation and amortization expense was primarily due to the capitalization of various internally developed software projects placed in service in late 2012 and in 2013, which in turn increased depreciation expense taken on those assets during the year ended December 31, 2013.

Professional service expenses are comprised of legal expenses, audit and accounting fees, consulting services and other outside costs. Professional service expenses were $1,979 for the year ended December 31, 2013 and $3,307 for the year ended December 31, 2012. This decrease of $1,328 or 40% was primarily due to a large decrease in legal fees related to the settlement of the class action lawsuit and legal fees related to the formation of Prosper Funding and registration of Prosper Funding and PMI’s offering. The PMI Group also saw an increase in accounting, tax and consulting fees offset by a decrease in other outside costs.

Facilities and maintenance expenses consist primarily of rent paid for PMI’s corporate office lease and data co-location facility, network and power usage costs, software licenses and subscriptions, and hardware and software maintenance and support. Facilities and maintenance expenses were $1,764 and $1,228 for the years ended December 31, 2013 and 2012, respectively. This increase of 44% was primarily due to additional software licenses and subscriptions purchased as well as hardware and software maintenance and support costs, and an increase in rent.

PMI recorded an expense to establish a reserve for class action settlement liability of $10,000 in the consolidated statements of operations for the year ended December 31, 2013.

Other expenses consist of bank service charges, NASAA state penalties, travel and entertainment expenses, taxes, licenses, communications costs, recruiting costs and other miscellaneous expenses. Other expenses were $1,733 and $1,580 for the years ended December 31, 2013 and 2012, respectively. Overall, this 10% increase is attributable to an increase in taxes and licenses, administrative costs, recruiting fees, travel and entertainment and internet costs.

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Liquidity and Capital Resources

  
For the year ended
December 31,
 
  2013  2012 
Net Loss $(27,181) $(16,110)
 
        
Net cash used in operating activities  (24,826)  (16,162)
Net cash used in investing activities  (69,826)  (78,258)
Net cash provided by financing activities  110,691   87,504 
 
        
Net Increase (decrease) in cash and cash equivalents  16,039   (6,916)
Cash and cash equivalents at the beginning of the period  2,300   9,216 
Cash and cash equivalents at the end of the period $18,339  $2,300 

PMI has incurred operating losses since its inception. PMI had negative cash flows from operations of $24,826 and $16,162 for the years ended December 31, 2013 and 2012, respectively. As reflected in the accompanying consolidated financial statements, PMI has an accumulated deficit of approximately $104,080 as of December 31, 2013.

At December 31, 2013, PMI had approximately $18,339 in available cash and cash equivalents and short term investments. Since its inception, PMI has financed its operations primarily through equity financing from various sources. PMI is dependent upon raising additional capital or debt financing to fund its current operating plan, however that PMI believes that its current cash position is sufficient to meet its current liquidity needs.

Net cash used in operating activities was $24,826 and $16,162 for the years ended December 31, 2013 and 2012, respectively. The increase in cash used in operating activities was primarily attributable to an increase in net loss from operating activities due to increased operating expense. PMI expects its efforts to improve cost efficiency to generate greater increases in origination revenue and reduce ongoing cash requirements.

Net cash used in investing activities was $69,826 and $78,258 for the year ended December 31, 2013 and 2012, respectively. The primary driver for the change was an increase in acquisition of Borrower Loans, offset by increased repayments of Borrower Loans. Net cash used in investing activities during 2013 included, $341,176 in acquisition of Borrower Loans and purchases of property and equipment of $2,889, offset by $181,700 in proceeds from the sales of Borrower Loans, $1,000 in maturities of short term investments and $105,692 in principal repayment of Borrower Loans.

Net cash provided by financing activities was $110,691 and $87,504 for the year ended December 31, 2013 and 2012, respectively. Net cash provided by financing activities during 2013 consisted of $860 of proceeds from the exercise of vested and unvested stock options, $169,742 of proceeds from the issuance of Notes, and $44,549 in proceeds from the issuance of convertible preferred stock, which was offset by $104,692 in repayment of Notes, $41 in purchases of restricted stock from stockholders and $273 in issuance costs of convertible preferred stock.

In January 2013, PMI issued and sold to investors 13,868,152 shares of new Series A preferred stock (“new Series A”) in a private placement at a purchase price of $1.44 per share for approximately $19,841 net of issuance costs. In connection with that sale, PMI issued 5,117,182 shares at par value $.01 per share, of Series A-1 convertible preferred stock to the holders of shares of PMI’s preferred stock that was outstanding immediately prior to the sale (“Old Preferred Shares”) in consideration for such stockholders participating in the sale. The new Series A and Series A-1 securities were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering.
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In connection with the new Series A sale, Old Preferred Shares were converted into shares of PMI common stock at a ratio of 1:1.  In addition, each such participating holder received a share of PMI’s new Series A-1 preferred stock for every dollar of liquidation preference associated with an Old Preferred Share held by such holder. Each share of Series A-1 preferred stock has a liquidation preference of $1.00 and converts into common stock at a ratio of 1,000,000:1.

In September 2013, PMI issued and sold to investors 8,288,784 shares of new Series B preferred stock (“new Series B”) in a private placement at a purchase price of $3.02 per share for approximately $24,880, net of issuance costs.  The new Series B securities were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering.

On July 19, 2013, solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action lawsuit pending before the Superior Court of California, County of San Francisco, California, entered into a Stipulation and Agreement of Compromise, Settlement, and Release (the “Settlement”) setting forth an agreement to settle all claims related thereto. In connection with the Settlement, PMI agreed to pay the plaintiffs an aggregate amount of $10,000, payable according to the following schedule: (i) $2,000 within 10 days of entry of an order by the court granting preliminary approval of the Settlement (“Preliminary Approval”); (ii) $2,000 on the one-year anniversary of Preliminary Approval; (iii) $3,000 on the two-year anniversary of Preliminary Approval; and (iv) $3,000 on the three-year anniversary of Preliminary Approval. The Settlement is subject to final approval by the court. Subject to satisfaction of the conditions set forth in the Settlement, the defendants will be released by the plaintiffs from all claims concerning or arising out of the offering of promissory notes on the platform from January 1, 2006 through October 14, 2008. For more information, see Note 12 of PMI’s consolidated financial statements located elsewhere in this Annual Report.

Income Taxes

PMI incurred no income tax provision for the year ended December 31, 2013 and 2012. Given PMI’s history of operating losses and inability to achieve profitable operations, it is difficult to accurately forecast how future results will be affected by the realization and use of net operating loss carry forwards.

ASC Topic 740, Income Taxes, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes PMI’s historical operating performance and the reported cumulative net losses in all prior years, PMI provided a full valuation allowance against PMI’s net deferred tax assets. PMI will continue to evaluate the realizability of the deferred tax assets each reporting period.

Off-Balance Sheet Arrangements

In February 2012, PMI formed Prosper Funding. PMI is the sole equity member of Prosper Funding and Prosper Funding’s accounts are included in PMI’s consolidated financial statements included in this Annual Report. Prosper Funding has been organized and is 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 PMI, and thus have its assets subject to claims by PMI’s creditors, in the event PMI becomes subject to a bankruptcy proceeding. PMI restructured the platform so that Borrower Loans are held by Prosper Funding and Prosper Funding issues and sells the Notes.

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PROSPER FUNDING LLC

Overview

Prosper Funding was formed in the state of Delaware in February 2012 as a limited liability company with its sole equity member being PMI. Prosper Funding was formed by PMI to hold the Borrower Loans assume PMI’s obligations underoriginated through the Notes Note Channel


and issue therelated Notes. Although Prosper Funding will beis consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI.

PMI developed the platform and owned the proprietary technology that makes operation of the platform possible. On February 1, 2013, PMI transferred the platform to Prosper Funding, giving Prosper Funding the right to operate the platform to originate and service Borrower Loans and Notes. Prosper Funding entered into an Administration Agreement with PMI pursuant to which PMI has agreed to provide certain administrative services relating to the platform. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the platform for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement between PMI and WebBank in relation to loan origination and funding. The license is terminable in whole or in part in relation to failure by PMI to pay the licensing fee or the termination of PMI as the provider of some or all of the aforementioned services.

Prosper Funding commenced operations as of February 1, 2013 when PMI transferred ownership of the platform, including all of the rights related to the operation of the platform, to Prosper Funding. Since February 1, 2013, all Notes issued and sold through the platform are issued, sold and serviced by Prosper Funding. Pursuant to   the Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the platform, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the making of Borrower Loans by WebBank and the funding of Borrower Loans by WebBank. Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages all other aspects of the platform on behalf of Prosper Funding.

All Borrower Loans are unsecured obligations of individual borrower members with a fixed interest rate and loan terms set at three or five years. All Borrower Loans are funded by WebBank. After funding a Borrower Loan, WebBank sells the Borrower Loan to Prosper Funding, without recourse to WebBank, in exchange for the principal amount of the Borrower Loan. WebBank does not have any obligation to purchasers any of the Notes.

Prosper FundingPFL formed Prosper Asset Holdings LLC (“PAH”)PAH in November 2013 as a limited liability company with the sole equity member being Prosper Funding.PFL. PAH was formed to purchase certain Borrower Loans from Prosper FundingPFL and, after holding such Borrower Loans for a shorting period of time, sell them to certain participants in the Whole Loan Channel that prefer to purchase Borrower Loans that have been held for a certain period of time following origination.Channel.

Trends and Uncertainties

The future performance of Borrower Loans may not be consistent with the historical trends demonstrated by Borrower Loans to date. During 2013, Prosper Funding increased its origination volume consistently in terms of both units and total dollar amounts and hopes to continue that trend of growth into the future. Over time, Prosper Funding expects its lender member base to grow as it gains more exposure to potential borrower and lender members and establishes its Notes and Borrower Loans as viable investment alternatives. Prosper Funding expects the growth of its lender member base will contribute to increased origination volume.

Prosper Funding’s operating plan calls for a strategy of increasing transaction volume, borrower focused marketing and improving the efficiency of the platform to increase revenue. Prosper Funding will generate revenue through license fees earned under the Administration Agreement and servicing fees from lender members which are described more fully in the Prosper Funding Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

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The peer-to-peer lending industry remains a very innovative and unique industry, and the application of federal and state laws in areas such as securities and consumer finance to Prosper Funding’s business is still evolving. Prosper Funding will continue to monitor this evolution actively in order to identify and respond quickly to any legislative or regulatory developments that may impact the platform.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of Prosper Funding’s consolidated financial condition and results of operations is based on Prosper Funding’s consolidated financial statements, which Prosper Funding has prepared in accordance with U.S. generally accepted accounting principles. The preparation of consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the related disclosures. Prosper Funding bases its estimates on the historical experience of PMI and on various other assumptions that Prosper Funding believes to be reasonable under the circumstances. Actual results could differ from those estimates. Prosper Funding’s significant accounting policies are more fully described in Note 2 to its consolidated financial statements included elsewhere in this Annual Report.

Critical accounting policies are those policies that Prosper Funding believes present the most complex or subjective measurements and have the most potential to impact its financial position and operating results. While all decisions regarding accounting policies are important, Prosper Funding believes that the following policies could be considered critical.

Fair Value Measurement

Following the Accounting Standards Codification (“ASC”) Topic 820 Fair Value Measurements and Disclosures, Prosper Funding determines the fair values of its financial instruments based on the fair value hierarchy established in that standard, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Prosper Funding uses various valuation techniques depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, Prosper Funding determines fair value using assumptions that it believes a market participant would use in pricing the asset or liability.

Prosper Funding’s financial instruments consist principally of cash and cash equivalents, restricted cash, Borrower Loans held for investment, Borrower Loans and corresponding Notes, accounts payable and accrued liabilities, .
The estimated fair values of cash, cash equivalents, restricted cash, accounts payable, and accrued liabilities approximate their carrying values because of their short-term nature. Loans held for investment,  Borrower Loans, and Notes are accounted for on a fair value basis. For additional information and discussion regarding Prosper Funding’s significant accounting policies surrounding fair value measurement, see Note 2, Note 5 and Note 6 to the consolidated financial statements included elsewhere in this Annual Report.

Borrower Loans and Notes

Prosper Funding purchases Borrower Loans from WebBank and either sells the Borrower Loans through the Whole Loan Channel or sells Notes corresponding to the Borrower Loan through the Note Channel and holds the Borrower Loans until maturity. Prosper Funding’s obligation to repay the Notes is conditioned upon the repayment of the associated Borrower Loan owned by Prosper Funding. Prosper Funding carries the  Borrower Loans and Notes on its balance sheet as assets and liabilities, respectively.

Prosper Funding has adopted the provisions of ASC Topic 825, Financial Instruments. ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. Prosper Funding applies the provisions of ASC Topic 825 to Borrower Loans and Notes on an instrument by instrument basis. The aggregate fair value of the Borrower Loans and Notes that are assets of liabilities of Prosper Funding are reported as separate line items in the assets and liabilities sections of the balance sheet using the methods described in ASC Topic 820.

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Prosper Funding determines the fair value of the Borrower Loans and Notes in accordance with the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As observable market prices are not available for the Borrower Loans Prosper Funding holds, or the Notes, or for similar assets and liabilities, Prosper Funding believes that the  Borrower Loans and Notes should be considered Level 3 financial instruments under ASC Topic 820. ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

In a hypothetical transaction as of the measurement date, Prosper Funding believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which it might offer Borrower Loans may result in differences between the aggregate outstanding principal balance of the Borrower Loans Prosper Funding sells and their fair value as of the transaction date. Changes in the fair value of Borrower Loans and Notes subject to the provisions of ASC Topic 820 are recognized in earnings; fees and costs associated with the acquisition of Borrower Loans are recognized as incurred. Prosper Funding estimates the fair value of the Borrower Loans and Notes using a discounted cash flow methodology based upon a set of valuation assumptions it believes market participants would use for similar assets and liabilities. The primary assumptions used to value the Borrower Loans and Notes include default rates and discount rates applied to each Prosper Rating.
Overall, if the fair value of the Borrower Loans held by Prosper Funding and funded through the Note Channel decrease or increase due to any changes in Prosper Funding’s assumptions, there will also be a corresponding decrease or increase in the fair value of the linked Notes. As a result, the effect on Prosper Funding’s earnings of adverse changes in key assumptions would be mitigated. However, the impact of these changes in fair value could have a material adverse impact on lender members’ investments in the Notes.

As Prosper Funding receives scheduled payments of principal and interest on the Borrower Loans it holds that were funded through the Note Channel, it in turn makes principal and interest payments on the corresponding Notes. These principal payments reduce the carrying value of those Borrower Loans, and Notes. If Prosper Funding does not receive payments on Borrower Loans it holds that were funded through the Note Channel, it is not obligated to and will not make payments on the corresponding Notes. The fair value of a group of Notes that correspond to the same Borrower Loan is approximately equal to the fair value of that Borrower Loan, less the servicing fee charged to holders of the Notes. If the fair value of that Borrower Loan decreases due to changes in Prosper Funding’s expectation regarding the likelihood of default or the amount of loss in the event of default, there will also be a corresponding decrease in the fair value of the corresponding Notes (an unrealized gain related to the Notes and an unrealized loss related to the Borrower Loan).
Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at December 31, 2013 for Borrower Loans and Notes are presented in the following table:

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 Borrower Loans  Notes 
Discount rate assumption:  9.77%*  9.77%*
Resulting fair value from:        
100 basis point increase $222,989  $220,362 
200 basis point increase  220,363   217,756 
 
        
Resulting fair value from:        
100 basis point decrease $228,465  $225,784 
200 basis point decrease  231,282   228,560 
 
        
Default rate assumption:  7.2%*  7.2%*
Resulting fair value from:        
10% higher default rates $223,233  $220,620 
20% higher default rates  220,039   217,439 
 
        
Resulting fair value from:        
10% lower default rates $228,151  $225,477 
20% lower default rates  230,554   227,866 

* Represents weighted average assumptions considering all Proper Ratings.
For additional information and discussion, see Note 2 and Note 6 to the consolidated financial statements included elsewhere in this Annual Report.

Results of Operations
Overview
The following table summarizes Prosper Funding’s net income for the years ended December 31, 2016 and December 31, 2015 (in thousands):
 
Year Ended
December 31,
    
 2016 2015 $ Change % Change
Total Net Revenue$72,439
 $93,053
 (20,614) (22)%
Total Expenses99,623
 67,718
 31,905
 47 %
Net Income (Loss)$(27,184) $25,335
 (52,519) (207)%
Total revenues for the year ended December 31, 2016 decreased $20.6 million, a 22% decrease from the year ended December 31, 2015, primarily due to decreased loan listings which decreased the administrative fee revenue –related party. Total expenses for the year ended December 31, 2016 increased $31.9 million, a 47% increase from the year ended December 31, 2015, primarily due to the $30.7 million non-recurring Colchis contract termination charge described in other expenses below. Net income for the year ended December 31, 2016 decreased $52.5 million, a 207% decrease from the year ended December 31, 2015, primarily due to the decrease in revenues and the non-recurring contract termination charge. Prosper Funding would have been profitable for the year if the Colchis contract termination charge had not been incurred.
Revenues
Revenue Recognition

The following table summarizes Prosper Funding’s revenue recognition policy is in accordance with ASC Topic 605, Revenue Recognition. Under ASC Topic 605, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,for the price of the services is fixedyears ended December 31, 2016 and determinable and collectability is reasonably assured.2015 (in thousands):


 Year ended December 31,    
 2016 2015 $ Change % Change
Revenues 
  
  
  
Operating Revenues 
  
  
  
Administration Fee Revenue - Related Party$36,630
 $57,919
 (21,289) (37)%
Servicing Fees, Net28,604
 16,218
 12,386
 76 %
Gain on Sale of Borrower Loans3,637
 14,151
 (10,514) (74)%
Other Revenues478
 1,500
 (1,022) (68)%
Total Operating Revenues69,349
 89,788
 (20,439) (23)%
Interest Income on Borrower Loans$44,649
 $41,380
 3,269
 8 %
Interest Expense on Notes$(41,187) $(38,174) (3,013) 8 %
Net Interest Income3,462
 3,206
 256
 8 %
Change in Fair Value on Borrower Loans, Loans Held for
   Investment and Notes, Net
(372) 59
 (431) (731)%
Total Revenues$72,439
 $93,053
 (20,614) (22)%
Administration Fee Revenue - Related Party

Prosper Funding primarily generates revenues through license fees it earns under its Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the platformmarketplace for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement, and (ii) PMI’s performance of its duties and obligations to WebBank under the Loan Account Program Agreement. ForThe decreases in the year ended December 31, 2013, Prosper Funding received $7,632 in administration fee revenue from PMI. Forwere the year ended December 31, 2012, result of lower listing volume during 2016.  The decrease in listings was the result of Prosper reducing marketing spend to reduce demand and maintain marketplace equilibrium.
Servicing Fee Revenue
Prosper Funding had not yet commenced operationsearns a fee from investors who purchase Borrower Loans through the Whole Loan Channel for servicing such loans on their behalf. The servicing fee compensates Prosper Funding for the costs it incurs in servicing these Borrower Loans, including managing payments from borrowers, payments to investors and therefore received $0 in administration fee revenue from PMI.
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Loan Servicing Fees

Loan servicing revenue includes monthly loan servicing fees and non-sufficient funds (“NSF”) fees on outstanding Borrower Loans. Loan servicing fees are accrued daily based on the current outstanding loan principal balance of the Borrower Loan, but are not recognized until payment is received due to the uncertainty of collection of Borrower Loan payments. Prosper Funding’smaintaining investors’ account portfolios. The servicing fee is currently equal to 1.0%generally set at 1% per annum of the outstanding principal balance of the each outstanding Borrower Loan.Loan prior to applying the current payment. The increase in servicing fees was due to the increase in Borrower Loans being serviced as a result of the cumulative growth in sales of Borrower Loans through the Whole Loan Channel over the past three years.  

Gain on Sale of Borrower Loans
Gain on Sale of Borrower Loans consists of net gains on Borrower Loans sold through the Whole Loan Channel. The decrease was due to a decrease in volume originated through the platform as described previously and the related sales and rebates given to investors of $5.9 million in fiscal 2016 to encourage whole loan purchases. This compares to no rebates given to investors on purchase in fiscal 2015.
Other Revenues
Other revenues consists primarily of fees earned from assisting whole loan purchasers with securitizations of their holdings.  The decrease was due to less instances of whole loan purchasers securitizing loans in 2016 compared to 2015.
Interest Income on Borrower Loans and Interest Expense on Notes

Prosper Funding recognizes interest income on the Borrower Loans it holdsoriginated through the Note Channel using the accrual method based on the stated interest rate to the extent that Prosper Funding believes it to be collectable.

Prosper Funding records interest expense on the corresponding Notes based on the contractual interest rate, as adjustedrates to reflect any determination bythe extent Prosper Funding that any portion of the interest on the related Borrower Loan is uncollectible.believes they

Loan servicing fees are accrued daily based on the current outstanding loan principal balance of Borrower Loans, but are not recognized until payment is received, due to uncertainty of collection. For each Borrower Loan serviced by Prosper Funding, Prosper Funding charges an annual servicing fee of 1.0% of the outstanding principal balance, which Prosper Funding deducts from each borrower payment.

Prosper Funding charges a non-sufficient funds fee to borrowers on the first failed payment of each billing period. Non-sufficient funds fees arewill be collectable. The interest rate charged to the borrower and collected and recognized immediately.

Prosper Funding’s procedures generally require the automatic debiting of the applicable borrower bank account by automated clearing house (“ACH”) transfer, although Prosper Funding also allows payment by check or bank draft. Prosper Funding charges a non-sufficient funds fee to a borrower member to cover the cost Prosper Funding incurs if an automatic payment fails or is otherwise rejected by the borrower’s bank, for example, if there is an insufficient balance in the bank account or if the account had been closed or otherwise suspended. If an automatic payment fails, Prosper Funding makes up to two additional attempts to collect; however, there is no additional fee charged to the borrower if those attempts also fail. Prosper Funding retains the entire amount of the non- sufficient funds fee.

The following table summarizes interest income on Borrower Loans and interest expense on Notes for the years ended December 31, 2013 and 2012.
 December 31, 
 2013 2012 
Interest income on borrower loans$32,862 $- 
Interest expense on notes (30,564) - 
Net interest income$2,298 $- 
Cost of Revenues

Cost of Services

Prosper Funding also incurs certain recurring expenses relating to fees under the Administration Agreement with PMI, as well as its agreements with WebBank, Wells Fargo, FOLIOfn Investments, Inc. and CSC Logic, Inc. In addition, Prosper Funding incurs certain ongoing expenses related to collateral requirements under its agreements with WebBank and Wells Fargo Bank. For the year ended December 31, 2013, Prosper Funding incurred $1,270 in cost of services. For the year ended December 31, 2012, Prosper Funding had not commenced operations and therefore incurred $0 in cost of services.

Repurchase and Indemnification Obligations
Under the terms of the Notes, the Lender Registration Agreements with participants in the Note Channel and the loan purchase agreements with participants in the Whole Loan Channel;, Prosper Funding may, in certain circumstances, become obligated to repurchase a Note or Borrower Loan from a lender member or indemnify a lender member against loss on a Note. Generally these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, and a violation of the applicable federal/state/local lending laws. These repurchase and indemnification obligations are evaluated at least once a quarter and represents an estimate based on the rate of historical loan losses as a percentage of originations (which generally occur within six to nine months of origination). The provision for repurchase and indemnification obligations may include a judgmental management adjustment due to the limited operating history of the PMI Group, changes in current economic conditions, the risk of new and as of yet undetected fraud schemes, changes in origination unit and dollar volumes and the lack of industry comparables. The provision for the repurchase and indemnification obligations was $83 for the year ended December 31, 2013. Since Prosper Funding did not commence operations until 2013, there was no provision for the repurchase and indemnification obligation in 2012.
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Other Income and Expenses

Change in Fair Value on Borrower Loans and Notes, net

Under the methods described in ASC Topic 820, Fair Value Measurements and Disclosures, Prosper Funding elected to account for unrealized gains or losses on the Borrower Loans it holds, andis generally 1% higher than the Notesinterest rate on a fair value basis.the corresponding Note to compensate Prosper Funding estimatedfor servicing the Borrower Loans.
Overall, the increase in net interest income for the year was primarily driven by the increase in volume of Borrower Loans originated through the Note Channel.
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies.methodologies based upon a set of valuation assumptions. The primary cash flowmain assumptions used to value thesuch Borrower Loans, Loans Held for Sale and Notes include prepayment rates derived from historical prepayment rates for each credit grade, default rates derived from historical performance, recovery rates and discount rates applied to each Prosper Ratingcredit grade based on the perceived credit risk of each Prosper Rating. Because Prosper Funding was obligated to pay principalcredit grade. Loans Held for Sale are primarily comprised of Borrower Loans held for short durations and interest on any Note equal toare recorded using the loan payments, if any, it received onsame approach as the corresponding Borrower Loan, net of its 1.0% servicing fee, changes inLoans.
The following table summarizes the fair value of the Notes were approximately equal to changes to the fair value of the corresponding Borrower Loans, adjustedadjustments for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to Note holders. These amounts were included as a component of other income (expense) in Prosper Funding’s consolidated statements of operations. The total fair value adjustment was $(4,856) and $5,734 for Borrower Loans and Notes, respectively, resulting in a net unrealized gain of $878 for the yearyears ended December 31, 2013. Since2016 and 2015, respectively (in thousands):
 Year ended December 31,
 2016 2015
Borrower Loans$(25,934) $(21,594)
Notes25,569
 21,774
Loans Held for Sale(7) (121)
Total$(372) $59
Expenses
The following table summarizes Prosper Funding did not commence operations until 2013, there were no fair value adjustmentsFunding’s expenses for the years ended December 31, 2016 and 2015 (in thousands):
 Year ended December 31,    
 2016 2015 $ Change % Change
Expenses       
Administration Fee Expense – Related Party$62,203
 $62,786
 $(583) (1)%
Servicing5,395
 3,705
 1,690
 46 %
General and Administrative1,321
 1,227
 94
 8 %
Other30,704
 —
 30,704
 100 %
Total Expenses$99,623
 $67,718
 $31,905
 47 %
Servicing
Servicing costs consist primarily of vendor costs and depreciation of internal use software costs associated with servicing Borrower Loans. The increase was primarily due to an increase in 2012.

Operating Expenses

loan processing costs which was driven by higher loan volumes being serviced.
Administration Fee Expense - Related Party

Pursuant to thean Administration Agreement between Prosper Funding and PMI, PMI manages the platformmarketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is required to pay PMI (a) an amount equal to one-twelfth (1/12) of the specified annual Corporate Administration Fees of $865,$500 thousand per month, (b) a fee for each Borrower Loan originated through the platform,marketplace, (c) 90%62.5% of all servicing fees collected by or on behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of Prosper Funding.


In addition, under a second Administration Agreement amongbetween PMI and PAH, a wholly owned subsidiary of Prosper Funding, and PAH Prosper Funding is required to pay PMI an annual fee of $150,$0.2 million, payable on a monthly basis, for PMI also being the administrator of PAH’s operations. AdministrationThe decrease in the administration fee expense was $5,053primarily due to the less loans being originated on the marketplace in 2016, resulting in decreased fees owed to PMI by Prosper Funding.
General and Administrative
General and administrative costs consist primarily of bank service charges and professional fees. The increase was primarily due to an increase in bank charges that were incurred with the increased transaction volume.
Other
Other expenses consist of contract termination costs. In November 2016, PMI and Prosper Funding, negotiated the termination of a contract with Colchis Capital Management, L.P. ("Colchis"). In exchange for termination of the contract, PMI, on behalf of Prosper Funding, agreed to pay Colchis $9 million and issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI's capitalization as of the date of issuance for $0.01 per share. The fair value of the warrants at the time of contract termination was $21.7 million. The total of the cash payment and the fair value of the warrants that PMI issued was recorded in Other expenses. Prosper Funding does not expect to incur similar contract termination charges in the future.
Liquidity and Capital Resources (in thousands):
 December 31,
 2016 2015
Net Income$(27,184) $25,335
Net cash provided in operating activities8,836
 34,174
Net cash used in investing activities(52,242) (52,815)
Net cash provided by financing activities35,309
 9,890
Net increase (decrease) in cash and cash equivalents(8,097) (8,751)
Cash and cash equivalents at the beginning of the period15,026
 23,777
Cash and cash equivalents at the end of the period$6,929
 $15,026
Net cash and cash equivalents decreased for the year ended December 31, 2013. Since Prosper Funding did not commence operations until 2013, there was no administration fee expense in 2012.

Depreciation and Amortization

Depreciation and amortization expense was $538 for the year ended December 31, 2013, which was primarily due to the capitalization of various internally developed software projects placed in service or transferred from PMI in 2013. Since Prosper Funding did not commence operations until 2013, there was no depreciation and amortization expense in 2012.

Professional Services

Professional service expenses are comprised of legal expenses, audit and accounting fees, consulting services and other outside costs. Professional service expenses2016. Cash flows were $26 and $114 for the year ended December 31, 2013 and 2012, respectively, representing a decrease of $88 or 77% compared to the prior year. The decrease wasnegative primarily due to a decrease in the legal fees relatedcash distribution to the formationparent of Prosper Funding$8.5 million and purchases of property and equipment of $5.6 million, these were offset of net income of $3.5 million when excluding the registration of the public offering of Notes and related by PMI Management Rights by Prosper Funding and PMI.

Other Operating Expense

Other expenses consist primarily of bank service charges. Other expenses were $242 and $91 for the year ended December 31, 2013 and 2012, respectively, representing an increase of $151 or 166% from the prior year. This increase is primarily due to higher bank service charges due to the commencement of operations in 2013.

Prosper Funding incurs certain fees relating to registering or qualifying its offering and sale of Notes with federal and state securities regulators, as well as additional fees relating to obtaining other licenses and permits that are necessary to the operation of its business. In addition, Prosper Funding incurs certain ongoing expenses related to collateral requirements under its agreements with WebBank and Wells Fargo Bank.

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Prosper Funding also incurs certain recurring expenses relating to fees under the two Administration Agreements with PMI, as well as its agreements with WebBank, Wells Fargo, FOLIOfn Investments, Inc. and CSC Logic, Inc. Prosper Funding will also incur additional expense to the extent it is required to repurchase any Notes or Borrower Loans or indemnify holders of any Notes. Prosper Funding will pay these recurring expenses from license fees and servicing fees that it earns in connection with the license contained in the first Administration Agreement and the servicing of Borrower Loans and Notes. Prosper Funding expects that the combination of the initial capital contribution made to Prosper Funding by PMI and Prosper Funding’s ongoing fee revenue will be sufficient for it to meet ongoing cash requirements and sustain its operations.

Liquidity and Capital Resources

  
For the year ended
December 31,
 
  2013  2012 
Net Income (Loss) $3,623  $(205)
 
        
Net cash used in operating activities  (1,755)  (205)
Net cash used in investing activities  (66,291)  - 
Net cash provided by financing activities  73,830   210 
 
        
Net increase in cash and cash equivalents  5,784   5 
Cash and cash equivalents at the beginning of the period  5   - 
Cash and cash equivalents at the end of the period $5,789  $5 

Prosper Funding has had positive cash flows since commencement of operations. At December 31, 2013, Prosper Funding had $5,789 in available cash and cash equivalents. Since its inception, Prosper Funding has financed its operations primarily through capital infusions from its parent, PMI. Prosper Funding believes that its current cash position is sufficient to meet its current liquidity needs.

Net cash used in operating activities was $1,755 and $205 for the year ended December 31, 2013 and 2012, respectively. The net cash used in operating activities in 2013 was primarily attributable to fees incurred related to certain recurring expenses under the Administration Agreements with PMI, as well as Prosper Funding’s agreements with WebBank, Wells Fargo, FOLIOfn Investments, Inc. and CSC Logic, Inc., partially offset by license fees and servicing fees Prosper Funding received.

non-cash loss on contract termination. Net cash used in investing activities was $66,291 and $0 for the year ended December 31, 2013 and 2012, respectively. Net cash used in investing activities in 2013 primarily consistedrepresents acquisitions of Borrower Loans (excluding acquisition of Borrower Loans offset by repayments of Borrower Loans, andsold to unrelated third parties which is included in cash flow from operations along with the corresponding proceeds from the sale of Borrower Loans), offset by repayment of Borrower Loans.

Net cash provided by financing activities was $73,830 and $210 for the year ended December 31, 2013 and 2012, respectively. The increase in cash provided by financing activities was primarily due to increased capital infusions contributed by PMI andrepresents proceeds from the issuance of Notes, partially offset by payments on Notes.

Notes and distributions to the parent. Net cash provided by financing activities increased in 2016 when compared to 2015 as Prosper Funding
Income Taxes

Prosper Funding incurred no income tax provision for the yearyears ended December 31, 20132016 and 2012.2015. Prosper Funding is a US disregarded entity and the income and loss is included in the return of its parent, PMI. Given PMI’s history of operating losses and historical inability to achieve profitable operations, it is difficult to accurately forecast how PMI’sProsper’s and Prosper Funding’s results will be affected by the realization and use of net operating loss carry forwards.

Off-Balance Sheet Arrangements

As a result of December 31, 2013,retaining servicing rights on the sale of Borrower Loans, Prosper Funding hasis a variable interest holder in certain special purpose entities that purchase these Borrower Loans.  None of these special purpose entities are consolidated as Prosper Funding is not engaged in any off-balance sheet financing activities.the primary beneficiary.  


Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in financial market prices and interest rates.
Because balances, interest rates and maturities of Borrower Loans are matched and offset by an equal balance of Notes with the exact same interest rates (net of our servicing fee) and initial maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined Borrower Loan and Note portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.
The fair values of Borrower Loans, Loans Held for Sale and the related Notes are determined using discounted cash flow methodologies based upon a set of valuation assumptions. The fair value adjustments for Borrower Loans are largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and due to the total principal balances of the Borrower Loans being very close to the total principal balances of the Notes.
Prosper had cash and cash equivalents of $22.3 million as of December 31, 2016, and $66.3 million as of December 31, 2015.  These amounts were held in various unrestricted deposits with highly rated financial institutions and short-term, highly liquid marketable securities consisting primarily of money market funds, commercial paper, U.S. treasury securities and U.S. agency securities. Cash and cash equivalents are held for working capital purposes.  Due to their short-term nature, Prosper believes that it does not have any material exposure to changes in the fair value of these liquid investments as a result of changes in interest rates. Decreases in short-term interest rates will not materially reduce interest income on these cash and cash equivalents because of the current low rate environment. Increases in short-term interest rates will moderately increase the interest income earned on these cash balances.  
Interest Rate Sensitivity
Prosper holds available for sale investments.  The fair value of Prosper’s available for sale investment portfolio was $32.8 million and $73.2 million as of December 31, 2016 and December 31, 2015, respectively.  These investments consisted of corporate debt securities, commercial paper, U.S. agency bonds, U.S. Treasury securities and short term bonds. To mitigate the risk of loss, Prosper’s investment policy and strategy is focused first on the preservation of capital and supporting our liquidity requirements, and then maximizing returns. To manage this risk, Prosper limits and monitors maturities, credit ratings, and concentrations within the investment portfolio. Changes in U.S. interest rates affect the interest earned on Prosper’s available for sale investments and the market value of those investments. A hypothetical 100 basis point increase in interest rates would result in a decrease of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of December 31, 2016, and of approximately $0.6 million in the fair value of Prosper’s available for sale investments as of December 31, 2015. A hypothetical 100 basis point decrease in interest rates would result in an increase of approximately $0.1 million in the fair value of Prosper’s available for sale investments as of December 31, 2016, and of approximately $0.6 million in the fair value of Prosper’s available for sale investments as of December 31, 2015. Any realized gains or losses resulting from such interest rate changes would only be recorded if Prosper sold the investments prior to maturity or the investments were not considered other-than-temporarily impaired.

Not applicable for smaller reporting companies.

86
Item 8.Financial Statements and Supplementary Data

Prosper Marketplace, Inc.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Convertible Preferred Stock and Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

Prosper Funding LLC
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Members' Equity


Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary financial statementsinformation required by this Item are8 is included in Item 157 under the caption "Quarterly Results of this Annual Report on Form 10-K and are presented beginning on page F-2.Operations."

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

Not Applicable.

Item 9A.Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Each Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in suchIn connection with the preparation of this Annual Report on Form 10-K, each Registrant’s Exchange Act Reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the management, of such Registrant, including such Registrant’s principal executive officer (“PEO”) and principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance that the objectives of the control system are met. Such Registrant’s disclosure controls and procedures were designed to provide reasonable assurance of achieving their stated objectives. Underunder the supervision and with the participation of management, including the PEOsuch Registrant’s Principal Executive Officer (PEO) and the PFO, each Registrant hasPrincipal Financial Officer (PFO), evaluated the effectiveness of the design and operation of itssuch Registrant’s disclosure controls and procedures (as such term isas defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act)Act of 1934, as amended, as of December 31, 2013, following the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework, and with further guidance for internal controls for small business provided by the SEC’s Interpretive Guidance in Release No. 34-55929.2016. Based upon this evaluation, the PEO and the PFO of sucheach Registrant have concluded that these disclosure controls and procedures are effective to provide reasonable assurance that material information relating to sucheach Registrant and its subsidiaries that is required to be disclosed in reports filed with, or submitted to, the SEC under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified by the SEC rules and forms, and (ii) is accumulated and communicated to management, including its PEO and PFO, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting
Under Section 404 of the supervision and with the participationSarbanes-Oxley Act of management, including the PEO and PFO of each Registrant, each such Registrant has evaluated changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during2002, each Registrant’s most recent fiscal quarter, and has concluded there was no change inmanagement is required to assess the effectiveness of such Registrant’s internal control over financial reporting as of the end of each fiscal year and report, based on that has materially affected, or is reasonably likely to materially affect,assessment, whether such Registrant’s internal control over financial reporting is effective.
Management of each Registrant is responsible for establishing and maintaining adequate internal control over financial reporting. Each Registrant’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of such Registrant’s financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Registrants’ management has assessed the effectiveness of the Registrants’ internal control over financial reporting as of December 31, 2016. In making this assessment the Registrants used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework (2013).” These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. Each Registrant’s assessment included documenting and evaluating the effectiveness of its internal control over financial reporting. Based on this evaluation, the person serving as each Registrant’s principal executive officer and principal financial officer has concluded that such Registrant’s internal controls were effective as of December 31, 2016.


Changes in Internal Control over Financial Reporting
During the fourth quarter of 2016, there were no changes in the internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
The Dodd-Frank Wall Street Reform and Consumer Protection Act exempts any company that is not a “large accelerated filer” or an “accelerated filer” (as defined by SEC rules) from the requirement that such company obtain an external audit of the effectiveness of its internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. As a result, each of the Registrants isare exempt from the requirement that itthey include in itstheir Annual Report on Form 10-K an attestation report on internal control over financial reporting by an independent registered public accounting firm; however, management’s annual report on internal control over financial reporting, pursuant to Section 404(a) of the Sarbanes-Oxley Act, is still required with respect to the Registrants.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
In connection with the preparation of this December 31, 2016 Form 10-K, the Registrants’ management, under the supervision and with the participation of each Registrant.Registrant’s Principal Executive Officer (PEO) and Principal Financial Officer (PFO), evaluated the effectiveness of the design and operation of each Registrant’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2016. Each Registrant’s PEO and PFO have concluded that, as of December 31, 2016, each Registrant’s disclosure controls and procedures were effective.

Item 9B.Other Information

Prosper Marketplace, Inc.

Not applicable.

Prosper Funding LLC

Not applicable.
PART III

Item 10.
Directors, Executive Officers, and Corporate Governance

Prosper Marketplace, Inc.
Executive Officers, Directors and Key Employees

Prosper Marketplace, Inc.

The following table sets forth information about PMI’s executive officers and directors as of the date of this Annual Report:Report on Form 10-K:

Name Age Position(s)
David Kimball 
Stephan P. Vermut67Executive Chairman and Director
Aaron Vermut4146 Chief Executive Officer and Director
Ronald Suber 4952 President
Usama Ashraf40Chief Financial Officer
Brad Pennington35Chief Risk Officer
Kunal Kaul39Executive Vice President, Operations
Sachin D. Adarkar
4750
General Counsel and Secretary
Aaron Vermut44Director
Christopher M. Bishko 4447 Director
Rajeev V. Date 4345 Director
Patrick W. Grady 3134Director
David R. Golob49Director
Nigel W. Morris58 Director

Stephan P. Vermut David Kimballhas served as PMI’sChief Executive ChairmanOfficer and a director of PMI since December 2016. From March 2016 to February 2017, Mr. Kimball served as PMI's Chief Financial Officer. He also currently serves as Chief Executive Officer and a director of PFL. Prior to joining PMI, Mr. Kimball was Senior Financial Officer of United Services Automobile Association's (USAA) Chief Operating Office, with financial responsibility for the real estate unit, the bank, the P&C and life insurance companies, the investment management company, and the call centers/distribution functions. Before his position as Senior Financial Officer of USAA's Chief Operating Office, Mr. Kimball spent eight years in various finance roles at USAA, including Senior Vice President of Corporate Finance, Chief Financial Officer of USAA Federal Savings Bank, and Assistant Vice President of Capital Markets.  Prior to his time at USAA, Mr. Kimball spent ten years at Ford Motor Company and Ford Motor Credit Company in both the U.S. and U.K., working on their securitization programs, debt issuance, and a variety of financial planning and analysis positions. Mr. Kimball holds an M.B.A. and a B.A. in English from Brigham Young University. PMI believes that Mr. Kimball's financial and business expertise give him the qualifications and skills to serve as a director.
Ronald Suber has served as President of PMI since March 2014. Prior to his appointment as Executive Chairman,President, Mr. VermutSuber served as Chief Executive OfficerPMI’s Head of Global Institutional Sales from January 2013 until March 2014. Mr. VermutSuber is also President and a director of PFL. Prior to joining PMI, Mr. Suber served as Managing Director at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC) from August 2012 until January 2013. Mr. Suber served as Head of Global Sales and Marketing, Senior Partner and Director of Merlin Securities, LLC from April 2008 until it was acquired by Wells Fargo Securities in August 2012. Mr. Suber served as President of Spectrum Global Fund Administration from 2006 to 2008. Mr. Suber was with Bear Stearns from 1992 to 2006, where he most recently served as Senior Managing Director. Mr. Suber received a B.A. in Economics from University of California, Berkeley.
Usama Ashraf has served as Chief Financial Officer of PMI since February 2017. Prior to joining PMI, from February 2016 to February 2017, Mr. Ashraf  served as Deputy Chief Financial Officer and Treasurer at Annaly Capital Management, Inc. (“Annaly") with responsibility for treasury, tax, management reporting and financial planning & analysis. Prior to his time at Annaly, Mr. Ashraf worked at United Services Automobile Association (“USAA”), where he served as Corporate Treasurer from November 2014 to February 2016 and Assistant Corporate Treasurer from January 2014 to October 2014. Before joining USAA, Mr. Ashraf spent 13 years at CIT Group, where he held various positions in the Treasury and Corporate M&A departments, most recently serving as Deputy Treasurer with responsibility for the firm’s Treasury activities in the United States.


He started his career in the investment banking division of Salomon Smith Barney/Citigroup focused on M&A. Mr. Ashraf received a B.S. in Economics, with concentrations in Finance and Accounting, from The Wharton School of the University of Pennsylvania.
Brad Pennington has served as Chief Risk Officer of PMI since May 2016. Prior to his appointment as Chief Risk Officer, Mr. Pennington served as PMI’s Vice President of Risk Analysis from April 2015 to May 2016 and Director of Risk Analysis from February 2012 to April 2015. Before joining PMI, from August 2010 to February 2012, Mr. Pennington was Assistant Director of Risk Management Services with Moody’s Analytics, where he worked with large global and U.S. bank clients focusing on Economic Capital, Basel Compliance and PD, LGD and EAD model development.  Prior to his time at Moody’s, Mr. Pennington spent 6 years at First Equity Card, a small-business credit card specialty finance start-up, where he served as Manager of Predictive Analytics from June 2005 to July 2010. Mr. Pennington received a B.S. in Economics from the Wharton Undergraduate School where he completed a self-directed course of study, obtaining minors in Finance, Statistics, Mathematics, Econometrics and Operations Research.
Kunal Kaul has served as PMI’s Executive Vice President, Operations since late December 2015. Prior to joining PMI, Mr. Kaul spent more than 13 years at Capital One, where he served in various positions, including Senior Business Director, Senior Business Manager and Senior Product Manager, across a number of departments. In his most recent roles at Capital One, Mr. Kaul served as Senior Business Director - Head of Home Loans Originations Operations Excellence from February 2015 to December 2015 and Senior Business Director - Retail Bank Mortgage & Home Equity Lending from January 2014 to February 2015. Mr. Kaul has an MBA from the Indian Institute of Management (Bangalore, India) and a degree in Chemical Engineering from Bombay University.
Sachin D. Adarkar has served as PMI’s General Counsel and Secretary since August 2009. Mr. Adarkar also serves as Secretary of PFL.  Prior to joining PMI, he served as Vice President and Deputy General Counsel of GreenPoint Mortgage Funding, Inc., a wholesale mortgage lender in Novato, CA. Prior to joining GreenPoint, Mr. Adarkar spent several years practicing with the law firm of Howard Rice Nemerovski Canady Falk & Rabkin, in San Francisco (now part of Arnold & Porter LLP), and also served as Vice President and General Counsel of Valley Media, Inc., a music and video distributor. Mr. Adarkar has a J.D. from UCLA, an M.A. from the University of California at Berkeley and a B.A., cum laude, from Georgetown University. Mr. Adarkar is a member of the California Bar.
Aaron Vermut has served as a director of PMI since May 2014. From March 2014 to December 2016, Mr. Vermut served as PMI's Chief Executive Officer, and Executive Chairman and a director of Prosper Funding.before that, from April 2013 until March 2014, he served as its President. Prior to joining PMI, Mr. Vermut served as Managing Director, Headco-Head of Prime Services, at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC). from August 2012 until April 2013. Mr. Vermut foundedwas one of the founders of Merlin Securities, LLC and served as Chairmanone of the Board, Chief Executive Officerits Managing Partners and Managing Partner of Merlin Securities, LLCdirectors from 2004 until it was acquired by Wells Fargo Securities in August 2012. Mr. Vermut served as President and Chief Executive Officer of Montgomery/Bank of America Prime Brokerage from 1995 to 2003. Prior to that, Mr. Vermut was a Partner of Furman Selz in New York and Managing Director of the Prime Brokerage Division of Furman Selz. Mr. Vermut has over 35 years of Wall Street experience, which includes 11 years in institutional sales at L.F. Rothschild & Co. Mr. Vermut received a B.S. in Business Administration from Babson College. PMI believes that Mr. Vermut’s financial and business expertise, including his background of founding, managing and directing financial and technology-enabled service companies, gives him the qualifications and skills to serve as a Director and Executive Chairman.

Aaron Vermut has served as PMI and Chief Executive Officer since March 2014. Prior to his appointment as Chief Executive Officer, Mr. Vermut served as President of PMI from April 2013 until March 2014. Mr. Vermut is also a director of PMI and Executive Chairman and a director of Prosper Funding. Prior to joining PMI, Mr. Vermut served as Managing Director, Head of Prime Services at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC). Mr. Vermut founded and served as Managing Partner and a director of Merlin Securities, LLC until it was acquired by Wells Fargo Securities in 2012. Mr. Vermut served as Principal of New Enterprise Associates from July 2000 to October 2003. Prior to that, Mr. Vermut served as Senior Consultant of Cambridge Technology Partners from 1995 to 1998. Mr. Vermut has an M.B.A. in Finance from The Wharton School, University of Pennsylvania and a B.A. in History and German Literature from Washington University in St. Louis.
Ronald Suber has served as President of PMI since March 2014.  Prior to his appointment as President, Mr. Suber served as PMI’s Head of Global Institutional Sales from January 2013 until March 2014. Mr. Suber is also President and a director of Prosper Funding.  Prior to joining PMI, Mr. Suber served as Managing Director at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC). Mr. Suber served as Head of Global Sales and Marketing, Senior Partner and Director of Merlin Securities, LLC from April 2008 until it was acquired by Wells Fargo Securities in 2012. Mr. Suber served as President of Spectrum Global Fund Administration from July 2006 to April 2008. Mr. Suber was with Bear Stearns from July 1992 to June 2006, where he most recently served as Senior Managing Director.  Prior tobelieves that Mr. Suber was Correspondent Clearing Sales at Pershing from June 1986Vermut's financial and business expertise, including his background of founding, managing and directing a financial and technology-enabled service company, give him the qualifications and skills to June 1991. Mr. Suber receivedserve as a B.A. in Economics from University of California, Berkeley.
Sachin D. Adarkardirector. has served as PMI’s General Counsel and Secretary since August 2009.  Prior to joining PMI, Mr. Adarkar was at the law firm of Sonnenschein, Nath & Rosenthal LLP in Palo Alto, CA from 2007 until 2009.   Prior to joining Sonnenschein, Mr. Adarkar served as Vice President and Deputy General Counsel of GreenPoint Mortgage Funding, Inc, a wholesale mortgage lender in Novato, CA, from 2003 until 2007.  Prior to joining GreenPoint, Mr. Adarkar spent several years practicing with the law firm of Howard Rice Nemerovski Canady Falk & Rabkin, in San Francisco, and also served as Vice President and General Counsel of Valley Media, Inc., a music and video distributor.  Mr. Adarkar has a J.D. from UCLA, an M.A. from the University of California at Berkeley and a B.A., cum laude, from Georgetown University. Mr. Adarkar is a member of the California Bar.

Christopher M. Bishkohas served as one of PMI’s directors since May 2013.  Mr. Bishko is a Partner at Omidyar Technology Ventures, which he joined in June 2015, and before that, he was an Investment Partner at Omidyar Network Services LLC, which he joined in September 2008.  Prior to joining Omidyar, Network Services LLC, Mr. Bishko worked in investment banking at JP Morgan securities,JPMorgan Securities, Inc. from October 1992 to July 2008. Mr. Bishko holds a B.S. in Biomedical Engineering from Duke University. PMI believes that Mr. Bishko’s experience as a venture capital investor in financial technology and internetInternet companies and his background in investment banking give him the qualificationqualifications and skills to serve as a director.

Rajeev V. Date has served as one of PMI’s directors since July 2013. Mr. Date previously served as one of PMI’s directors from January 2009 to September 2010. Mr. Date currently serves as the Managing Partner of Fenway Summer LLC, a U.S. consumer financial advisoryan investment firm, and investment firm.as the Managing Director of Fenway Summer Ventures, Fenway Summer’s venture capital affiliate. From January 2012 to January 2013, Mr. Date served as the Deputy Director of the United States Consumer Financial Protection Bureau (“CFPB”). Before being appointed Deputy Director, Mr. Date was appointed the Special Advisor to the Secretary of the Treasury for the CFPB, and, in that capacity, acted as the interim leader of the CFPB. From October 2010 to August 2011, Mr. Date served as Associate Director of Research, Markets, and Regulations of the CFPB. Prior to joining the CFPB, Mr. Date served as Chairman & Executive Director of Cambridge Winter Center for Financial Institutions Policy, a non-profit nonpartisan think tank focused on financial institutions policy, from March 2009 to September 2010. From August 2007 to February 2009, Mr. Date served as a Managing Director in the Financial Institutions Group at Deutsche Bank Securities, where his key responsibility was acting as a coverage officer for


specialty finance firms and regional banks. Before that, Mr. Date was Senior Vice President for Corporate Strategy and Development at Capital One Financial, where he led M&A development efforts across the U.S. banking and specialty finance markets. Mr. DateHe began his business career in the financial institutions practice of the consulting firm McKinsey & Company. Mr. DateHe has also served as an attorney, in both private practice and government. Mr. Date received a J.D., magna cum laude, from Harvard Law School and a B.S. (highest honors) from University of California, Berkeley. PMI believes that Mr. Date’s financial, business and regulatory expertise give him the qualifications and skills to serve as a director
director. Mr. Date qualifies as an "audit committee financial expert" under SEC guidelines.
Patrick W. Gradyhas served as one of PMI’s directors since January 2013. Mr. Grady is a Managing MemberPartner of Sequoia Capital, a private investment partnership, which he joined in March 2007. Prior to joining Sequoia Capital, Mr. Grady was an Associate at Summit Partners from July 2004 to February 2007. Mr. Grady holds a B.S. in Economics and Finance from Boston College. PMI believes that Mr. Grady’s experience as a venture capital investor with a focus on financial technologies and his overall management experience, give him the qualifications and skills to serve as a director.
 Prosper Funding LLC

The following table sets forth information about Prosper Funding’s executive officers and directors  Mr. Grady qualifies as of the date of this Annual Report:

NameAgePosition(s)
Stephan P. Vermut67Executive Chairman and Director
Aaron Vermut41Chief Executive Officer and Director
Ronald Suber
49
President and Director
Sachin D. Adarkar47Secretary
Joshua P. Hachadourian46Treasurer
Bernard J. Angelo44Director
David DeAngelis44Director

89
an "audit committee financial expert" under SEC guidelines.
Stephan P. VermutDavid R. Golob is Prosper Funding and PMI’s Executive Chairman and one of Prosper Funding directors. Mr. Vermut has served as one of PMI’s Executive Chairmandirectors since MarchMay 2014. Mr. vermut served a s Prosper Funding's Chief Executive Officer. Prior to his appointment as Executive Chairman of PMI, Mr. Vermut served as PMI’s Chief Executive Officer from January 2013 to March 2014.  Prior to joining PMI, Mr. Vermut served as Managing Director, Head of Prime Services at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC). Mr. Vermut founded and served as Chairman of the Board, Chief Executive Officer and Managing Partner of Merlin Securities, LLC until it was acquired by Wells Fargo Securities in 2012. Mr. Vermut served as President and Chief Executive Officer of Montgomery/Bank of America Prime Brokerage from 1995 to 2003. Prior to that, Mr. Vermut wasGolob has been a Partner at Francisco Partners, a private equity firm, since 2001. Mr. Golob currently serves on the board of Furman Selzdirectors of Barracuda Networks. Mr. Golob holds an A.B. degree in New Yorkchemistry from Harvard College and Managing Directoran M.B.A. degree from the Stanford Graduate School of the Prime Brokerage Division of Furman Selz. Mr. Vermut has over 35 years of Wall Street experience, which includes 11 years in institutional sales at L.F. Rothschild & Co. Mr. Vermut received a B.S. in Business Administration from Babson College.  Prosper FundingBusiness. PMI believes that Mr. Vermut’sGolob’s financial and business expertise, including his backgroundexperience in the private equity and venture capital industries analyzing, investing in and serving on the boards of founding, managing and directing financial and technology-enabled servicedirectors of technology companies, give him the qualifications and skills to serve as a director and Executive Chairman.

director.
Aaron VermutNigel W. Morris is Prosper Funding and PMI’s Chief Executive Officer and one of Prosper Funding’s directors. Mr. Vermut has served as one of PMI’s Chief Executive Officerdirectors since MarchJune 2014. PriorMr. Morris previously served as one of PMI’s directors from December 2009 to his appointment as Chief Executive OfficerJanuary 2013. Mr. Morris is the managing partner of PMI,QED Investors, an investment firm he founded in 2008. Mr. VermutMorris was also the co-founder of Capital One Financial Services, where he served as President of PMIand Chief Operating Officer and Vice Chairman from April 20131994 until March 2014. Prior to joining PMI,his retirement in 2004. Mr. Vermut served as Managing Director, Head of Prime Services at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC). Mr. Vermut founded and served as Managing Partner andMorris has a director of Merlin Securities, LLC until it was acquired by Wells Fargo SecuritiesBSC in 2012. Mr. Vermut served as Principal of New Enterprise AssociatesPsychology from July 2000 to October 2003. Prior to that, Mr. Vermut served as Senior Consultant of Cambridge Technology Partners from 1995 to 1998. Mr. Vermut has an M.B.A. in Finance from The Wharton School, University of Pennsylvania and a B.A. in History and German Literature from WashingtonEast London University in St. Louis. Prosper FundingLondon, England and an MBA with distinction from London Business School, where he is also a fellow. PMI believes that Mr. Vermut’sMorris’s financial and business expertise, including his diversified background of managing and directing financial and technology-enabled servicepublic companies, gives him the qualifications and skills to serve as a director and Chief Executive Officer.

Ronald Suber is Prosper Funding’s President and one of Prosper Funding’s directors.  Mr. Suber has served as PMI’s President since March 2014. Prior to his appointment as President, Mr. Suber served as PMI’s Head of Global Institutional Sales since January 2013 to March 2014. Prior to joining PMI, Mr. Suber served as Managing Director at Wells Fargo Prime Services, LLC (formerly Merlin Securities, LLC). Mr. Suber served as Head of Global Sales and Marketing, Senior Partner and Director of Merlin Securities, LLC from April 2008 until it was acquired by Wells Fargo Securities in 2012. Mr. Suber served as President of Spectrum Global Fund Administration from July 2006 to April 2008. Mr. Suber was with Bear Stearns from July 1992 to June 2006, where he most recently served as Senior Managing Director.  Prior to that, Mr. Suber was Correspondent Clearing Sales at Pershing from June 1986 to June 1991. Mr. Suber received a B.A. in Economics from University of California, Berkeley.  Prosper Funding believes that Mr. Suber’s financial and business expertise, including his experience managing awith financial and technology-enabled service company,services firms, as well as his general operational and management experience, give him the qualifications and skills to serve as a director.
Family Relationships
Aaron Vermut, a director of PMI, is the son of Stephan P. Vermut, a former Executive Chairman and President.
Sachin D. Adarkar is Prosper Funding’s Secretary.  Mr. Adarkar has served as PMI’s General Counsel and Secretary since August 2009.  Prior to joining PMI, he was at the law firmdirector of Sonnenschein, Nath & Rosenthal LLP in Palo Alto, CA from 2007 until 2009.   Prior to joining Sonnenschein, Mr. Adarkar served as Vice President and Deputy General Counsel of GreenPoint Mortgage Funding, Inc., a wholesale mortgage lender in Novato, CA, from 2003 until 2007.  Prior to joining GreenPoint, Mr. Adarkar spent several years practicing with the law firms of Howard Rice Nemerovski Canady Falk & Rabkin, in San Francisco, and also served as Vice President and General Counsel of Valley Media, Inc., a music and video distributor.  Mr. Adarkar has a J.D. from UCLA, an M.A. from the University of California at Berkeley and a B.A., cum laude, from Georgetown University.  Mr. Adarkar is a member of the California Bar.PMI.

Joshua P. Hachadourian is Prosper Funding’s Treasurer.  Mr. Hachadourian has served as PMI’s Vice President Finance since January 2014. Prior to his appointment as Vice President, Finance, Mr. Hachadourian served as PMI’s Controller from June 2013 to January 2014.  Prior to joining PMI, Mr. Hachadourian was a Senior Manager at Burr Pilger Mayer, Inc. from 2008 to 2013.  Mr. Hachadourian was at Deloitte & Touche, LLP from 1999 to 2008 where he most recently served as a Senior Manager.  During his time in public accounting, Mr. Hachadourian served numerous global public company financial services institutions.  Mr. Hachadourian is a licensed CPA and attended University of California, Santa Barbara where he received a Bachelor of Arts degree with highest honors in Business Economics with an Accounting Emphasis in 1999.

Bernard J. Angelo has served on Prosper Funding’s board of directors since March 2012. Mr. Angelo joined Global Securitization Services, LLC (“Global Securitization”) in April 1997 and has extensive experience in managing commercial paper and medium term note programs.  In addition to his administrative skills, he has over twelve years of experience in both the business and legal side of structured finance. At Global Securitization, Mr. Angelo has been active in assisting clients and their legal counsel during the structuring phase of their transactions as well as assimilating bank sponsored commercial paper programs into the operating matrix at Global Securitization.  Prior to joining Global Securitization, Mr. Angelo was an Assistant Vice President at Bankers Trust Company from January 1993 to April 1997 where he was responsible for oversight of the treasury and accounting functions on the Corporate Trust side of structured transactions managed by the bank.  Mr. Angelo currently also serves on the board of ATAX TEBS I, LLC, Bay View Deposit Corporation, BEC Funding II LLC, Carmax Auto Funding LLC, CEC Funding LLC, CenterPoint Energy Transition Bond Company II, LLC, CenterPoint Energy Transition Bond Company III, LLC, CenterPoint Energy Transition Bond Company LLC, Ford Credit Auto Receivables Two LLC, National City Mortgage Capital LLC, PG&E Energy Recovery Funding LLC, and World Omni Auto Receivables LLC.  He has a B.S. in Finance from Siena College.  Prosper Funding believes that Mr. Angelo’s experience in structured finance as well as his general management experience, give him the qualifications and skills to serve as a director.

David V. DeAngelis has served on Prosper Funding’s board of directors since May 2013. Mr. DeAngelis joined Global Securitization Services, LLC (“Global Securitization”) in March 2002 and has over eighteen years of financial markets experience. Prior to joining Global Securitization, Mr. DeAngelis was a Senior Accountant at Nomura Securities International, a Japanese investment firm, from October 1998 to February 2002 where he was responsible for daily profit and loss preparation and reporting, general ledger maintenance, month-end closing entries and month-end reporting in the Fixed Income Controllers Department. Prior to October 1998, Mr. DeAngelis worked in the International Accounting departments of U.S. investment firms specializing in Emerging Markets. Mr. DeAngelis has a Bachelor of Science in Accounting from St. John’s University. Prosper Funding believes that Mr. DeAngelis’s financial markets experience, as well as his general management experience, give him the qualifications and skills to serve as a director.
Board Composition and Election of Directors

Prosper Marketplace, Inc.

PMI’s board of directors currently consists of foureight seats, with one vacancy to be filled by a designee of QPL Holdings (PF) LP. All of the current members all of whomPMI's board of directors were elected as directors pursuant to the terms of a voting rights agreement entered into among certain of PMI’s stockholders. In selecting the composition of its board of directors, PMI seeks to ensure that its board of directors collectively has a balance of expertise in the following areas: internet based business, consumer financial products and experience directing public and start-up companies. In addition, although PMI doesn’t have a separate policy regarding diversity on its board of directors, PMI considers diversity of race, ethnicity, gender, age and cultural background.  Based on these criteria, PMI believes that its board of directors has been effective in identifying diverse directors. The board of directorsdirectors’ composition provisions of PMI’s voting rights agreement are still in effect.  For more information regarding the terms of the voting rights agreement, see “Item 13. – Certain Relationships and Related Transactions, and Director Independence.” Holders of the Prosper Funding Notes offered through the platform,our marketplace, and the accompanying PMI Management Rights, will have no ability to elect or influence PMI’s directors or approve significant corporate transactions, such as a merger or other sale of PMI or its assets.

Aaron Vermut, Chief Executive Officer of PMI, is the son of Stephan Vermut, Executive Chairman and a director of PMI.
Prosper Funding LLC

Prosper Funding’s board of directors currently consists of five members.  Prosper Funding’s goal is to assemble a board of directors that operates cohesively and works with management in a constructive way.  Prosper Funding believes that its directors possess valuable experience and the knowledge necessary to guide its business.  Its current board of directors consists of individuals with proven records of success in their chosen professions. They all have the highest integrity and a keen intellect. They are collegial yet independent in their thinking, and are committed to the hard work necessary to be informed about the lending industry, Prosper Funding, and its key constituents, including borrower members, lender members, stockholders and management.

Aaron Vermut, Chief Executive Officer and a director of Prosper Funding is the son of Stephan Vermut, Executive Chairman and director of Prosper Funding.

Board Leadership

Prosper Marketplace, Inc.

Because PMI’s common stock is not listed on a national exchange, PMI is not required to maintain a board of directors consisting of a majority of independent directors, or to maintain an audit, nominating or compensation committee. PMI does not have a lead independent director.

91
Prosper Funding LLC

Because Prosper Funding’s membership interestCode of Ethics
Our Board of Directors is not listedcommitted to a high standard of corporate governance practices and, through its oversight role, believes that it has encouraged and promoted a requisite culture of ethical business conduct among PMI’s officers and employees. To memorialize its commitment to these standards, on January 11, 2017, the Board of Directors of PMI adopted a national exchange, Prosper Funding“Code of Ethics and Business Conduct” that applies to all of PMI's employees, directors and officers, including the Chief Executive Officer, Chief Financial Officer and other executive officers. A copy of this code is not requiredavailable on our website at https://www.prosper.com/plp/about/. We intend to maintain a boardsatisfy the disclosure requirement under Item 5.05 of directors consistingForm 8-K regarding amendment to, or waiver from, certain provisions of a majoritythe Code of independent directors,Ethics and Business Conduct by posting such information on Prosper's website or to maintain an audit, nominating or compensation committee. Prosper Funding does not have a lead independent director.

in public filings.
Director Independence

Prosper Marketplace, Inc.

Because PMI’s common stock is not listed on a national securities exchange or listed in an automated inter-dealer quotation system of a national securities association or to issuers of such securities, PMI is not required to maintain a board of directors consisting of a majority of independent directors or to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors.  Nevertheless, PMI’s board of directors has not analyzeddetermined the independence of PMI’s directors under any applicable stock exchangeeach director based on the independence criteria set forth in the listing standards.  Holdersstandards of the New York Stock Exchange (“NYSE”). In making its determinations, the Board considered the current and prior relationships that each non-employee director has with Prosper Funding Notes have no ability to elect or influence PMI's directors.

Prosper Funding LLC

Because Prosper Funding’s membership interest is not listed on a national securities exchange, Prosper Funding is not required to maintain aand all other facts and circumstances the board of directors consistingdeemed relevant in determining their independence, including any transactions between each director or any member of a majority ofhis or her family, and Prosper, its senior management or our independent directorsregistered public accounting firm. Based upon information requested from and provided by each director concerning his or to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors.  Prosper Funding’sher background, employment and affiliations, including family relationships, the board of directors hasdetermined that each of Messrs. Date, Grady, Golob and Morris do not analyzedhave a relationship that would interfere with the independenceexercise of Prosper Funding’sindependent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under any applicable stock exchangethe listing standards.  Holdersrequirements and rules of the Prosper Funding Notes have no ability to elect or influence Prosper Funding’s directors.

NYSE.
Board Committees

Prosper Marketplace, Inc.

Nominating Committee

PMI is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act. Therefore, PMI is not required to have a nominating committee comprised of independent directors. PMI currently does not have a standing nominating committee and accordingly, there are no charters for such committee. PMI believes that standing committees area nominating committee is not necessary for a company of its size with its type of business. PMI also believes that its directors collectively have the requisite background, experience, and knowledge to fulfill the limited duties and obligations that a nominating committee may have.

Compensation Committee
Compensation Committee

PMI is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act.  Nevertheless, PMI’s board of directors approved the formation of a Compensation Committee in August 2011. As of December 31, 2016, the members of the Compensation Committee were Patrick W. Grady (Chair) and Christopher Bishko compose PMI'sM. Bishko.  The Compensation Committee oversees PMI’s executive officer compensation committee, with Mr. Grady servingarrangements, plans, policies and programs maintained by PMI and administers PMI’s equity-based compensation plan for employees generally (including issuance of stock options, RSUs and other equity-based awards granted other than pursuant to a plan).  The Compensation Committee meets at such times as Chairman.
Audit Committee

PMI is not a “listed issuer” as defined under Section 10A-3determined appropriate by the Chair of the Exchange Act.  Nevertheless, Compensation Committee.
Audit Committee
PMI’s board of directors approved the formation of an audit committeeAudit Committee in January 2010. As of December 31, 2016, the members of the Audit Committee were Rajeev V. Date (Chair) and Patrick Grady composeW. Grady.  The Audit Committee oversees financial risk exposures, including monitoring the integrity of PMI’s consolidated financial statements, internal controls over financial reporting and the independence of PMI’s Independent Registered Public Accounting Firm.  The Audit Committee receives internal control related assessments and reviews and discusses PMI’s annual and quarterly consolidated financial statements with management.  In fulfilling its oversight responsibilities with respect to compliance matters, the Audit Committee meets at least quarterly with management, PMI’s Independent Registered Public Accounting firm and PMI’s internal legal counsel to discuss risks related to PMI’s financial reporting function.


The Audit Committee is exempt from independence listing standards because PMI's common stock is not listed on a national securities exchange or listed in an automated inter-dealer quotation system of a national securities association or to issuers of such securities. Nevertheless, the board of directors of PMI has determined that each of the current members of PMI's Audit Committee is independent under the listing requirements and rules of the NYSE, and also satisfies the independence requirements of Section 10(m)(3) of the Exchange Act. Additionally, PMI's board of directors has determined that each of the current members of the Audit Committee is an audit committee with Mr. Date to serving as Chairman.
Prosper Funding LLC

Nominating Committee

Prosper Funding is not a “listed issuer”financial expert as defined under Section 10A-3SEC regulations the listing requirements and rules of the Exchange Act and, therefore, is not required to have a nominating committee comprised of independent directors.  Prosper Funding currently does not have a standing nominating committee and, accordingly, there are no charters for such committee.  Prosper Funding believes that standing committees are not necessary for a company of its size with its type of business.  Prosper Funding also believes that its directors collectively have the requisite background, experience, and knowledge to fulfill the limited duties and obligations that a nominating committee may have.

Compensation Committee

Prosper Funding is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and, therefore, is not required to have a compensation committee comprised of independent directors.  Prosper Funding does not have any employees and does not compensate its officers or directors; accordingly, it does not believe that it needs a compensation committee.

Audit Committee

Prosper Funding is not a “listed issuer” as defined under Section 10A-3 of the Exchange Act and, therefore, is not required to have an audit committee comprised of independent directors.  Prosper Funding currently does not have a standing audit committee and, accordingly, there are no charters for such committee.  Prosper Funding believes that standing committees are not necessary for a company of its size with its type of business.  Prosper Funding also believes that its directors collectively have the requisite background, experience, and knowledge to fulfill the limited duties and obligations that an audit committee may have.

NYSE.
Limitations on Officers’ and Directors’ Liability and Indemnification Agreements

Prosper Marketplace, Inc.

As permitted by Delaware law, PMI’s amended and restated certificate of incorporation and bylaws contain provisions that limit or eliminate the personal liability of its directors for breaches of duty to the corporation. PMI’s amended and restated certificate of incorporation and bylaws limit the liability of directors to the fullest extent permitted under Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breaches of their fiduciary duties as directors, except liability for:

any breach of the director’s duty of loyalty to PMI or PMI’s stockholders;
●any breach of the director’s duty of loyalty to PMI or PMI’s stockholders;
any act or omission not in good faith, believed to be contrary to the interests of PMI or its shareholders, involving reckless disregard for the director’s duty, for acts that involve an unexcused pattern of inattention that amounts to an abdication of duty, or that involves intentional misconduct or knowing or culpable violation of law;

any unlawful payments related to dividends, unlawful stock repurchases, redemptions, loans, guarantees or other distributions; or
●any act or omission not in good faith, believed to be contrary to the interests of PMI or its shareholders, involving reckless disregard for the director’s duty, for acts that involve an unexcused pattern of inattention that amounts to an abdication of duty, or that involves intentional misconduct or knowing or culpable violation of law;

●any unlawful payments related to dividends, unlawful stock repurchases, redemptions, loans, guarantees or other distributions; or

●any transaction from which the director derived an improper personal benefit.

These limitations do not affect the availability of equitable remedies, including injunctive relief or rescission. As permitted by Delaware law, PMI’s amended and restated certificate of incorporation and bylaws also provide that:

PMI will indemnify its directors and officers to the fullest extent permitted by law;
●PMI will indemnify its directorsPMI may indemnify its other employees and other agents to the same extent that PMI indemnifies its officers and directors; and officers to the fullest extent permitted by law;

●PMI may indemnify its other employees and other agents to the same extent that PMI indemnifies its officers and directors; and

●PMI will advance expenses to its directors and officers in connection with a legal proceeding, and may advance expenses to any employee or agent; provided, however, that such advancement of expenses shall be made only upon receipt of an undertaking by the person to repay all amounts advanced if it should be ultimately determined that the person was not entitled to be indemnified.
The indemnification provisions contained in PMI’s amended and restated certificate of incorporation and bylaws are not exclusive.

In addition to the indemnification provided for in PMI’s amended and restated certificate of incorporation and bylaws, PMI has entered into indemnification agreements with each of its directors and officers. The indemnification agreements require PMI, among other things, to indemnify such persons for all expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement (if such settlement is approved in advance by PMI) (collectively, “Expenses”), actually and reasonably incurred by such person in connection with the investigation, defense or appeal of any proceeding to which such person may be made a party, a potential party, a non-party witness, or otherwise by reason of:

●such person’s service as a director or officer of PMI;

●any action or inaction taken by such person or on such person’s part while acting as director, officer, employee or agent of PMI; or

●such person’s actions while serving at the request of PMI as a director, officer, employee, trustee, general partner, managing member, agent or fiduciary of PMI or any other entity, in each case, whether or not serving in any such capacity at the time any liability or expense is or was incurred.

PMI; (ii) any action or inaction taken by such person or on such person’s part while acting as director, officer, employee or agent of PMI; or (iii) such person’s actions while serving at the request of PMI as a director, officer, employee, trustee, general partner, managing member, agent or fiduciary of PMI or any other entity, in each case, whether or not serving in any such capacity at the time any liability or expense is or was incurred.  In addition, PMI is required to indemnify against any Expenses actually and reasonably incurred in connection with any action establishing or enforcing a right to indemnification or advancement of expenses under the indemnification agreement or under any directors’ and officers’ liability insurance policies maintained by PMI to the


extent that such person is successful in such action.  The indemnification agreements also provide that PMI agrees to indemnify such persons to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of the agreement or PMI’s amended and restated certificate of incorporation or bylaws. Moreover, the indemnification agreements provide that any future changes under Delaware law that expand the ability of a Delaware corporation to indemnify its officers and directors are automatically incorporated into the agreements.

Under the indemnification agreements, PMI is not obligated to provide indemnification on account of any proceeding unless such person acted in good faith and in a manner reasonably believed to be in the best interests of PMI, and with respect to criminal proceedings, such person had no reasonable cause to believe his conduct was unlawful. The termination of a proceeding by judgment, settlement, or conviction or upon a plea ofnolo contendere or its equivalent does not, by itself, create the presumption that such person did not satisfy the above standards.

In addition, under the indemnification agreements, PMI is not obligated to provide indemnification for:

● (i) any proceedings or claims initiated or brought voluntarily by such person and not by way of defense, unless such indemnification is authorized by PMI, other than a proceeding to establish such person’s right to indemnification;

●any expenses incurred by such person with respect to any proceeding instituted by such person to enforce and interpret the terms of his indemnification agreement, unless such person is successful in such action;

●which payment has actually been made to or on behalf of such person under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid;

●an accounting or disgorgement of profits pursuant to Section 16(b) of the Exchange Act, as amended, or similar provisions of federal, state or local statutory law or common law, if such person is held liable therefor (including pursuant to any settlement arrangements); and

●any reimbursement of PMI by such person of any bonus or other incentive-based or equity-based compensation or of any profits realized by such person from the sale of securities of PMI, as required in each case under the Exchange Act, as amended (including any such reimbursements that arise from an accounting restatement of PMI pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to PMI of profits arising from the purchase and sale by such person of securities in violation of Section 306 of the Sarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any settlement arrangements).

The indemnification agreements also provide that PMI agrees to indemnify such persons to the fullest extent permitted by law, even if such indemnification is not specifically authorized by PMI, other than a proceeding to establish such person’s right to indemnification; (ii) any expenses incurred by such person with respect to any proceeding instituted by such person to enforce and interpret the otherterms of his indemnification agreement, unless such person is successful in such action; (iii) which payment has actually been made to or on behalf of such person under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid; (iv) an accounting or disgorgement of profits pursuant to Section 16(b) of the Exchange Act, as amended, or similar provisions of federal, state or local statutory law or common law, if such person is held liable therefor (including pursuant to any settlement arrangements); and (v) any reimbursement of PMI by such person of any bonus or other incentive-based or equity-based compensation or of any profits realized by such person from the agreementsale of securities of PMI, as required in each case under the Exchange Act, as amended (including any such reimbursements that arise from an accounting restatement of PMI pursuant to Section 304 of the Sarbanes-Oxley Act, or PMI's amendedthe payment to PMI of profits arising from the purchase and restated certificatesale by such person of incorporation or bylaws.  Moreover,securities in violation of Section 306 of the indemnification agreements provide thatSarbanes-Oxley Act), if such person is held liable therefor (including pursuant to any future changes under Delaware law that expand the ability of a Delaware corporation to indemnify its officers and directors are automatically incorporated into the agreements.

settlement arrangements).
PMI also maintains a general liabilityan insurance policy that covers certain liabilities of its directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers.

PMI believes that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers. To the extent these provisions permit PMI to indemnify its officers and directors for liabilities arising under the Securities Act, however, PMI has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Prosper Funding LLC

Prosper Funding’s Fifth Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”) provides that, to the fullest extent permitted by applicable law, Prosper Funding’s directors and officers will not be liable to Prosper Funding for, and shall be indemnified by Prosper Funding against, any loss, damage or claim incurred by reason of any act or omission performed or omitted by such officer or director in good faith on Prosper Funding’s behalf and in a manner reasonably believed to be within the scope of the authority conferred on the officer or director by the LLC Agreement, except for any loss, damage or claim incurred by reason of the officer’s or director’s gross negligence or willful misconduct; provided, however, that any such indemnity shall be provided out of and to the extent of Prosper Funding’s assets only.  In addition, the LLC Agreement provides that, to the fullest extent permitted by applicable law, Prosper Funding may advance any expenses incurred by an officer or director defending any claim, demand, action, suit or proceeding prior to its final disposition, upon Prosper Funding’s receipt of an undertaking by or on behalf of the officer or director to repay such amount if it is determined that the officer or director is not entitled to be indemnified under the LLC Agreement.  Prosper Funding will not pay any such indemnification from any borrower loan collections that are allocable to the payment of Prosper Funding Notes.

Prosper Funding and PMI have entered into an Amended and Restated Services and Indemnity Agreement (the “GSS Agreement”) with Global Securitization Services, LLC (“GSS”) and Prosper Funding’s independent directors, David DeAngelis and Bernard Angelo, who are employees of GSS and are described as the “GSS Representatives.”  Under the GSS Agreement, PMI has agreed to indemnify the GSS Representatives and GSS (collectively, the “Indemnitees”) against any loss, damage or claim incurred by the Indemnitees as a result of the GSS Representatives’ service as independent directors for by reason of any act or omission performed or omitted by the GSS Representatives as Prosper Funding’s independent directors, except for any loss, damage or claim incurred by reason of the GSS Representative’s gross negligence or willful misconduct.  If any proceeding is asserted against the Indemnitees for which they may be indemnified under the GSS Agreement, PMI will retain and direct counsel to defend such action and will be responsible for paying all reasonable fees and disbursements of such counsel.  The Indemnitees have the right to approve such counsel, but may not unreasonably withhold approval.  If a court of competent jurisdiction determines that an Indemnitee is not entitled to indemnification under the GSS Agreement, GSS must repay any amounts paid by PMI to or on behalf of such Indemnitee in connection with those matters as to which it has been determined that such Indemnitee is not entitled to indemnification.

Prosper Funding believes that these provisions are necessary to attract and retain qualified persons as directors and officers.  To the extent these provisions permit Prosper Funding to indemnify its officers and directors for liabilities arising under the Securities Act, however, Prosper Funding has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Code of Ethics

Item 11.Executive Compensation  
Prosper Marketplace, Inc.

Compensation Discussion and Analysis
PMI’s board of directors has adopted a Code of Business Conduct and Ethics applying to PMI’s directors, officers and employees (the “Code”). The Code is reasonably designed to deter wrongdoing and promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, (ii) full, fair, accurate, timely and understandable disclosure in reports and documents filed with, or submitted to, the SEC and in other public communications made by PMI, (iii) compliance with applicable governmental laws, rules and regulations, (iv) the prompt internal reporting of violations of the Code to appropriate persons identified in the Code, and (v) accountability for adherence to the Code.  You may request a copy of the Code by writing to PMI at its office address.Overview

Prosper Funding LLC

Prosper Funding has not adopted a code of ethics.  Prosper Funding does not believe that a code of ethics is necessary because it has no employeesThis section describes PMI's executive compensation objectives, compensation-setting process, executive compensation components and its officers are also officers of PMI and are subject to PMI’s Code of Business Conduct and Ethics.

Item 11.
Executive Compensation

Executive Officer Compensation

Prosper Marketplace, Inc.

Summary Compensation Table

The following table provides information regarding thesignificant 2016 compensation earned during the year ended December 31, 2013 and December 31, 2012 by each person serving during the fiscal year ended December 31, 2013 asdecisions for PMI's principal executive officer or other executive officer, who PMI collectively refer to as PMI's “named executive officers.”

Name and Principal PositionYear Salary ($)  Bonus ($)  
Option
Awards
($)(1)
  
All Other
Compensation
  Totals ($) 
   
  
  
  
  
 
Dawn G. Lepore (2)2013 $9   -  $5   -  $14 
Chief Executive Officer2012  119   -   38   -   157 
 
                     
Stephan P. Vermut (3)2013  284   -   185   -   469 
Chief Executive Officer2012  -       -   -   - 
 
                     
Ronald Suber (3)2013  284   -   185       469 
Head of Global Institutional Sales2012  -       -   -   - 
 
 
                    
Aaron Vermut (3)2013  225   -   185   -   410 
President2012  -   -   -   -   - 

(1) Calculated in accordance with ASC 718 using the Black-Scholes model giving consideration to estimated forfeitures for outstanding options to purchase shares of PMI’s common stock.  There were no forfeitures by the above named executive officers during 2013("NEOs"). The compensation provided to PMI's NEOs for 2016 is set forth in detail in the Summary Compensation Table and 2012.  The key assumptions used in PMI’s ASC 718 calculationother tables and the accompanying footnotes and narrative that follow this section.
PMI's named executive officers for 2016 are discussed in Note 2 of PMI’s consolidated financial statements incorporated by reference into this Annual Report. .as follows:

(2) Ms. Lepore resigned as actingDavid Kimball, our Chief Executive Officer, and who served as our Chief Financial Officer through February 27, 2017;
Aaron Vermut, who served as our Chief Executive Officer through December 1, 2016;
John Hiestand, our Vice President, onFinance and who served as our Principal Financial Officer through March 18, 2016;
Brad Pennington, our Chief Risk Officer;


Cheryl Law, who served as our Chief Marketing Officer through January 22, 2013. Ms. Lepore6, 2017;
Kunal Kaul, our Executive Vice President, Operations; and
Parker Barrile, who served as our Chief Product Officer through September 30, 2016.
Mr. Hiestand served as Principal Financial Officer until March 18, 2016, when Mr. Kimball was granted 22,406 share option awards on March 15, 2012 with an exercise price of $1.70, which were subjectappointed Chief Financial Officer and Principal Financial Officer. Mr. Hiestand continues to serve as Vice President, Finance. Effective December 1, 2016, Mr. Vermut resigned from PMI and Mr. Kimball was appointed to the termsrole of Chief Executive Officer. Effective February 27, 2017, Mr. Usama Ashraf replaced Mr. Kimball as Chief Financial Officer and conditionsPrincipal Financial Officer.

Executive Compensation Objectives
The objectives of PMI's executive compensation are to:
attract, retain and motivate senior management leaders who are capable of advancing PMI's mission and strategy and ultimately, creating and maintaining its long-term equity value;
•align the 2005 Planinterests of PMI's executive officers with its stockholders’ long-term interests; and
reward executive officers for their contributions to PMI's overall performance as set forth below. Such option award terminated by its terms when Ms. Leporewell as for their individual performance.

Compensation-Setting Process
In 2016 and in prior years, PMI did not exercise within three months of her resignation from PMI. Ms. Lepore was granted 47,602 share nonstatutory option awards on August 5, 2013 with an exercise price of $0.10, which were subject to the terms and conditions of the 2005 Plan as set forth below. Such option award 47,602 terminated by its terms when Ms. Lepore did not exercise within ninety days from the date of grant.

(3) Messrs. Stephan Vermut, Ronald Suber and Aaron Vermut were each granted 1,849,089 share option awards on August 20, 2013 with an exercise price of $0.10, which are subject to the terms and conditions of the 2005 Plan as set forth below.
Narrative Discussion of the Summary Compensation Table

The named executive officers identified above have been granted stock option awards upon employment with PMI and for merit increases as further discussed below under “Outstanding Equity Awards at December 31, 2013.”  PMI has noa formal incentive compensation programsprogram in place for its executive officers. PMI does not believe that itsThe Compensation Committee is responsible for evaluating and approving compensation policies promote inappropriate or excessive risk taking.  The compensation it pays to its namedfor PMI's executive officers, consistsincluding the NEOs. In setting 2016 compensation, PMI's Chief Executive Officer worked closely with the Compensation Committee in making recommendations and attending Committee meetings. Because of three components:his daily involvement with PMI's executive team, the Chief Executive Officer was involved in the determination of compensation for all of PMI's executive officers other than himself. The Compensation Committee also delegated to the Chief Executive Officer the authority to make compensation decisions for senior management and executive officers (other than the Chief Executive Officer, Chief Financial Officer, President and Chief Operating Officer), subject to certain compensation limits set by the Compensation Committee.

Executive Compensation Components

PMI's 2016 Named Executive Officer Compensation packages include: (1) base salary,salary; (2) cash bonuses; and (3) equity-based compensation in the form of stock options and restricted stock units (RSUs). PMI believes that this compensation mix supports its objective of attracting, motivating and retaining a discretionary bonustalented and stock option awards.entrepreneurial executive team who will provide leadership for Prosper’s success in dynamic and competitive markets. PMI's compensation program has been weighted toward equity-based compensation, rather than cash compensation, in order to maximize retention and ensure that a significant portion of the executives’ compensation is tied to the company's and its stockholders’ long-term interests.

Base Salary. Base salary is a fixed amount, and is not tied to any metric relating to the performance of PMI’sPMI's business as a whole. The base salary of each executive officer is initially established in the executive officer's offer letter, and reviewed annually by the Compensation Committee. In determining base salaries for 2016, PMI's Compensation Committee together with the Chief Executive Officer considered the individual executive officer's scope of responsibilities, contributions, prior salary level and position (in case of a promotion), and financial and market conditions.



The following table summarizes information regarding the base salaries for PMI's named executive officers for 2016:
Name 2016 Base Salary
David Kimball (1) $500,000
Aaron Vermut (2) $27,000
John Hiestand (3) $240,000
Brad Pennington (4) $350,000
Cheryl Law (5) $350,000
Kunal Kaul $300,000
Parker Barrile (6) $300,000
(1)In March of 2016, PMI hired Mr. Kimball as its new Chief Financial Officer, with an annual base salary of $375,000. Effective December 1, 2016, Mr. Kimball was appointed Chief Executive Officer of PMI. The table reflects Mr. Kimball’s annual base salary in effect immediately after his appointment as Chief Executive Officer.
(2)In early 2016, PMI’s Compensation Committee reviewed executive base salaries and decided to keep Mr. Vermut’s annual base salary at $360,000, the same level as the previous year. Effective July 1, 2016, Mr. Vermut voluntarily reduced his annual base salary to $27,000. Mr. Vermut resigned as Chief Executive Officer of PMI effective December 1, 2016. The table reflects Mr. Vermut’s annual base salary in effect immediately prior to his resignation as Chief Executive Officer.
(3)Mr. Hiestand’s annual base salary was increased from $225,000 to $240,000 in December of 2016.
(4)Mr. Pennington’s annual base salary was increased from $250,000 to $350,000 in May of 2016.
(5)Ms. Law’s annual base salary was increased from $300,000 to $350,000 in November of 2016.
(6)In early 2016, PMI’s Compensation Committee reviewed executive base salaries and decided to keep Mr. Barrile’s annual base salary at $300,000, the same level as the previous year. Mr. Barrile resigned as PMI’s Chief Product Officer effective September 30, 2016. The table reflects Mr. Barrile’s annual base salary in effect immediately prior to his resignation as Chief Product Officer.

CashBonuses.  Discretionary cash bonuses which PMI has only paid out on a limited number of occasions, also are not tied to any specific metrics regarding PMI’s performance. ExceptCompany performance, and are determined by the Compensation Committee (in consultation with the Chief Executive Officer) in its sole discretion. In prior years, the Compensation Committee has approved discretionary cash bonuses for PMI's executive officers, including its NEOs, in order to reward PMI's individual executive officers for their contribution toward PMI's growth initiatives and performance toward individual goal achievement. In November 2016, the options grantedCompensation Committee decided to award certain executive officers, including certain NEOs, retention bonuses in lieu of performance bonuses in order to incentivize and encourage the grantees to remain with PMI. The retention bonuses will replace the grantees' 2016 and 2017 performance-based cash bonuses, and be equal to 75% of their respective base salary as of the close of the applicable calendar year. In November 2016, the Compensation Committee awarded retention bonuses to Mr. Kimball, Mr. Pennington, Ms. Lepore, Mr. Stephan Vermut, Mr. SuberLaw and Mr. AaronKaul, to be paid in March 2017. Ms. Law left PMI in January of 2017, and was therefore ineligible to receive the retention bonus for 2016. Mr. Vermut PMI’sand Mr. Barrile resigned from their respective offices prior to 2017 and were likewise ineligible to be paid a cash bonus award for 2016. The amount of the cash bonus paid to each of the NEOs for 2016 is disclosed in the “Bonus” column of the Summary Compensation Table.

Equity Compensation.  PMI has used stock option awards are generally structured so that they vest over multiple years, which alignoptions and restricted stock units ("RSUs") as the interestsprincipal component of its executive compensation. Consistent with its compensation objectives, PMI believes this approach aligns the interest of its grantees with the long-term interests of PMI’s stockholders. PMI believes that stock options also serve as an effective retention tool due to vesting requirements that are based on continued service with the company. In granting equity awards, PMI has customarily considered, among other things, the executive officer’s cash compensation, the need to retain and motivate executive officers and to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value, PMI's financial results, and each executive officer's individual contributions and responsibilities. In 2016, the Compensation Committee approved the grant of stock options to its NEOs for performance compensation, retention and motivational purposes. The optionsamounts and terms of the awards granted to Ms. Leporeeach of the NEOs in March 2012 vested as follows: (i) 50% vested immediately upon grant, (ii) approximately 16.67% vested upon2016 is disclosed in the completion2016 Grants of four monthsPlan-Based Awards table and accompanying footnotes of the Outstanding Equity Awards at 2016 Fiscal Year End table.


Employment Agreements

PMI has entered into employment (iii) approximately 16.67% vested uponarrangements with each of its NEOs, which are comprised of an offer letter and an At Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement. Each of these arrangements was approved or authorized on PMI’s behalf by the completionCompensation Committee or, in certain instances, its Board of five monthsDirectors.

Each of the offer letters provided for "at will" employment and (iv) approximately 16.67% vestedsets forth the initial compensation arrangements for the NEO, generally including an initial base salary, an annual cash bonus opportunity, and an equity award. Certain of the offer letters provide for payments or an acceleration of the executive's equity award grant upon the completiontermination of six months of employment. The options granted to Ms. Leporetheir employment in August 2013 were fully vested upon grant. The options granted to Mr. Stephan Vermut, Mr. Suber and Mr. Aaron Vermut vest over multiple years, but will vest immediately uponspecified situations, including following a change in control.

All stock options granted to PMI’s named executive officers These arrangements (including potential payments and terms) are incentive stock options, todiscussed in more detail in the extent permissible under the Internal Revenue Code, as amended. All equity awards to PMI’s employees and directors were granted at no less than the fair market value of PMI’s common stock on the date of each award. In the absence of a public trading market for PMI’s common stock, PMI’s board of directors has determined the fair market value of its common stock in good faith based upon consideration of a number of relevant factors including the status of PMI’s development efforts, financial status and market conditions. See “Item 15. —Note to Consolidated Financial Statements” incorporated by reference into this Annual Report.

Outstanding Equity Awards at December 31, 2013

The following table sets forth certain information regarding outstanding equity awards granted to PMI’s named executive officers that remained outstanding as of December 31, 2013.

Outstanding Equity Awards

Option Awards
Name
Number of Securities
Underlying Unexercised
Options (#) Exercisable
Number of Securities
Underlying Unexercised
Options (#) Unexercisable
Option
Exercise
Price
Option
Expiration
Date
Dawn Lepore*--$--
Stephan Vermut--$--
Ronald Suber--$--
Aaron Vermut--$--


* Ms. Lepore resigned as PMI’s acting Chief Executive Officer and President on January 22, 2013.

As of December 31, 2013, there were no material contracts, agreements, plans or arrangements, written or unwritten, that provided for payments or stock option awards to the named executive officers above in connection with their respective resignation, retirement or other termination.  All options granted to PMI’s named executive officers, except as otherwise provided, shall be subject to the terms and conditions“Narrative Discussion of the 2005 Stock Option Plan as set forthSummary Compensation Table and Grants of Plan-Based Awards Table” and the "Potential Payments upon Termination or Change in Control" sections and related tables below.

Employee Benefit PlansOther Compensation Information

Stock Option PlanBenefits Programs

In 2005, PMI’s stockholders approved the adoption of the 2005 Stock Option Plan.  On December 1, 2010, PMI’s stockholders approved the adoption of thePMI's employee benefit programs, including its 401(k) plan, health and welfare programs, Amended and Restated 2005 Stock Option Plan (as amended and restated,2015 Equity Incentive Plan, are designed to provide a competitive level of benefits to PMI's employees generally, including its executive officers and their families. PMI's executive officers are entitled to participate in the “2005 Plan”).  The 2005 Plan will terminate upon the earliest to occur of (i) December 1, 2020, (ii) the date on which all shares of common stock available for issuance under the 2005 Plan have been issued as fully vested shares of common stock,same employee benefit plans, and (iii) the termination of all outstanding stock options granted pursuant to the 2005 Plan.  The 2005 Plan provides for the grant of the following:

·incentive stock options under the federal tax laws (“ISOs”), which may be granted solely to PMI’s employees, including officers; and

·nonstatutory stock options (“NSOs”), which may be granted to PMI’s directors, consultants or employees, including officers.
Share Reserve.  On June 3, 2011 PMI’s board of directors and stockholders approved an amendment to the 2005 Plan to increase the total pool of shares subject to options issuable under the 2005 Plan by 3,550,875 shares.  On September 20, 2011 and October 17, 2011, respectively, PMI’s board of directors and stockholders approved another amendment to the 2005 Plan increasing the share pool by 1,000,000 shares.    On May 10, 2012 and July 17, 2012, respectively, PMI’s compensation committee and stockholders approved another amendment to the 2005 Plan increasing the share pool by 1,700,000 shares.  On January 14, 2013, PMI’s board of directors and stockholders approved another amendment to the 2005 Plan increasing the share pool by 56,483,417 shares. On July 17, 2013 and July 19, 2013, respectively, PMI’s board of directors and stockholders approved another amendment to the 2005 Plan increasing the share pool by 22,636,540 shares. On September 23, 2013, PMI’s board of directors and stockholders approved another amendment to the 2005 Plan increasing the share pool by 31,988,295. On October 29, 2013, PMI amended and restated its Certificate of Incorporation to effect a 10-for-1 reverse stock split. On March 18, 2013, PMI’s Compensation Committee approved an amendment to the 2005 Plan, which amendment was made effective as of October 29, 2013, adjusting the number of shares of PMI's common stock reserved for issuance under the 2005 Plan from 126,347,916 to 12,634,791 to reflect the 10-for-1 reverse stock split. As of the date hereof, an aggregate of 12,634,791 shares of PMI’s common stock are authorized for issuance under the 2005 Plan.  Shares of PMI’s common stock subject to options that have expired or otherwise terminate under the 2005 Plan without having been exercised in full will again become available for grant under the plan.  Shares of PMI’s common stock issued under the 2005 Plan may include previously unissued shares or reacquired shares bought on the market or otherwise.

Administration.  The 2005 Plan is administered by PMI’s board of directors, which in turn has delegated authority to administer the plan to the board of director's compensation committee (the “Administrator”).  Subject to the terms of the 2005 Plan, the Administrator determines recipients, the numbers and types of stock awards to be granted and thesame terms and conditions, of the stock awards, including the period of their exercisability and vesting.  Subject to the limitations set forth below, the Administrator will also determine the exercise price of options granted under the 2005 Plan.as all other full-time employees.

98
Stock options will be granted pursuant to stock option agreements.  The exercise price for ISOs cannot be less than 100% of the fair market value of the common stock subject to the option on the date of grant.  The exercise price for NSOs cannot be less than 85% of the fair market value of the common stock subject to the option on the date of grant.  Options granted under the 2005 Plan will vest at the rate specified in the option agreement.  In general, the term of stock options granted under the 2005 Plan may not exceed ten years.  Unless the terms of an optionholder’s stock option agreement provide for earlier or later termination, if an optionholder’s service relationship with PMI, or any affiliate of PMI, ceases due to disability or death, the optionholder, or his or her beneficiary, may exercise any vested options for up to 12 months after the date the service relationship ends, unless the terms of the stock option agreement provide for earlier termination.  If an optionholder’s service relationship with PMI, or any affiliate of PMI, ceases without cause for any reason other than disability or death, the optionholder may exercise any vested options for up to three months after the date the service relationship ends, unless the terms of the stock option agreement provide for a longer or shorter period to exercise the option. Unvested shares of PMI’s common stock issued in connection with an optionholder's early exercise may be repurchased by PMI for up to ninety days after the date the service relationship with such person ends.

Acceptable forms of consideration for the purchase of PMI’s common stock under the 2005 Plan, to be determined at the discretion of the Administrator at the time of grant, include (i) cash, (ii) the tendering of other shares of common stock or the attestation to the ownership of shares of common stock that otherwise would be tendered to PMI in exchange for PMI’s reducing the number of shares necessary for payment in full of the option price for the shares so purchased (provided that the shares tendered or attested to in exchange for the shares issued under the 2005 Plan may not be shares of restricted stock at the time they are tendered or attested to), or (iii) any combination of (i) and (ii) above.

Generally, an optionholder may not transfer a stock option other than by will or the laws of descent and distribution or a domestic relations order.  However, an optionholder may designate a beneficiary who may exercise the option following the optionholder’s death.

Limitations.  The aggregate fair market value, determined at the time of grant, of shares of PMI’s common stock with respect to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of PMI’s stock plans may not exceed $100.  The options or portions of options that exceed this limit are treated as NSOs.  No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of PMI’s total combined voting power unless the following conditions are satisfied:

·the option exercise price must be at least 110% of the fair market value of the stock subject to the option on the date of grant; and

·the term of any ISO award must not exceed five years from the date of grant.
Option Grants to Outside Directors.  Options may be granted to outside directors in accordance with the policies established from time to time by the Administrator specifying the number of shares, if any, to be subject to each award and the time(s) at which such awards shall be granted.  All options granted to outside directors shall be NSOs and, except as otherwise provided, shall be subject to the terms and conditions of the 2005 Plan.

Adjustments.  In the event that there is a specified type of change in PMI’s capital structure not involving the receipt of consideration by PMI, such as a stock split or stock dividend, the number of shares reserved under the 2005 Plan and the maximum number and class of shares issuable to an individual in the aggregate, and the exercise price or strike price, if applicable, of all outstanding stock awards will be appropriately adjusted.

Dissolution or Liquidation.  In the event of a proposed dissolution or liquidation of PMI, the Administrator shall provide written notice to each participant at least 20 days prior to the effective date of such proposed transaction.  To the extent it has not been previously exercised, an award will terminate immediately prior to the consummation of such proposed action.  The Administrator may specify the effect of a liquidation or dissolution on any award of restricted stock or other award at the time of grant of such award.

Reorganization.  Upon the occurrence of a Reorganization Event (as defined below), each outstanding option shall be assumed or an equivalent option substituted by the successor corporation, except in the event that the successor corporation does not assume the option or an equivalent option is not substituted, then the Administrator shall notify the optionholder that one of the following will occur:

·all options must be exercised as of a specified time prior to the Reorganization Event or will be terminated immediately prior to the Reorganization Event; or
·all outstanding options will terminate upon consummation of such Reorganization Event and each participant will receive, in exchange therefore, a cash payment per share equal to the difference between the acquisition price per share and the exercise price.
A “Reorganization Event” is defined as (i) a merger or consolidation of PMI with or into another entity, as a result of which all of PMI’s common stock is converted into or exchanged for the right to receive cash, securities or other property or (ii) any exchange of all of PMI’s common stock for cash, securities or other property pursuant to a share exchange transaction.

PMI's 401(k) Plan

PMI maintains through its payroll and benefits service provider, a defined contribution employee retirement plan that covers all of its employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service, which is $17.5 for 2013.  Participants who are at least 50 years old can also make “catch-up”Service.  PMI's contributions which in 2013 may be up to an additional $5.5 above the statutory limit.  Under the 401(k) plan are discretionary. During the year ended December 31, 2016, PMI contributed $2.6 million to the 401(k) plan.

All full-time employees, including PMI's named executive officers, may participate in its health and welfare benefit programs, including medical, dental and vision care coverage, disability insurance and life insurance.

Perquisites and Other Personal Benefits

Currently, PMI does not view perquisites or other personal benefits as a significant component of its compensation. Accordingly, PMI does not generally provide perquisites, such as company cars and paid parking spaces, to its executive officers. PMI does reimburse its executive officers for certain relocation expenses, subject to the terms and conditions prescribed by the Compensation Committee. In 2016, PMI reimbursed Mr. Kimball and Mr. Kaul for relocation expenses incurred in connection with their employment. The reimbursement amounts paid to each employeeof Mr. Kimball and Mr. Kaul for 2016 is fully vesteddisclosed in the “All Other Compensation” column and accompanying footnotes of the Summary Compensation Table.

In the future, PMI may provide additional perquisites or other personal benefits in limited circumstances, such as where PMI believes it is appropriate to assist an individual executive in the performance of his or her deferred salary contributions.  Employee contributions are heldduties and invested by the plan’s trustee.  PMI’s contributions to the plan are discretionary and PMI has not made any contributions to date.for recruitment, motivation or retention purposes.

DirectorPost-Employment Compensation

As reflectedThe Compensation Committee recognizes that a possible, threatened, or pending change of control transaction could result in the table below,departure or distraction of PMI’s executives. To establish a meaningful financial incentive for PMI’s executive officers to work diligently through and beyond a proposed transaction that may involve a change in control of the company, certain of the stock options and restricted stock units granted to PMI’s NEOs will fully vest upon a change in control of PMI, occasionally grants optionswhile others will fully vest in the event that such officer is subject to a termination of employment without cause within 12 months after a change in control of PMI.

In addition, during 2016, PMI entered into severance arrangements with each of Mr. Kimball and Mr. Pennington as part of their offer letter and amendment to offer letter, respectively. PMI considered the retention of Mr. Kimball and Mr. Pennington to be important to the achievement of Prosper’s short and long-term goals, and believes that these protections are necessary to induce these individuals to forego other opportunities. The severance arrangements provide that each of Mr. Kimball and Mr. Pennington would be entitled to a lump sum payment equal to six months’ of annual base salary (less applicable deductions


and withholdings) in the event that the respective officer’s employment is terminated by PMI without cause or by Mr. Kimball and Mr. Pennington, as applicable, for good reason (each as defined in the applicable offer letter). Receipt of these severance benefits is conditioned on the officer’s signing a release of claims in favor of PMI.

For additional information regarding these severance and change in control arrangements, see "Potential Payments Upon Termination or Change in Control.”

Compensation Risk Assessment

PMI's management evaluates and mitigates any risk that may exist relating to its directorscompensation plans, practices and policies for their service onall employees, including PMI's NEOs. PMI's management has concluded that PMI's compensation policies and practices do not create or promote inappropriate or excessive risk taking.
Summary Compensation Table
The following table provides information regarding the boardcompensation earned during the years ended December 31, 2016, December 31, 2015 and December 31, 2014 by each of directors but does not otherwise compensate directors for their service on the board.PMI’s named executive officers (in thousands):  
Name 
Fees
earned or
paid in
cash
  
Stock
awards
  
Option
awards(1)($)
   
Non-equity
incentive plan
compensation
  
Nonqualified
deferred
compensation
earnings
  
All other
compensation
  Total 
Patrick W. Grady $-  $-  $-   $-  $-  $-  $- 
Rajeev V. Date  -   -  $8   -   -   -  $8(2)
Christopher Bishko  -   -   -    -   -   -   - 
Court Coursey (3)  -   -   -    -   -   -   - 
Timothy C. Draper (3)  -   -   -    -   -   -   - 
Nigel W. Morris (3)  -   -  $75(4)   -   -   -  $75 
Eric Schwartz (3)  -   -  $75(5)   -   -   -  $75 
Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($)(1) 
Option
Awards
($)(1)
 
All Other
Compensation ($)(2)
 Totals ($)
David Kimball (3) 2016 $305
 $383
 $1,510
 $3,351
 $31
 $5,580
Chief Executive Officer and             

former Chief Financial Officer

              
Aaron Vermut (4) 2016 191
 —
 —
 364
 11
 566
Former Chief Executive 2015 360
 200
 —
 3,654
 14
 4,228
Officer

 2014 300
 140
 —
 191
 —
 631
John Hiestand (5) 2016 226
 72
 —
 254
 11
 480
Vice President, Finance and 2015 152
 25
 —
 1,454
 —
 1,631
Former Principal Financial
Officer

             

Brad Pennington 2016 316
 263
 —
 2,572
 11
 3,162
Chief Risk Officer             

Cheryl Law (6) 2016 313
 —
 —
 2,200
 13
 2,526
Former Chief Marketing             

Officer

             

Kunal Kaul (7) 2016 300
 225
 268
 1,185
 31
 2,009
Executive Vice President,             

Operations

             

Parker Barrile (8) 2016 225
 —
 —
 2,699
 9
 2,933
Former Chief Product Officer 2015 75
 85
 2,937
 4,343
 5
 7,445

(1)CalculatedThe amounts reported represent the grant date fair value of the restricted stock units and stock options granted to the named executive officers as calculated in accordance with the Financial Accounting Board’s Topic ASC 718, Compensation –Stock Compensation (“ASC 718”) using thea Black-Scholes model giving consideration to estimated forfeitures for outstanding options to purchase shares of PMI’s common stock.  The key assumptions used in PMI’s ASC 718 calculation are discussed in Note 2 of PMI’s consolidated financial statements, which are incorporated by reference into this Annual Report.


(2)“All Other Compensation” consists of compensation received from employer matching contributions to PMI’s 401(k) plan and relocation reimbursement paid by PMI for each named executive officer.  
(3)Mr. David Kimball joined PMI in March 2016 as its Chief Financial Officer. He was appointed PMI's Chief Executive Officer in December 2016. Mr. Kimball's Total Compensation for 2016 includes relocation expenses of $31,141 and a sign-on bonus of $125,000.
(4)Mr. Aaron Vermut resigned as Chief Executive Officer of PMI effective December 1, 2016.
(5)Mr. John Hiestand joined PMI in May 2015 as its Vice President of Finance. Mr. Hiestand served as the Principal Financial Officer of PMI until March 2016.
(6)Ms. Cheryl Law resigned as Chief Marketing Officer of PMI effective January 6, 2017.
(7)Mr. Kaul's Total Compensation for 2016 includes relocation expenses of $20,583.
(8)Mr. Parker Barrile resigned as Chief Product Officer of PMI effective September 30, 2016.
2016 Grants of Plan-Based Awards (1)(2)
The following table sets forth certain information regarding grants of plan-based awards to PMI's named executive officers during 2016 (dollar amounts in thousands, except per share information).
Name Grant Date (2)  
All Other Stock Awards:
Number of
Shares of
Stock or Units
(#)
 
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
  
Exercise
or Base
Price of
Option
Awards
($/Sh)
 
Grant
Date Fair
Value of
Stock and
Option
Awards
($)(3)
 
David Kimball 05/03/16  705,465
 1,410,925
  $2.14
 $2,737
 
  06/17/16  —
 2,115,703
  2.14
 1,873
 
Aaron Vermut      1,170,000
(4) 
 2.14
 364
(5) 
John Hiestand 05/03/16  —
 103,000
  2.14
 93
 
       475,000
(4) 
 2.14
 137
(5) 
Brad Pennington 06/17/16  —
 2,764,149
  2.14
 2,447
 
       400,000
(4) 
 2.14
 125
(5) 
Cheryl Law 06/17/16  —
 2,484,778
  2.14
 2,200
 
Kunal Kaul 05/03/16  125,000
 250,000
  2.14
 529
 
  06/17/16  —
 1,043,916
  2.14
 924
 
Parker Barrile 06/17/16  —
 2,103,878
  2.14
 1,862
 
  05/03/16  —
 1,596,160
(4) 
 2.14
 837
 
(1)The following columns are intentionally omitted from this table: Estimated Future Payouts under Non-Equity Incentive Plan Awards, and Estimated Future Payouts under Equity Incentive Plan Awards.
(2)The equity awards granted to the Prosper Marketplace Inc.NEOs in 2016 were granted under, and governed by the terms of, PMI's 2015 Incentive Plan and the applicable award agreements. See the footnotes to the Outstanding Equity Awards at 2016 Fiscal Year-End table below for a description of the vesting schedule of the equity awards granted in 2016 and reported in the Table above.


(3)The amounts reported represent the grant date fair value of the restricted stock units and stock options granted to the named executive officers as calculated in accordance with the Financial Accounting Board’s Topic ASC 718, Compensation –Stock Compensation (“ASC 718”) using a Black-Scholes model to purchase shares of PMI’s common stock.  The key assumptions used in PMI’s ASC 718 calculation are discussed in Note 2 of PMI’s consolidated financial statements.statements, which are incorporated by reference into this Annual Report.
(4)On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved the repricing of all outstanding stock options held by employees and directors that had an exercise prices above the then current fair market value of PMI’s common stock (the "Reprice"), effectively reducing the exercise price of such options to $2.14 per share. These options were granted in prior periods and repriced in connection with the Reprice.
(5)The incremental fair value of the holder's eligible outstanding options as of the repricing date are as follows: $364 thousand for Mr. Vermut; $149 thousand for Mr. Hiestand; $125 thousand for Mr. Pennington; and $837 thousand for Mr. Barrile.

Narrative Discussion of the Summary Compensation Table and Grants of Plan-Based Awards Table
Offer Letters and Arrangements
David Kimball. In November 2016, PMI entered into an offer letter with Mr. Kimball in connection with his appointment as its Chief Executive Officer. In addition to his initial base salary, Mr. Kimball's offer letter provided for (i) up to $500,000 in bonus payments, subject to achievement of certain performance targets; (ii) reimbursement of certain relocation expenses; and (iii) eligibility to participate in the benefit programs generally available to employees of PMI. PMI also committed to grant Mr. Kimball an equity award of options exercisable into shares of PMI common stock representing up to 7.1% of PMI’s capitalization on a fully diluted basis, subject to the terms and conditions of the offer letter. In addition, the offer letter included certain severance arrangements, the terms of which are described under "Post-Employment Compensation" above.
Mr. Kimball's November 2016 offer letter replaced the offer letter PMI entered into with Mr. Kimball in March 2016 in connection with his appointment as its Chief Financial Officer. In addition to the severance, reimbursement and benefits arrangements included in the November 2016 offer letter, Mr. Kimball's March 2016 offer letter included his initial base salary and equity grant as CFO and provided for a one-time sign-on bonus of $125,000, subject to certain repayment requirements in the event of Mr. Kimball’s termination from PMI within 12 months of his employment.
Kunal Kaul. In December 2015, PMI entered into an offer letter with Mr. Kaul in connection with his appointment as its Executive Vice President, Operations. In addition to his initial base salary and equity grant, Mr. Kaul's offer letter provided for (i) a one-time sign-on bonus of $40,000, subject to certain repayment requirements in the event of Mr. Kaul's termination from PMI within 12 months of his employment; (ii) eligibility to receive an annual performance bonus in a target amount of 40% of his base salary; (iii) reimbursement of certain relocation expenses; and (iv) eligibility to participate in the benefit programs generally available to employees of PMI.
John Hiestand. In April 2015, PMI entered into an offer letter with Mr. Hiestand in connection with his appointment as its Director, Operations & Innovation. In addition to his initial base salary and equity grant, Mr. Hiestand's offer letter provided for (i) eligibility to receive an annual performance bonus in a target amount of 43% of his base salary; and (ii) eligibility to participate in the benefit programs generally available to employees of PMI.
Parker Barrile. In August 2015, PMI entered into an offer letter with Mr. Barrile in connection with his appointment as its Chief Product Officer. In addition to his initial base salary and equity grant, Mr. Barrile's offer letter provided for (i) eligibility to receive an annual performance bonus in a target amount of 40% of his base salary; and (ii) eligibility to participate in the benefit programs generally available to employees of PMI.
Cheryl Law. In August 2014, PMI entered into an offer letter with Ms. Law in connection with her appointment as its Chief Marketing Officer. In addition to her initial base salary and equity grant, Ms. Law's offer letter provided for eligibility to participate in the benefit programs generally available to employees of PMI.


Brad Pennington. In January 2012, PMI entered into an offer letter with Mr. Pennington in connection with his appointment as its Director, Credit Risk Management. In addition to his initial base salary and equity grant, Mr. Pennington's offer letter provided for (i) a one-time sign-on bonus of $15,000; (ii) reimbursement of certain relocation expenses; and (iii) eligibility to participate in the benefit programs generally available to employees of PMI. In November 2016, PMI amended Mr. Pennington's offer letter to provide for certain severance arrangements, the terms of which are described under "Post-Employment Compensation" above.
Equity Incentive Plans
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2, which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). The 2005 Plan and 2015 Plan are collectively referred to in this Annual Report as the "Equity Plans".
In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms.  Unless sooner terminated by PMI’s Board of Directors, the 2015 Plan will expire ten years from the date of its adoption.  All stock options granted to NEOs are incentive stock options, to the extent permissible under the Internal Revenue Code, as amended. All equity awards to PMI’s employees and directors were granted at no less than the fair market value of its common stock on the date of each award. In the absence of a public trading market for PMI common stock, PMI’s Board of Directors, acting on its own or through the Compensation Committee, has determined the fair market value of its common stock in good faith based upon consideration of a number of relevant factors including the status of its development efforts, financial status and market conditions. See “Item 15.-Notes to Consolidated Financial Statements”.
The 2005 Plan provided for grants in the form of non-qualified stock options and stock purchase rights, which were available for grant to PMI’s directors, consultants or employees, including officers, and incentive stock options, which were available for grant solely to its employees, including officers.  The 2015 Plan provides for grants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, and unrestricted stock.  Under the 2015 Plan, incentive stock options may be granted solely to PMI’s employees, including officers.  Awards other than incentive stock options may be granted to its directors, consultants or employees, including officers. The Equity Plans are administered by PMI’s Board of Directors, which in turn has delegated authority to administer the plans to the Compensation Committee.
Shares of PMI’s common stock subject to options that have expired or otherwise terminate under the 2015 Plan or the 2005 Plan without having been exercised in full will become available for grant under the 2015 Plan.  Shares of PMI’s common stock issued under the 2015 Plan may include previously unissued shares or reacquired shares bought on the market or otherwise.
As of December 31, 2016, an aggregate of 49,820,740 options to purchase our common stock were authorized for issuance under the 2015 Plan. Of such authorized options, as of December 31, 2016, a total of 22,397,078 options were outstanding under the 2015 Plan and 27,423,662 options were available for grant, including 21,486,492 shares that were forfeited under the 2015 Plan. As of December 31, 2016, 6,097,552 options under the 2015 Plan have vested and 2,300 have been exercised. As of December 31, 2016, there were zero stock options available for grant under the 2005 Plan.
The NEOs identified herein have been granted equity awards upon employment with PMI, for merit increases, and for retention purposes.
Outstanding Equity Awards at 2016 Fiscal Year End
The following table sets forth certain information regarding outstanding equity awards granted to PMI’s named executive officers that remained outstanding as of December 31, 2016.  


Name Grant Date  Vesting Commencement Date Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) (1)
David Kimball 5/3/2016
(2) 
 3/18/2016 —
 1,410,925
 2.14 5/2/2026  
  5/3/2016
(3) 
 3/18/2016 —
 —
 —
 —
 705,465
  6/17/2016
(4) 
 4/28/2016 470,156
 1,645,547
 2.14 6/16/2026 —
Aaron Vermut 8/20/2013
(5) 
 3/30/2013 —
 —
 — — 265,435
  1/28/2014
(6) 
 1/28/2014 2,940,660
 —
 0.11 1/28/2024 —
  2/27/2015
(7) 
 2/27/2014 1,170,000
 —
 2.14 2/27/2025 —
John Hiestand 3/5/2016
(8) 
 3/1/2015 475,000
 —
 2.14 3/4/2025 —
  5/3/2016
(9) 
 4/28/2016 22,889
 80,111
 2.14 5/2/2026 —
Brad Pennington 3/28/2012
(10) 
 2/27/2012 62,500
 —
 0.34 2/27/2022 —
  8/5/2013
(2) 
 3/19/2013 —
 —
 0.02 — 14,220
  1/28/2014
(10) 
 1/1/2014 125,000
 —
 0.11 1/28/2024 —
  1/23/2015
(10) 
 1/16/2015 200,000
 —
 2.14 1/22/2025 —
  2/20/2015
(10) 
 2/13/2015 85,000
 —
 2.14 2/19/2025 —
  2/27/2015
(11) 
 2/27/2015 115,000
 —
 2.14 2/26/2025 —
  6/17/2016
(4) 
 4/28/2016 614,225
 2,149,894
 2.14 6/16/2026 —
Cheryl Law 11/7/2014
(2) 
 10/6/2014 1,747,315
 800,855
 1.13 11/6/2024 —
  6/17/2016
(2) 
 4/28/2016 552,173
 1,932,605
 2.14 6/16/2026 —
Kunal Kaul 3/15/2016
(3) 
 12/28/2015 —
 —
 — 3/14/2026 125,000
  5/3/2016
(2) 
 12/28/2015 62,500
 187,500
 2.14 5/2/2026 —
  6/17/2016
(4) 
 4/28/2016 231,981
 811,935
 2.14 6/16/2026 —
Parker Barrile —
  — —
 —
 — — —
(1)Represents (i) shares of restricted stock issued upon the early exercise of stock options (“Restricted Stock”) and (ii) restricted stock units (“RSUs”), in each case that remained unvested as of December 31, 2016. PMI has a right to repurchase any shares of Restricted Stock that remain unvested at the time the holder of such shares ceases to provide services to PMI.
(2)This option vests over four years, with 1/4 vesting on the first anniversary of the applicable vesting commencement date set forth in the table (the "Vesting Commencement Date") and 1/48 vesting each month thereafter for the following three years, except that, in the event of a change in control of PMI, a sale of all or substantially all of PMI's assets, or a liquidation, dissolution or winding up of PMI (each, a "Corporate Transaction"), any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction.
(3)These RSUs initially vest, if at all, when PMI files for an initial public offering and the lock-up period expires or there is a change in control, whichever occurs first (each, a “Triggering Event”). The number of RSUs that vest upon a Triggering Event will be equal to the number of RSUs that would have vested had the RSUs been subject to only the following vesting condition: vesting over four years, with 1/4 vesting on the first anniversary of the vesting commencement date and 1/48 vesting each month thereafter for the following three years; except that, in the event of a change in control, any unvested RSUs will vest immediately prior to the effective time of the change in control (the “Time-Based Vesting Schedule”). Thereafter, the RSUs shall vest pursuant to the Time-Based Vesting Schedule until the RSUs are fully vested.
(4)This option vests over three years, with 1/36 vesting on the one month anniversary of the Vesting Commencement Date and 1/36 vesting each month thereafter on the same day of the month as the Vesting Commencement Date (and if there is no corresponding day, on the last day of the month), except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction.


(5)This Restricted Stock was issued upon early exercise of stock options granted to the executive officer on the applicable Grant Date, and shall vest and be released from PMI’s repurchase right over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.
(6)This option vested in full upon the achievement of certain performance objectives.
(7)This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years.
(8)This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years.
(9)This option vests over three years, with 1/36 vesting on the one month anniversary of the Vesting Commencement Date and 1/36 vesting each month thereafter on the same day of the month as the Vesting Commencement Date (and if there is no corresponding day, on the last day of the month).
(10)This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/4 vesting on the first anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following three years, except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction.
(11)This option is subject to an early exercise provision and is immediately exercisable. This option vests over four years, with 1/2 vesting on the second anniversary of the applicable Vesting Commencement Date and 1/48 vesting each month thereafter for the following two years, except that, in the event of a Corporate Transaction, any unvested options will vest in full immediately prior to the effective time of the Corporate Transaction.
2016 Option Exercises and Stock Vested
The following table sets forth information regarding equity awards held by PMI's named executive officers that were exercised, vested or settled during 2016 (dollar amounts in thousands):
  Option Awards Stock Awards
Name 
Number of
Shares
Acquired on
Exercise
(#)
 
Value
Realized
on Exercise
($)
 
Number of
Shares
Acquired
on Vesting
(#)
  
Value
Realized on
Vesting/Settlement
($) (1)
David Kimball —
 —
 —
  —
Aaron Vermut —
 —
 2,311,360
  $4,080
John Hiestand —
 —
 —
  —
Brad Pennington —
 —
 56,875
  $100
Cheryl Law —
 —
 —
  —
Kunal Kaul —
 —
 —
  —
Parker Barrile —
 —
 —
  —
(1)The amount reported as value realized on vesting/settlement of restricted stock units is calculated by multiplying the fair value of PMI's common stock as of the vesting date of the award by the number of RSUs.


Potential Payments Upon Termination or a Change In Control of PMI
The following table provides the estimated value of the payments that PMI would provide to its named executive officers in connection with a change in control of PMI and/or a termination of employment. In determining amounts payable, we have assumed in all cases that the change in control or termination of employment, as applicable, occurred on December 31, 2016. With respect to a termination of employment, we have assumed in all cases that the termination was without cause.
Name Cash Severance ($) Number of Unvested Options (#) Estimated Value of Unvested Options at December 31, 2016 ($) (1) Number of Unvested RSUs and Stock Awards (#) Estimated Value of Unvested RSUs and Stock Awards at December 31, 2016 ($) Total Estimated Value ($)
  (dollar amounts in thousands)
             
David Kimball            
Involuntary Termination $250
 —
 —
   
 $250
Change in Control   2,869,560
 —
 705,465
 $162.3
 $162.3
Involuntary Termination following Change in Control —
 —
 —
 —
 —
 —
Aaron Vermut            
Change in Control —
 —
 —
 —
 —
 —
Involuntary Termination following Change in Control —
 1,170,000
 —
 —
 —
 —
John Hiestand            
Change in Control —
 —
 —
 —
 —
 —
Involuntary Termination following Change in Control —
 —
 —
 —
 —
 —
Brad Pennington —
          
Involuntary Termination $175
         $175
Change in Control   2,448,964
 $4
 14,220
 $3
 $7
Involuntary Termination following Change in Control —
 —
 —
 —
 —
 —
Cheryl Law (2)            
Change in Control —
 2,733,460
 —
 —
 —
 —
Involuntary Termination following Change in Control —
 —
 —
 —
 —
  
Kunal Kaul —
 999,435
 —
 125,000
 $29
 $29
Change in Control            
Involuntary Termination following Change in Control —
 —
 —
 —
 —
 —
Parker Barrile (3)            
Change in Control —
 —
 —
 —
 —
 —
Involuntary Termination following Change in Control —
 —
 —
 —
 —
 —


(1)All unvested options of Mr. Kimball, Mr. Vermut, Ms. Law, and Mr. Kaul are out of the money (exercise price above stock price as of May 29, 2016) and therefore there is no value to the acceleration.
(2)Ms. Cheryl Law resigned as Chief Marketing Officer of PMI effective January 6, 2017.
(3)Mr. Parker Barrile resigned as Chief Product Officer of PMI effective September 30, 2016.
Compensation Committee Interlocks and Insider Participation

During the fiscal year ended December 31, 2016, Patrick W. Grady served as the Chairman, and Christopher M. Bishko served as a member, of PMI’s Compensation Committee. No member of the Compensation Committee is or has been an officer or employee of PMI at any time or had any relationship with PMI requiring disclosure as a related party transaction. During the fiscal year ended December 31, 2016, none of PMI's executive officers served as a member of the Board of Directors or Compensation Committee (or other board committee serving an equivalent function) of any unrelated entity that had one or more of its executive officers serving on PMI’s Board of Directors or Compensation Committee (or other board committee serving an equivalent function).
Director Compensation
The following table shows compensation for the year ended December 31, 2016 to PMI’s directors who were not also named executive officers at the time they received compensation as directors (in thousands):
Name 
Fees
earned or
paid in
cash ($)
 
Equity
awards ($)
  Total
Patrick W. Grady —
 —
  —
Rajeev V. Date (1) —
 $743
  $743
Christopher M. Bishko —
 —
  —
David R. Golob —
 —
  —
Nigel W. Morris (2) —
 $743
  $743
Stephan P. Vermut (3) —
 —
  —
(1)On May 3, 2016, Mr. Date received a non-statutory option to purchase 705,349 shares of common stock. The option vests over four years, with 1/4 vesting on the first anniversary of the vesting commencement date of April 28, 2016, and 1/48 vesting each month thereafter for the following three years, subject to Mr. Date's continued service on PMI's Board of Directors.
(2)Mr. Date was granted 75,000 share option awards on August 20, 2013Morris is associated with QED Fund II, L.P. On May 3, 2016, PMI issued QED Fund II, L.P. a warrant to purchase 705,349 shares of common stock at an exercise price of $0.10, which are$2.14 per share. The warrant vests over four years, with 1/4 vesting on the first anniversary of the vesting commencement date of April 28, 2016, and 1/48 vesting each month thereafter for the following three years, subject to terms and conditionsMr. Morris' continued service on PMI's Board of the 2005 Plan. This was the only outstanding option award for Mr. Date as of December 31, 2013.Directors.
(3)Effective January 14, 2013, Messrs. Coursey, Draper, MorrisMr. Vermut resigned as an employee of PMI on April 1, 2016 and Schwartz resigned from PMI's boardas a Director of directors.PMI effective December 1, 2016.
(4)Represents a warrant to acquire 43,831 shares of PMI’s common stock at $1.70 per share granted to QED Fund I, L.P. as compensation for Mr. Morris. Such warrant was forfeited by its terms on January 14, 2013 when Mr. Morris resigned from PMI’s board of directors.
(5)Represents a warrant to acquire 43,831 shares of PMI’s common stock at $1.70 per share granted to Mr. Schwartz.  Such warrant was the only outstanding option award for Mr. Schwartz as of December 31, 2013.

From time to time, PMI reimburses certain of its non-employee directors for travel and other expenses incurred in connection with attending board of directors meetings.  PMI has agreed to reimburse certain of its directors for legal expenses incurred by them stemming from the class action lawsuit as described in the “Information About Prosper Marketplace, Inc.—Legal Proceedings” incorporated by reference into this Annual Report.
Prosper Funding LLCmeetings.

Prosper Funding does not compensate any
COMPENSATION COMMITTEE REPORT
The Compensation Committee of its officers.PMI has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and based on such review and discussions, the Compensation Committee recommended to PMI's Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Director Compensation
COMPENSATION COMMITTEE

Prosper Funding does not compensate its directors for service on the Board.  On May 30, 2013, Prosper Funding, PMI, Global Securitization Services, LLC (“GSS”), and Prosper Funding’s independent directors, David V. DeAngelis and Bernard J. Angelo, who are employees of GSS and are described as the “GSS representatives,” entered into an Amended and Restated Services and Indemnity Agreement (the “GSS Agreement”), pursuant to which, among other things, (i) GSS and the GSS representatives agreed that the GSS representatives would serve as Prosper Funding’s independent directors, and (ii) Prosper Funding agreed to pay GSS an annual fee of $5 as compensation for providing such independent director services.  The GSS Agreement amended and restated, in its entirety, the Services and Indemnity Agreement, dated March 1, 2012, entered into by Prosper Funding, PMI, GSS, Bernard J. Angelo and Kevin P. Burns.  On the same date the parties entered into the GSS Agreement, Kevin P. Burns resigned as a director of Prosper Funding and David V. DeAngelis was elected a director of Prosper Funding. Prosper Funding does not consider the annual fee it pays to GSS to constitute director compensation.Patrick W. Grady, Chair
Christopher M. Bishko

Name
Fees earned
or paid in
cash ($)
Stock
awards ($)
Option
awards ($)
Non-equity
Incentive plan
compensation
($)
Nonqualified
deferred
compensation
earnings ($)
All other
compensation
($)
Total ($)
Sachin Adarkar$-$-$-$-$-$-$-
Bernard J. Angelo-------
David V. DeAngelis-------
Joseph L. Toms-------
Kirk T. Inglis-------
Kevin P. Burns-------
Stephan Vermut-------
Aaron Vermut-------
Ronald Suber-------
Item 12.
Security Ownership of Certain Beneficial ownersOwners and Management and Related Stockholder Matters

Prosper Marketplace, Inc.

Principal Security Holders of PMI following the Recapitalization

The following table sets forth information regarding the beneficial ownership of PMI’s common stock as of March 27, 2014,3, 2017, by:

each of PMI’s directors;
●each of PMI’s directors;
each of PMI’s named executive officers;

each person, or group of affiliated persons, who is known by PMI to beneficially own more than 5% of PMI’s common stock; and
●each of PMI’s named executive officers;

●each person, or group of affiliated persons, who is known by PMI to beneficially own more than 5% of PMI’s common stock; and

●all of PMI’s directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of common stock issuable upon the exercise of stock options or warrants that are immediately exercisable or exercisable within 60 days after March 27, 2014.securities. Except as otherwise indicated in the footnotes to the table below, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.

Percentage ownership calculations are based on 13,425,863222,330,214 shares of common stock outstanding as of March 27, 2014.3, 2017, assuming the conversion of all of PMI’s convertible preferred stock.  Each share of PMI preferred stock is convertible at any time at the discretion of the holder. Shares of PMI’s Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series BF Preferred Stock convert into shares of PMI common stock at a ratio of 1 to 1. Shares of PMI’s Series A-1 Preferred Stock convert into shares of PMI common stock at a ratio of 1,000,000 to 1.

In computing the number of shares of common stock beneficially owned by a person or entity and the percentage ownership of that person or entity, PMI deemed outstanding all shares of common stock subject to options and warrants held by that person or entity that are currently exercisable or exercisablevesting within 60 days of March 27, 2014.3, 2017.  Except as set forth in footnote 17 below, PMI did not deem these shares outstanding however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1.0% is denoted with an asterisk (*). Except as otherwise indicated in the footnotes to the table below, addresses of named beneficial owners and officers are in care of Prosper Marketplace, Inc., 101 Second221 Main Street, 15th3rd Floor, San Francisco, CA 94105.


102
  Total Beneficial Ownership 
 
 Number of  Beneficial Ownership 
Name of Beneficial Owner Shares  Percentage 
  2013  2013 
Officer and Directors      
 
    
Rajeev Date (1)  75,000   * 
 
        
Pat Grady (2)  10,249,583   43.29%
 
        
Christopher Bishko (3)  434,591   3.18%
 
        
Stephan Vermut (4)  3,130,629   21.29%
 
        
Aaron Vermut (5)  3,130,629   21.29%
 
        
Ronald Suber (6)  3,130,629   21.29%
 
        
Dawn Lepore  -   - 
 
        
All directors and executive officers as a group (7)*  20,151,061   72.45%
 
        
5% Shareholders        
Accel Partners (8)  4,632,485   28.86%
 
        
Agilus Ventures (9)  1,202,408   8.64%
 
        
Draper Fisher Jurvetson (10)  1,457,557   10.28%
 
        
IDG Capital Partners (11)  4,632,485   28.86%
 
        
Meritech Capital Partners (12)  997,839   7.14%
 
        
Sequoia Capital (13)  10,249,583   43.29%
 
        
BlackRock (14)  1,657,746   10.99%
 
        
Garrison (15)  1,657,746   10.99%
 
        
Stephan Vermut (16)  3,130,629   21.29%
 
        
Aaron Vermut (17)  3,130,629   21.29%
 
        
Ronald Suber (18)  3,130,629   21.29%
Name of Beneficial Owner 
Number of
Shares Owned (1)
 Number of Shares Underlying Options, and Warrants Exercisable Currently or Within 60 Days (2) Total Number of Shares Beneficially Owned (3) 
Beneficial
Ownership
Percentage
Directors and Executive Officers        
Rajeev V. Date (4) 26,115
 376,337
 402,452
 *
Patrick W. Grady (5) 51,247,915
 —
 51,247,915
 23.05%
Christopher M. Bishko (6) 2,172,955
 —
 2,172,955
 *
David R. Golob  (7) 17,413,325
 —
 17,413,325
 7.83%
Nigel W. Morris  (8) 1,073,970
 551,337
 1,625,307
 *
David Kimball —
 1,087,360
 1,087,360
 *
Aaron Vermut (9) 10,215,265
 4,110,660
 14,325,925
 6.33%
Ronald Suber (10) 10,215,265
 3,565,660
 13,780,925
 6.10%
Brad Pennington (11) 175,095
 1,508,883
 1,683,978
 *
Sachin Adarkar —
 1,287,792
 1,287,792
 *
Kunal Kaul —
 431,305
 431,305
 *
John Hiestand —
 509,333
 509,333
 *
Parker Barrile (12) —
 —
 —
 *
Cheryl Law (13) —
 1,535,033
 1,535,033
 *
All directors and executive officers as a group (14) 92,539,905
 14,963,700
 107,503,605
 45.30%
5% Shareholders  
 

    
Sequoia Capital (15) 51,247,915
 —
 51,247,915
 23.05%
Pinecone Investments LLC (16) —
 35,544,141
 35,544,141
 13.78%
Accel Partners (17) 24,320,667
 —
 24,320,667
 10.94%
IDG Capital Partners (18) 24,320,667
 —
 24,320,667
 10.94%

(1)As of March 27, 2014, there were 13,425,863Includes shares of common stock outstanding.  If all(including common stock issuable upon the conversion of preferred stock,stock) owned directly or indirectly, but does not include shares subject to options and warrants.
(2)Includes shares subject to options or warrants owned directly or indirectly that are currently exercisable or will become exercisable within 60 days of March 3, 2017.
(3)
The amounts and options were converted into sharespercentages of common stock there wouldbeneficially owned are reported on the basis of regulations of the Securities and Exchange Commission governing the determination of beneficial ownership of securities. Under the rules of the Commission, a person is deemed to be 46,560,897a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of common stock outstanding assuch security, or “investment power,” which includes the power to dispose of March 27, 2013.  Onor to direct the disposition of such security. A person is also deemed to be a fully diluted as-converted basis, PMI’s officers, directors and 5% shareholders would own the following percentagesbeneficial owner of PMI’s stock, as of March 27, 2013:any securities for which that person has a right to acquire beneficial ownership within 60 days.
·Dawn Lepore: 0.00%
·Rajeev Date: *
·Pat Grady: 24.73%
Christopher Bishko: 1.05%
·Stephan Vermut: 7.55%
Aaron Vermut: 7.55%
Ronald Suber: 7.55%
All directors and executive officers as a group: 49.02%
Accel Partners: 11.18%
Agilus Ventures: 2.90%
Draper Fisher Jurvetson: 3.52%
IDG Capital Partners: 11.18%
Meritech Capital Partners: 2.41%
Sequoia Capital: 24.73%
BlackRock: 5.00%
Garrison: 5.00%
Stephan Vermut: 7.55%
Aaron Vermut: 7.55%
Ronald Suber: 7.55%

(1)(4)Consists of 75,000376,337 shares of common stock issuable upon the exercise of stock options and 26,115 shares of common stock issuable upon the conversion of preferred stock held by Rajeev  Date.Mr. Date or his affiliate.  

(2)
(5)Consists of 10,249,58351,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Mr. Grady is a partner of Sequoia Capital and therefore may be deemed to share voting and investment power over these shares. Mr. Grady disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.

(3)
(6)Consists of 214,7761,086,975 shares of common stock 217,196and 1,085,980 shares of common stock issuable upon the conversion of preferred stock and warrants to purchase 2,619 shares of common stock issuable upon the exercise of warrants held by Omidyar Network.Network through certain of its affiliates. Mr. Bishko is an investmenta partner of Omidyar Network


Technology Ventures and therefore may be deemed to share voting and investment power over these shares. Mr. Bishko disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.
(7)Consists of 17,413,325 shares of common stock issuable upon the conversion of preferred stock held by Francisco Partners through certain of its affiliates. Mr. Golob is a partner of Francisco Partners and therefore may be deemed to share voting and investment power over these shares. Mr. Golob disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.

(4)
(8)Consists of 1,849,0491,005,935 shares of common stock, 693,40868,035 shares of common stock issuable upon the conversion of preferred stock and 588,132551,337 shares of common stock issuable upon the exercise of warrants held by QED Investors through certain of its affiliates.  Mr. Morris is a partner of QED Investors and therefore may be deemed to share voting and investment power over these shares. Mr. Morris disclaims beneficial ownership with respect to the shares except to the extent of his pecuniary interest therein.
(9)Includes 1,983,275 shares of common stock issuable upon the conversion of preferred stock. Mr. Vermut's holdings include 192,260 shares of restricted common stock that were purchased through the early exercise of stock options and remain unvested.
(10)Consists of 4,385,445 shares of common stock, 1,983,275 shares of common stock issuable upon the conversion of preferred stock and 13,780,925 shares of common stock issuable upon the exercise of stock options held by Stephan VermutMr. Suber or his affiliate. Mr. VermutSuber is deemed to have voting and investment power over these shares. Mr. VermutSuber disclaims beneficial ownership with respect to the shares held by his affiliate except to the extent of his pecuniary interest therein.

(5)
(11)Mr. Pennington's holdings include 4,740 shares of restricted common stock that were purchased through the early exercise of stock options and remain unvested. 
(12)Mr. Barrile resigned as PMI’s Chief Product Officer effective September 30, 2016.
(13)Cheryl Law resigned as PMI's Chief Marketing Officer effective January 6, 2017.
(14)Consists of 1,849,04918,731,985 shares of common stock, 693,40873,807,920 shares of common stock issuable upon the conversion of preferred stock, and 588,132 shares of common stock issuable upon the exercise of stock options held by Aaron Vermut.

(6)Consists of 1,849,049 shares of common stock, 693,408 shares of common stock issuable upon the conversion of preferred stock and 588,132 shares of common stock issuable upon the exercise of stock options held by Ronald Suber.

(7)Consists of 5,762,043 shares of common stock, 12,547,003 shares of common stock issuable upon the conversion of preferred stock, 1,839,39614,412,363 shares of common stock issuable upon the exercise of stock options and 2,619551,337 shares of common stock issuable upon the exercise of warrants.

(8)
(15)Represents 1,133,055 shares of common stock, 1,449,17151,247,915 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Sequoia Capital is deemed to have voting and 7,639investment power over the shares. The address for Sequoia Capital is 3000 Sand Hill Road, 4-250, Menlo Park, California 94025.
(16)
Represents 35,544,141 shares of common stock issuable upon the exercise and conversion of warrantsthe preferred stock warrant held by Pinecone Investments LLC, an affiliate of Colchis Capital Management, L.P. The members of Pinecone Investments LLC are all of the partners of Colchis Capital Management, L.P., or entities established by one or more of them. The address for Colchis Capital Management, L.P. is 150 California St., 18th Floor, San Francisco, CA 94111.
(17)Represents 5,703,470 shares of common stock and 7,245,859 shares of common stock issuable upon the conversion of preferred stock held by Accel Partners through certain of its affiliates (collectively, the “Accel Shares”); 874,0153,498,765 shares of common stock and 944,5464.722,733 shares of common stock issuable upon the conversion of preferred stock held by IDG Capital Partners through certain of its affiliates (the “IDG Shares”); and 174,262877,185 shares of common stock 222,884and 2,272,655 shares of common stock issuable upon the conversion of preferred stock and 1,175 shares of common stock issuable upon exercise of warrants held by the James Breyer 2011 Annuity Trust 2Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). Accel Partners is deemed to have voting and investment power over the Accel Shares. Accel Partners is an affiliate of IDG Capital Partners and may also therefore be deemed to share voting and investment power over the IDG Shares. Mr. Breyer is a partner of Accel Partners and therefore Accel Partners may also be deemed to share voting and investment power over the Breyer Shares. Accel Partners disclaims beneficial ownership of the IDG Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address of Accel Partners is 428 University Avenue, Palo Alto, California 94301.


104
Tableextent of Contentsits pecuniary interest therein. The address of Accel Partners is 428 University Avenue, Palo Alto, California 94301.
(9)
(18)Represents 708,519 shares of common stock, 486,358 shares of common stock issuable upon the conversion of preferred stock and 7,531 shares of common stock issuable upon exercise of warrants held by Agilus Ventures through certain of its affiliates. Volition Capital, LLC, manages the US portfolio of Agilus Ventures under a sub-advisory agreement and has voting and investment power over the shares held by Agilus Ventures. The address of Agilus Ventures is 82 Devonshire Street, E16B, Boston, Massachusetts 02109

(10)Represents 710,8993,498,765 shares of common stock and 746,658 shares of common stock issuable upon the conversion of preferred stock held by Draper Fisher Jurvetson through certain of its affiliates. Draper Fisher Jurvetson is deemed to have voting and investment power over these shares. The address for Draper Fisher Jurvetson is 2882 Sand Hill Road, Suite 150, Menlo Park, California 94025.

(11)Represents 699,753 shares of common stock and 944,5464,722,733 shares of common stock issuable upon the conversion of preferred stock held by IDG Capital Partners through certain of its affiliates (“IDG Shares”); 1,133,0555,703,470 shares of common stock 1,449,171and 7,245,859 shares of common stock issuable upon the conversion of preferred stock and 7,639 shares of common stock issuable upon exercise of warrants held by Accel Partners through certain of its affiliates (collectively, the “Accel Shares”); and 174,262877,185 shares of common stock 222,884and 2,272,655 shares of common stock issuable upon the conversion of preferred stock and 1,175 shares of common stock issuable upon exercise of warrants held by the James Breyer 2011 Annuity Trust 2Capital, LLC and James W. Breyer 2005 Trust dated 2/25/2005 (collectively, the “Breyer Shares”). IDG Capital Partners is deemed to have voting and investment power over the IDG Shares. IDG Capital Partners is an affiliate of Accel Partners and may also therefore be deemed to share voting and investment power over the Accel Shares. Mr. Breyer is a partner of Accel Partners, which is an affiliate of IDG Capital Partners, and therefore IDG Capital Partners may also be deemed to share voting and investment power over the Breyer Shares. IDG Capital Partners disclaims beneficial ownership of the Accel Shares and Breyer Shares except to the extent of its pecuniary interest therein. The address for IDG Capital Partners is 99 Queen’s Road Central, Unit 1509, The Center, Hong Kong, China.

(12)Represents 439,33 shares of common stock, 555,751 shares of common stock issuable upon the conversion of preferred stock and 2,755 shares of common stock issuable upon the exercise of warrants held by Meritech Capital Partners through certain of its affiliates. Meritech Capital Partners is deemed to have voting and investment power over these shares. The address for Meritech Capital Partners is 245 Lytton Avenue, Suite 350, Palo Alto, California 94301.

(13)Represents 439,333 shares of common stock issuable upon the conversion of preferred stock held by Sequoia Capital through certain of its affiliates. Sequoia Capital is deemed to have voting and investment power over these shares. The address for Sequoia Capital is 300 Sand Hill Road, 4-250, Menlo Park, California 94025

(14)Represents 1,657,746 shares of common stock issuable upon the conversion of preferred stock held by BlackRock through certain of its affiliates.  BlackRock is deemed to have voting and investment power over these shares.  The address for BlackRock is 40 East 52nd Street, New York, NY 10022.

(15)Represents 1,657,746 shares of common stock issuable upon the conversion of preferred stock held by Garrison through certain of its affiliates.  Garrison is deemed to have voting and investment power over these shares.  The address for Garrison is 1290 Avenue of the Americas, Suite 914, New York, NY 10019.

(16)Consists of 1,849,089 shares of common stock, 693,408 shares of common stock issuable upon the conversion of preferred stock and 588,132 shares of common stock issuable upon the exercise of stock options held by Stephan Vermut or his affiliate. Mr. Vermut is deemed to have voting and investment power over these shares. Mr. Vermut disclaims beneficial ownership with respect to the shares held by his affiliate except to the extent of his pecuniary interest therein.

(17)Consists of 1,849,089 shares of common stock, 693,408 shares of common stock issuable upon the conversion of preferred stock and 588,132 shares of common stock issuable upon the exercise of stock options held by Aaron Vermut.

(18)Consists of 1,849,089 shares of common stock, 693,408 shares of common stock issuable upon the conversion of preferred stock and 588,132 shares of common stock issuable upon the exercise of stock options held by Ronald Suber.

Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information, as of December 31, 2013,2016, with respect to shares of PMI common stock that may be issued under PMI'sPMI’s existing equity compensation plans.

105
Plan Category 
Number of shares of common stock to be issued upon exercise of outstanding options,
warrants and rights
(1)
  
Weighted average
exercise price of outstanding options, warrants and rights
  Number of shares of common stock remaining available for future issuance under equity compensation plans  
Number of
shares of
common
stock to be
issued upon
exercise of
outstanding
options,
warrants, RSUs
and rights (1)
 
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
 
Number of
shares of
common
stock
remaining
available for
future
issuance
under equity
compensation
plans
Equity compensation plans approved by stockholders: 
  
  
       
Prosper Marketplace, Inc. 2005 Stock Incentive Plan, as amended  938,585  $0.20   5,414,052 
Prosper Marketplace, Inc. 2005 Stock Plan, as amended and restated 20,755,795  $0.82  — 
Prosper Marketplace, Inc. 2015 Equity Incentive Plan, as amended 22,397,078  $2.14  27,423,662 
All stockholder approved plans  938,585  $0.20   5,414,052  43,152,873  $1.48  27,423,662 
Equity compensation plans not approved by stockholders:                  
N/A  N/A  N/A   N/A 
Outstanding Common Stock Warrants 1,203,344  $1.64  — 
All non-stockholder approved plans  N/A   N/A   N/A  1,203,344  $1.64  — 
Total  938,585  $0.20   5,414,052  44,356,217  $1.48  27,423,662 

(1)The 2005 Stock Incentive Plan includesIncludes option and RSU issuances to employee,employees, directors and certain consultants, advisors or vendors; however it does not include warrants granted to outside individuals, consultants, advisors and vendors.

The information set forth in Note 10 to the “Notes to Consolidated Financial Statements” below under the caption “Stock Option Plan and Compensation” is incorporated herein by reference.

Prosper Funding LLC

PMI is the sole member of, and holds a 100% equity interest in, Prosper Funding.  Prosper FundingPFL. PFL does not have any equity compensation plans.

Item 13.
Certain Relationships and Related Transactions, and Director Independence


Prosper Marketplace, Inc.

TransactionsAgreements with Related Parties

PFL
On January 22, 2013, PMI entered into thean Administration Agreement with Prosper Funding,PFL (as amended to date, the “PMI Administration Agreement”), pursuant to which PMI agreed to provide certain administrative services relating to the platform.
Since PMI’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 5% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 5% stockholders.  Since January 1, 2013,marketplace.  Under the PMI has engaged in the following financial transactions withAdministration Agreement, PFL is required to pay PMI (a) an aggregate value of greater than $120 with its directors, executive officers and holders of more than 5% of its voting securities and other affiliates of its directors and executive officers.  PMI believes that allamount equal to one-twelfth (1/12) of the transactions described below were madespecified annual Corporate Administration Fees equal to 50% of finance and legal personnel costs, (b) a fee for each Borrower Loan originated through the marketplace, (c) 90% of all servicing fees collected by or on terms no less favorable to PMI than could have been obtained from unaffiliated third parties.behalf of Prosper Funding, and (d) all nonsufficient funds fees collected by or on behalf of PFL.

Asset Transfer

OnAlso on January 22, 2013, Prosper FundingPFL and PMI entered into an Asset Transfer Agreement (the “Asset Transfer Agreement”) pursuant to which PMI, effective February 1, 2013 (i) transferred the platformmarketplace and substantially all of PMI’s assets and rights related to the operation of the platformmarketplace to Prosper Funding,PFL, and (ii) made a capital contribution to Prosper FundingPFL in excess of $3,000.$3 million. Under the Asset Transfer Agreement, PMI also transferred substantially all of its remaining assets to Prosper Funding,PFL, including (i) all outstanding PMI Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee ("(“the Indenture"Indenture”), (ii) all PMI Borrower Loans corresponding to such Notes, (iii) all lender/borrower/group leader registration agreements related to the PMIsuch Notes or the PMIand Borrower Loans, and (iv) all documents and information related to the foregoing. The transfer of assets under the Asset Transfer Agreement is referred to as the “Asset Transfer.” Certain hardware and agreements relevant to the development, maintenance and use of the platform,marketplace, including in relation to the origination, funding and servicing of Prosper Funding Borrower Loans, and the issuance, funding and payment of the Prosper Funding Notes, were not transferred or assigned to Prosper FundingPFL by PMI. In addition, PMI did not transfer to Prosper FundingPFL (i) agreements with PMI’s directors, officers or employees and PMI’s financial, legal or other advisors or consultants, (ii) certain agreements with vendors to provide PMI with goods or services in the ordinary course of business (including software licensed pursuant to any “shrink wrap” or “click wrap” license), and (iii) certain cash and short-term investments.

In the Asset Transfer Agreement, PMI agreed, among other things, to:

·
(i)fund any repurchase obligation with respect to the PMItransferred Notes, and indemnify Prosper FundingPFL for any other losses that arise out of any lender/borrower/group leader registration agreement related to the PMItransferred Notes or the PMI Borrower Loans, including as a result of a breach by PMI of any of its representations or warranties made therein;

·
(ii)fund any arbitration filing or administrative fees or arbitrator fees payable under any lender/borrower/group leader registration agreement related to the PMItransferred Notes or the PMI Borrower Loans; and

·
(iii)fund any indemnification obligations that arise under any group leader registration agreement entered into by PMI prior to the date of the Asset Transfer.asset transfer.
PMI has continued to service the PMI Borrower Loans pursuant to the Administration Agreement between PMI and Prosper Funding. Under the Administration Agreement, PMI agreed, among other things, to use commercially reasonable efforts to service and collect the PMI Borrower Loans and will indemnify Prosper Funding for any losses as a result of its breach of such obligation.

Holders of the PMItransferred Notes are third party beneficiaries under the Asset Transfer Agreement and the Administration Agreement.

PMI Note Assumption

Under Section 4.1 of the Indenture, PMI maycould transfer substantially all of its assets to any person without the consent of the holders of the PMIexisting Notes, provided that the transferee expressly assumesassumed all of PMI’s obligations under the Indenture and the PMIexisting Notes. In that case, the transferee willwould succeed to and be substituted for PMI, and PMI willwould be discharged from all of its obligations and covenants, under the Indenture and the PMIexisting Notes. Accordingly, on January 22, 2013, PMI, Prosper FundingPFL and Wells Fargo Bank, as trustee entered into thean Amended and Restated Indenture (the “Amended and Restated Indenture”), effective February 1, 2013, which (i) effected such assumption, substitution and discharge (the “Note Assumption”), and (ii) amended and restated the Indenture to reflect the Note Assumption and to make certain other amendments to the Indenture as permitted therein. Following the Note Assumption, Prosper Funding isPFL became the obligor with respect to the PMItransferred Notes and the Amended and Restated Indenture, and PMI no longer has any obligations with respect thereto.
Agreements with Prosper Asset Holdings LLC
On November 22, 2013, PMI entered into an Administration Agreement with Prosper Asset Holdings LLC (“PAH”), a wholly owned subsidiary of PFL (the “PAH Administration Agreement), pursuant to which PMI agreed to provide PAH certain administrative services related to PAH’s operations.  Under the PAH Administration Agreement, PAH is required to pay PMI an annual fee in the amount of $150,000.


Also on November 22, 2013, PMI and PAH entered into a Loan Servicing Agreement, pursuant to which PMI agreed to service certain Borrower Loans acquired by PAH under a Loan Sale Agreement entered into on the same date between PAH and PFL.  In exchange for servicing these Borrower Loans, PAH agreed to pay PMI the servicing fee identified in the loan listing for each loan purchased by PAH.
Certain Relationships Among Directors and Officers
Mr. Aaron Vermut, a director and the former Chief Executive Officer of PMI, is the son of Stephan P. Vermut, who served as Executive Chairman of PMI until April 1, 2016 and as a director of PMI until December 1, 2016. Mr. Stephan P. Vermut's total compensation in 2016 and 2015 was $451,108 and $411,800, respectively.
Participation in the Platform

Marketplace
PMI’s executive officers, directors and 5% shareholderscertain affiliates, have bidopened investor accounts on the marketplace and purchased PMI Notes, Prosper Funding Noteshave made deposits to and PMI Borrower Loans originated through the platformwithdrawals from their accounts, and invested in portions of borrowers’ loan requests from time to time in the past. Aspast via purchases of December 31, 2013, these parties had purchased $5,989 of PMI Notes, Prosper Funding Notes, and PMI Borrower Loans throughmay do so in the platform. James Breyer has purchased Prosper Fundingfuture. The Notes PMI Notes and PMI Borrower Loans in an aggregate amount of $1,825; Ronald Suber has purchased Prosper Funding Notes and PMI Notes in an aggregate amount of $1,151; Larry Cheng has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $34; Kirk Inglis has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $51; Nigel Morris has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $103; Timothy Draper has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $852; Joseph Toms has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $14; Dawn Lepore has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $31; and Aaron Vermut has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $18. Of the total aggregate amount of Prosper Funding Notes, PMI Notes and PMI Borrower Loans purchased by executive officers, directors, 5% shareholders from launch of the platform through December 31, 2013, approximately $388 or 14% of principal has been charged off, as compared to approximately $72,976 or 12% of principal charged off for all Prosper Funding Notes, PMI Notes and PMI Borrower Loans originated from launch of the platform through December 31, 2013. The Prosper Funding Notes, PMI Notes and PMI Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other lender members. In addition, from time to time, PMI funded portions of qualified loan requests and held any Prosper Funding Notes and PMI Notes it purchased as a result of such funding for its own account. As of December 31, 2013, PMI had purchased Prosper Funding Notes and PMI Notes for investments in the aggregate amount of approximately $274.

investors.
Financing Arrangements with Significant Shareholders, Directors and Officers

Since January 1, 2016, PMI has repurchased 385,230 shares for a total of $7,704.60 from Stephen Vermut.
In January 2013, PMI entered into a Stock Purchase Agreement with certain new investors and certain of its existing investors (each a “Share Purchaser” and, collectively, the “Share Purchasers”), pursuant to which PMI issued and sold to such Share Purchasers (directly or through certain of their affiliates) an aggregate of 13,868,152 shares of PMI’s Series A Preferred Stock for an aggregate consideration of $20,000. The Share Purchasers included SC Prosper Holdings LLC, Merlin Acorn, LP, Draper Fisher Jurvetson, TomorrowVentures 2010 Fund, LLC, QED Fund I, L.P. and Eric & Erica Schwartz Investments LLC.

In connection with that sale, PMI also issued 5,117,182 shares at the par value $0.01 per share of Series A-1 convertible preferred stock "(Series A-1 Preferred Stock)" to certain previous holders of PMI’s preferred stock who participated in the sale. Upon issuance of PMI Series A and Series A-1 Preferred Stock, all of PMI’s preferred stock existing prior to such issuance was converted into PMI common stock at a 1:1 ratio if the holder of the preferred stock participated in this offering or at a 10:1 ratio if the holder of the preferred stock did not so participate.

The participants in this convertible preferred stock financing included the (i) executive officers, (ii) directors, and (iii) individuals and entities set forth in the following table, each of which held, directly or indirectly (either directly or through one or more affiliates), 5% or more of any class of PMI’s voting securities at the time the transaction was consummated.
Participant Series A  Series A-1 
  
 
  
 
 
Stephan Vermut  693,408   - 
Ronald Suber  693,408   - 
James Breyer  154,925   163,330 
Aaron Vermut  693,408   - 
Accel Partners  1,007,307   1,061,955 
Agilus Ventures  486,358   512,745 
Benchmark Capital Partners  96,338   101,564 
Crosslink Capital  288,853   304,525 
DAG Ventures  426,007   449,118 
Draper Fisher Jurvetson  497,981   524,999 
IDG Capital Partners  664,008   700,033 
Meritech Capital Partners  426,007   449,120 
Sequoia Capital  6,934,084   - 

On September 23, 2013, PMI entered into a Stock Purchase Agreement with certain new investors and certain of its existing investors (each, a “Series B Share Purchaser” and, collectively, the “Series B Share Purchasers”), pursuant to which, PMI issued and sold to such Series B Share Purchasers (either directly or through certain of their respective affiliates) 8,288,734 shares of PMI’s Series B Preferred Stock (the “Shares”) for an aggregate purchase price of $25,000, net of issuance costs. The Share Purchasers included SC Prosper Holdings LLC and Omidyar Network Fund LLC.
The participants in this convertible preferred stock financing included the (i) executive officers, (ii) directors, and (iii) individuals and entities set forth in the following table, each of which held, directly or indirectly (either directly or through one or more affiliates), 5% or more of any class of PMI’s voting securities at the time the transaction was consummated.
ParticipantSeries B
Draper Fisher Jurvetson                                               248,677
IDG Capital Partners                                               280,538
Accel Partners                                               509,824
BlackRock                                            1,657,746
Garrison                                            1,657,749
Sequoia Capital                                            3,315,499
For further information regarding stock ownership for executive officers, directors and security holders owning greater than 5% ownership of all PMI classes of voting securities please see “Principal Securityholders—Prosper Marketplace, Inc.”

As of the date of this Annual Report, three of PMI's directors, Patrick Grady, Stephan P. Vermut and Christopher Bishko are affiliated with Sequoia Capital, Merlin Acorn, LP, and Omidyar Network respectively.  The notes to PMI's beneficial ownership table describe these affiliations in greater detail in “Item 12—12. Security Ownership of Certain Beneficial ownersOwners and Management and Related Stockholder Matters—Principal Security Holders.Prosper Marketplace, Inc.”

Under the terms of the amended and restated voting agreement, dated April 7, 2015, certain investors in PMI’s convertible preferred stock, have each agreed, subject to maintaining certain ownership levels, to exercise their voting rights so as to elect one designee of Francisco Partners III, L.P., one designee of SC Prosper Holdings LLC, one designee of QPL Holdings (PF) LP, one designee of the Series A-1 convertible preferred stock holders, PMI’s Chief Executive Officer (“CEO”), one common director designated by the CEO, and two independent directors.
Under the terms of the amended and restated investor rights agreement, dated February 27, 2017, the holders of a majority of the registrable securities of PMI have the right to demand that PMI file a registration statement under the Securities Act, so long as the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $20 million.  These registration rights are subject to specified conditions and limitations.  In addition, PMI is promptly required to give written notice to all holders of registrable securities prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of PMI.  The amended and restated investor rights agreement also provides that if PMI registers any of its shares for public sale, stockholders with registration rights will have the right to include their shares in the registration statement, subject to specified conditions and limitations.  Further, in the amended and restated investor rights agreement, if PMI receives from any holders of registrable securities a written request that PMI effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement, PMI is required to use reasonable best efforts to file a Form S-3 registration statement and to effect such registration as would permit or facilitate the sale and distribution of all or such portion of such holder’s registrable securities as are specified in the request, so long as the anticipated aggregate offering price, net of underwriting discounts and commissions, would exceed $2.5 million.
Indemnification Agreements

PMI'sPMI’s amended and restated certificate of incorporation provides that it will indemnify its directors and officers to the fullest extent permitted by Delaware law. In addition, PMI has entered into separate indemnification agreements with each of its directors and executive officers. For more information regarding these agreements, see “Item 10. Directors, Executive Officers and Corporate Governance—Prosper Marketplace, Inc.—Limitations on Officers’ and Directors’ Liability and Indemnification Agreements” for more information.

Prosper Funding LLCPolicies and Processes for Transactions Involving Related Parties

Prosper Funding entered into the Administration Agreement pursuant to which PMI has agreed to provide certain administrative services relating to the platform.
Asset Transfer

On January 22, 2013, Prosper FundingPMI’s board of directors has not adopted a formal policy or procedure that must be followed prior to any transaction, arrangement or relationship with a related person, as defined by SEC regulations.

PMI has adopted a corporate Code of Ethics and PMI entered into the Asset Transfer Agreement pursuant to which PMI, effective February 1, 2013 (i) transferred the platformCorporate Governance (the “Code”) that is enforced throughout all levels of management and substantially alldeals with conflicts of PMI’s assets and rights related to the operation of the platform to Prosper Funding, and (ii) made a capital contribution to Prosper Funding in excess of $3,000. Under the Asset Transfer Agreement, PMI also transferred substantially all of its remaining assets to Prosper Funding, including (i) all outstanding PMI Notes issued by PMI under the Indenture (ii) all PMI Borrower Loans, (iii) all lender/borrower/group leader registration agreements related to the PMI Notes or the PMI Borrower Loans, and (iv) all documents and information related to the foregoing. Certain hardware and agreements relevant to the development, maintenance and use of the platform, including in relation to the origination, funding and servicing of Prosper Funding Borrower Loans, and the issuance, funding and payment of the Prosper Funding Notes, were not transferred or assigned to Prosper Funding by PMI.  In addition, PMI did not transfer to Prosper Funding (i) agreements withinterest, among other things. The Code requires PMI’s directors, officers and employees to avoid any conduct or employeesactivities that conflict, or appear to conflict, with Prosper’s interests, or that may make it difficult for the individual to perform his or her duties objectively. The Code also requires directors and executive officers to disclose any actual or potential conflict of interest to PMI’s financial, legal or other advisors or consultants, (ii) certain agreements with vendorsChief Compliance Officer, who will report such conflicts to provide PMI with goods or services in the ordinary course of business (including software licensed pursuant to any “shrink wrap” or “click wrap” license), and (iii) certain cash and short-term investments.PMI’s Audit Committee for review.

In the Asset Transfer Agreement,PMI’s directors and executive officers are required each year to respond to a questionnaire regarding their independence. The questionnaire also requires each director and executive officer to identify if they or an immediate family member had been indebted to, or had been a participant in any material transactions with, PMI agreed, among other things, to:or any of its subsidiaries. Additionally, PMI’s directors and executive officers are required to disclose on a quarterly basis whether they or an immediate family member had made any direct or indirect investments on Prosper’s platform.

·fund any repurchase obligation with respect to the PMI Notes, and indemnify Prosper Funding for any other losses that arise out of any lender/borrower/group leader registration agreement related to the PMI Notes or the PMI Borrower Loans, including as a result of a breach by PMI of any of its representations or warranties made therein;

·fund any arbitration filing or administrative fees or arbitrator fees payable under any lender/borrower/group leader registration agreement related to the PMI Notes or the PMI Borrower Loans; and

·fund any indemnification obligations that arise under any group leader registration agreement entered into by PMI prior to the date of the Asset Transfer.

PMI continues to service the PMI Borrower LoansThe standards applied pursuant to the Administration Agreement between PMIabove-described procedures are to provide comfort that potential conflicts of interest or related party transactions are identified and Prosper Funding. Under the Administration Agreement, PMI agreed, among other things, to use commercially reasonable efforts to servicereceived appropriate oversight and collect the PMI Borrower Loans and will indemnify Prosper Funding for any losses as a result of its breach of such obligation.review.

Director Independence
Holders of the PMI Notes are third party beneficiaries under the Asset Transfer Agreement and the Administration Agreement.

PMI Note Assumption

Under Section 4.1 of the Indenture, PMI may transfer substantially all of its assets to any person without the consent of the holders of the PMI Notes, provided that the transferee expressly assumes all of PMI’s obligations under the Indenture and the PMI Notes. In that case, the transferee will succeed to and be substituted for PMI, and PMI will be discharged from all of its obligations and covenants, under the Indenture and the PMI Notes. Accordingly, on January 22, 2013, PMI, Prosper Funding and the Wells Fargo Bank, as trustee, entered into the Amended and Restated Indenture, effective February 1, 2013, which (i) effected the Note Assumption, and (ii) amended and restated the Indenture to reflect the Note Assumption and to make. Following the Note Assumption, Prosper Funding is the obligor with respect to the PMI Notes and the Indenture, and PMI no longer has any obligations with respect thereto.

Prosper Funding has not engaged in any other transactions with its directors, executive officers, holders of more than 5% of its voting securities, or immediate family members or other affiliates of its directors, executive officers or 5% stockholders.

Participation in the Platform

Prosper Funding’s executive officers, directors and affiliates have bid on and purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans originated through the platform from time to time in the past. As of December 31, 2013, these parties had purchased $3,046 of Prosper Funding Notes, PMI Notes and PMI Borrower Loans through the platform. Christian Larsen has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of approximately $1,803; Ronald Suber has purchased Prosper Funding Notes and PMI Notes in an aggregate amount of $1,151; Aaron Vermut has purchased Prosper Funding Notes and PMI Notes in an aggregate amount of $18; Joseph Toms has purchased Prosper Funding Notes and PMI Notes in an aggregate amount of $14; Kirk Inglis has purchased Prosper Funding Notes, PMI Notes and PMI Borrower Loans in an aggregate amount of $51; Daniel Sanford has purchased Prosper Funding Notes and PMI Notes in an aggregate amount of $7; and Sachin Adarkar has purchased Prosper Funding Notes and PMI Notes in an aggregate amount of $1. Of the total aggregate amount of Prosper Funding Notes purchased by executive officers, directors and affiliates from launch of the platform through December 31, 2013, approximately $142 or 9% of principal has been charged off, as compared to approximately $72,976 or 12% of principal charged off for all Prosper Funding Notes, PMI Notes and PMI Borrower Loans originated from launch of the platform through December 31, 2013. The Prosper Funding Notes, PMI Notes and PMI Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other lender members. In addition, from time to time, Prosper Funding funded portions of qualified loan requests and held any Prosper Funding Notes it purchased as a result of such funding for its own account. As of December 31, 2013, Prosper Funding had purchased Prosper Funding Notes for investments in the aggregate amount of approximately $161.
Indemnification Agreements

Under Prosper Funding’s organizational documents, it is required to indemnify its directors and officers in certain instances.   For more information regarding director independence, see “Item 10. Directors, Executive Officers, and Corporate Governance—Prosper Funding LLC—Limitations on Officers’ and Directors’ Liability and Indemnification Agreements.Marketplace, Inc.—Director Independence.”

Item 14.
Principal Accounting Fees and Services

Prosper Marketplace, Inc. and Prosper Funding LLC
Burr Pilger Mayer, Inc.Deloitte & Touche LLP (“BPM”Deloitte”) served as PMI and Prosper Funding’sPFL’s independent registered public accounting firm for the fiscal year ended December 31, 20132016 and is serving in such capacity for the current fiscal year. BPMDeloitte was engaged in August 2013. 

October 2014.
The aggregate fees billed by BPMDeloitte for professional services to PMI and Prosper FundingPFL were $105$2,724 thousand and $2,079 thousand in 2013. 2016 and 2015, respectively.

OUM & Co. LLP served as PMI and Prosper Funding’s independent registered public accounting firm for the fiscal year ended 2012, and the period from January 2013 through August 2013.Audit Fees. The aggregate fees billed by OUM & Co. LLP to PMI and Prosper Funding were $97 and $452 during the fiscal years ended December 31, 2013 and 2012, respectively.
Audit Fees.  The aggregate fees billed by BPMDeloitte for professional services rendered for PMI and Prosper FundingPFL for the audit of annual financial statements, the review of the quarterly financial statements, and services that are normally provided in connection with statutory and regulatory filings or engagements were $105$2,316 thousand and $1,840 thousand in 2013.  OUM & Co. LLP billed $972016 and $452 for such fees in 2013 and 2012,2015, respectively.
Audit Related Fees.  There were no The aggregate fees billed by BPM or OUM & Co. LLP for 2013 and 2012Deloitte for professional assurance and related services reasonably related to the performance of the audit of the PMI and Prosper Funding’sPFL’s financial statements, but not included under Audit Fees.
Fees were $361 thousand and $237 thousand in 2016 and 2015, respectively.  These fees include merger and acquisition related due diligence, service organization control readiness assessment and service organization control assessment.  
Tax Fees.  There were no The aggregate fees billed by BPM or OUM & Co. LLPDeloitte for 20132016 and 20122015 for professional services for tax compliance, tax advice and tax planning were $44 thousand and $0 in 20132016 and 2012. 
2015. 
All Other Fees.  None. Deloitte billed $2 thousand and $2 thousand, in 2016 and 2015, respectively, related to fees not included in “Audit”, “Audit Related Fees” or “Tax Fees.”


PART IV

Item 15.
Exhibits and Financial Statement Schedule

(a) Reports of Independent Registered Public Accounting Firms
 
(a1) Report of Independent Registered Public Accounting Firm for PMIF-1
  
(a2) Report of Former Independent Registered Public Accounting Firm for PMIF-2
(a3) Report of Independent Registered Public Accounting Firm for Prosper Funding LLCF-27
(a4) Report of Former Independent Registered Public Accounting Firm for Prosper FundingF-28
  
(b) Documents List 
1. Financial Statements as of and for the year ended December 31, 2016
 
Prosper Marketplace, Inc. 
Consolidated Balance Sheets as of December 31, 20132016 and 20122015
F-3
F-2
Consolidated Statements of Operations for the years ended December 31, 20132016, 2015 and 20122014
F-4
F-3
Consolidated StatementsStatement of Stockholders' EquityOther Comprehensive Income (Loss) for the years ended December 31, 20132016, 2015 and 20122014
F-5
F-4
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit for the years ended December 31, 2016, 2015 and 2014
F-5
Consolidated Statements of Cash Flows for the years ended December 31, 20132016, 2015 and 20122014
F-6
Notes to Consolidated Financial Statements
F-7
  
Prosper Funding LLC 
Consolidated Balance Sheets as of December 31, 20132016 and 20122015
F-29
F-45
Consolidated Statements of Operations for the years ended December 31, 20132016 and 20122015
F-30
F-46
Consolidated Statements of Member'sMember’s Equity for the years ended December 31, 20132016 and 20122015
F-31
F-47
Consolidated Statements of Cash Flows for the years ended December 31, 20132016 and 20122015
F-32
F-48
Notes to Consolidated Financial Statements
F-33
F-49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Prosper Marketplace, Inc.
San Francisco, CA

We have audited the accompanying consolidated balance sheetsheets of Prosper Marketplace, Inc. and its subsidiaries (the “Company”"Company") as of December 31, 2013,2016 and 2015, and the related consolidated statements of operations, changes inother comprehensive loss, convertible preferred stock and stockholders’ equity,deficit, and cash flows for each of the year then ended.  The Company’s management is responsible for thesethree years in the period ended December 31, 2016. These consolidated financial statements.statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prosper Marketplace, Inc. and its subsidiaries as of December 31, 2013,2016 and 2015, and the results of their operations and their cash flows for each of the year thenthree years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

/s/ Burr Pilger Mayer, Inc.
DELOITTE & TOUCHE LLP
San Francisco, CaliforniaCA
March 31, 201417, 2017




Prosper Marketplace, Inc.
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)
F-1
 December 31, December 31,
ASSETS2016 2015
Cash and Cash Equivalents$22,337
 $66,295
Restricted Cash163,907
 151,223
Available for Sale Investments, at Fair Value32,769
 73,187
Accounts Receivable757
 2,434
Loans Held for Sale, at Fair Value624
 32
Borrower Loans, at Fair Value315,627
 297,273
Property and Equipment, Net24,853
 24,965
Prepaid and Other Assets4,606
 6,433
Servicing Assets12,786
 14,363
Goodwill36,368
 36,368
Intangible Assets, Net9,212
 13,051
Total Assets$623,846
 $685,624
LIABILITIES,  CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
   DEFICIT
 
  
Accounts Payable and Accrued Liabilities$15,017
 $22,409
Payable to Investors142,644
 136,507
Notes, at Fair Value316,236
 297,405
Other Liabilities17,173
 20,735
Convertible Preferred Stock Warrant Liability21,711
 —
Total Liabilities512,781
 477,056
Commitments and Contingencies (see Note 18)

 

Convertible Preferred Stock – $0.01 par value; 217,388,425 shares authorized; 177,388,425 issued and outstanding as of December 31, 2016; 177,388,425 shares authorized; 177,388,425 issued and outstanding as of December 31, 2015. Aggregate liquidation preference of $325,952 as of December 31, 2016 and 2015.
275,938
 275,938
Stockholders' Deficit 
  
Common Stock – $0.01 par value; 338,222,103 shares authorized; 70,843,044 shares issued and 69,907,109 outstanding as of December 31, 2016; 270,326,075 shares authorized; 70,367,425 issued and 69,431,490 outstanding as of December 31, 2015212
 127
Additional Paid-In Capital123,988
 102,971
Less: Treasury Stock(23,417) (23,417)
Accumulated Deficit(265,648) (146,907)
Accumulated Other Comprehensive Loss(8) (144)
Total Stockholders' Deficit$(164,873) $(67,370)
Total Liabilities,  Convertible Preferred Stock and Stockholders' Deficit$623,846
 $685,624
All share numbers reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
The accompanying notes are an integral part of these consolidated financial statements.


Prosper Marketplace, Inc.
Consolidated Statements of Operations
(in thousands, except for share and per share amounts)
Table
 Year ended December 31,
 2016 2015 2014
Revenues     
Operating Revenues     
Transaction Fees, Net$95,130
 $161,708
 $68,229
Servicing Fees, Net28,903
 17,238
 4,552
Gain on Sale of Borrower Loans3,637
 14,151
 3,227
Other Revenues5,245
 7,687
 1,828
Total Operating Revenues132,915
 200,784
 77,836
Interest Income 
  
  
Interest Income on Borrower Loans44,649
 41,606
 42,087
Interest Expense on Notes(41,187) (38,174) (38,734)
Net Interest Income3,462
 3,432
 3,353
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net(372) 59
 128
Total Net Revenues136,005
 204,275
 81,317
Expenses 
  
  
Origination and Servicing33,944
 31,139
 14,098
Sales and Marketing70,146
 112,284
 41,971
General and Administrative102,735
 86,480
 27,917
Restructuring Charges, Net17,027
 —
 —
Other Expenses, Net30,348
 —
 —
Total Expenses254,200
 229,903
 83,986
Net Loss Before Taxes(118,195) (25,628) (2,669)
Income Tax Expense546
 340
 —
Net Loss$(118,741) $(25,968) $(2,669)
Excess Return to Preferred Shareholders on Repurchase—
 —
 (14,892)
Net Loss Applicable to Common Shareholders$(118,741) $(25,968) $(17,561)
Net Loss Per Share – Basic and Diluted$(1.85) $(0.47) $(0.39)
Weighted-Average Shares - Basic and Diluted64,196,537
 55,547,408
 44,484,005
The weighted average number of Contentsshares and the net loss per share reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016
The accompanying notes are an integral part of these consolidated financial statements.



Prosper Marketplace, Inc.
Consolidated Statements of Other Comprehensive Loss
(in thousands)
 Year ended December 31,
 2016 2015 2014
Net Loss$(118,741) $(25,968) $(2,669)
Other Comprehensive Income (Loss), Before Tax 
  
  
Change in Net Unrealized Gain (Loss) on Available for Sale Investments, at Fair Value148
 (144) —
Realized (Gain) Loss on Sale of Available for Sale Investments, at Fair Value(12) —
 —
Other Comprehensive Income (Loss), Before Tax136
 (144) —
Income tax effect—
 —
 —
Other Comprehensive Income (Loss), Net of Tax136
 (144) —
Comprehensive Loss$(118,605) $(26,112) $(2,669)
The accompanying notes are an integral part of these consolidated financial statements.



Prosper Marketplace, Inc.
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit
(in thousands, except for share amounts)
  Convertible Preferred Stock Common Stock Treasury Stock        
  Shares Amount Shares Amount Shares Amount 
Additional
Paid-In
Capital
 Accumulated Other Comprehensive Income 
Accumulated
Deficit
 Total
Balance as of January 1, 2014 136,370,340
 $44,822
 67,944,015
 $75
 (911,320) $(291) $83,676
 $—
 $(103,952) $(20,492)
Issuance of convertible preferred stock, Series C, net of issuance costs 24,404,770
 69,958
 —
 —
 —
 —
 —
 —
 —
 —
Exercise of vested stock options —
 —
 295,750
 1
 —
 —
 76
 —
 —
 77
Exercise of nonvested stock options —
 —
 4,328,585
 —
 —
 —
 —
 —
 —
 —
Repurchase of restricted stock —
 —
 (909,465) —
 (24,615) (12) —
 —
 —
 (12)
Restricted stock vested —
 —
 —
 25
 —
 —
 320
 —
 —
 345
Exercise of warrants —
 —
 584,615
 1
 —
 —
 226
 —
 —
 227
Stock-based compensation expense —
 —
 —
 —
 —
 —
 2,042
 —
 —
 2,042
Repurchase of preferred stock (7,275,325) (3,635) —
 —
 —
 —
 —
 —
 (14,892) (14,892)
Net loss —
 —
 —
 —
 —
 —
 —
 —
 (2,669) (2,669)
Balance as of January 1, 2015 153,499,785
 $111,145
 72,243,500
 $102
 (935,935) $(303) $86,340
 $—
 $(121,513) $(35,374)
Cumulative effect of adoption of fair value method for servicing rights —
 $—
 —
 $—
 —
 $—
 $—
 $—
 $574
 $574
Issuance of convertible
   preferred stock, Series D, net of issuance costs
 23,888,640
 164,793
 —
 —
 —
 —
 —
 —
 —
 —
Exercise of vested stock
   options
 —
 —
 3,125,890
 8
 —
 —
 771
 —
 —
 779
Exercise of nonvested stock
   options
 —
 —
 76,045
 —
 —
 —
 —
 —
 —
 —
Repurchase of restricted stock —
 —
 (1,493,775) —
 —
 —
 —
 —
 —
 —
Repurchase of common stock —
 —
 —
 —
 (4,241,300) (23,114) —
��—
 —
 (23,114)
Restricted stock vested —
 —
 —
 17
 —
 —
 471
 —
 —
 488
Restricted stock units sold —
 —
 450,000
 —
 —
 —
 1,630
 —
 —
 1,630
Exercise of warrants —
 —
 207,065
 —
 —
 —
 125
 —
 —
 125
Stock-based compensation
   expense
 —
 —
 —
 —
 —
 —
 13,634
 —
 —
 13,634
Change in net unrealized loss on available for sale investments, at fair value —
 —
 —
 —
 —
 —
 —
 (144) —
 (144)
Net Loss —
 —
 —
 —
 —
 —
 —
 —
 (25,968) (25,968)
Balance as of December 31, 2015 177,388,425
 275,938
 74,608,725
 127
 (5,177,235) (23,417) 102,971
 (144) (146,907) (67,370)
Exercise of vested stock
   options
 —
 —
 466,300
 6
 —
 —
 305
 —
 —
 311
Repurchase of restricted stock —
 —
 (673,750) —
 —
 —
 —
 —
 —
 —
Restricted stock vested —
 —
 —
 79
 —
 —
 196
 —
 —
 275
Issuance of common stock, for settlement of vested RSUs —
 —
 635,068
 —
 —
 —
 —
 —
 —
 —
Exercise of warrants —
 —
 48,001
 —
 —
 —
 11
 —
 —
 11
Stock-based compensation
   expense
 —
 —
 —
 —
 —
 —
 20,505
 —
 —
 20,505
Change in net unrealized loss on available for sale investments, at fair value —
 —
 —
 —
 —
 —
 —
 136
 —
 136
Net Loss —
 —
 —
 —
 —
 —
 —
 —
 (118,741) (118,741)
Balance as of December 31, 2016 177,388,425
 $275,938
 75,084,344
 $212
 (5,177,235) $(23,417) $123,988
 $(8) $(265,648) $(164,873)

The number of shares reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
The accompanying notes are an integral part of these consolidated financial statements.


Prosper Marketplace, Inc.
Consolidated Statements of Cash Flows
(in thousands)
 For the Year
Ended December 31,
 2016 2015 2014
Cash Flows from Operating Activities:     
Net Loss$(118,741) $(25,968) $(2,669)
Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operating Activities: 
  
  
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes372
 (59) (596)
Depreciation and Amortization13,220
 7,649
 2,097
Gain on Sales of Borrower Loans(9,634) (14,561) (4,048)
Amortization and Change in Fair Value of Servicing Rights11,053
 4,860
 792
Stock-Based Compensation Expense19,787
 13,011
 2,021
Restructuring Liability6,052
 —
 —
Change in Fair Value of Contingent Consideration199
 1,001
 —
Other, Net1,534
 216
 444
Warrants Issued for Contract Termination21,711
 —
 —
Changes in Operating Assets and Liabilities: 
  
  
Purchase of Loans Held for Sale at Fair Value(1,979,952) (3,517,467) (1,416,715)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value1,979,352
 3,525,759
 1,411,531
Restricted Cash Except for those Related to Investing Activities(5,459) (68,896) (28,125)
Accounts Receivable1,677
 865
 (2,856)
Prepaid and Other Assets1,825
 (1,360) (2,840)
Accounts Payable and Accrued Liabilities379
 6,493
 8,047
Payable to Investors6,137
 72,013
 26,469
Other Liabilities(12,179) 1,888
 1,797
Net cash provided by (Used in) Operating Activities(62,667) 5,444
 (4,651)
Cash Flows from Investing Activities: 
  
  
Purchase of Borrower Loans Held at Fair Value(217,582) (197,436) (177,088)
Principal Payments of Borrower Loans Held at Fair Value173,710
 151,893
 121,082
Purchases of Property and Equipment(10,760) (15,977) (12,246)
Maturities of Short Term Investments1,279
 1,274
 1,271
Purchases of Short Term Investments(1,277) (1,277) (1,274)
Purchases of Available for Sale Investments, at Fair Value(11,725) (77,538) —
Proceeds from Sale of Available for Sale Securities12,445
 4,022
 —
Maturities of Available for Sale Securities39,593
 —
 —
Acquisition of Businesses, Net of Cash Acquired—
 (38,147) —
Changes in Restricted Cash Related to Investing Activities(7,225) (1,027) (3,351)
Net Cash Used in Investing Activities(21,542) (174,213) (71,606)
Cash Flows from Financing Activities: 
  
  
Proceeds from Issuance of Notes Held at Fair Value217,767
 197,228
 176,865
Payments of Notes Held at Fair Value(173,958) (151,838) (120,909)
Repayment of Borrowings—
 (5,047) —
Proceeds from Issuance of Convertible Preferred Stock, Net—
 164,793
 69,958
Proceeds from Exercise of Warrants and Stock Options including Early Exercise, and Issuance of Restricted Stock541
 5,004
 1,118
Repurchase of Common Stock and Restricted Stock(80) (23,246) (30)
Repurchase of Preferred Stock—
 —
 (18,527)
Taxes Paid for Awards Vested Under Equity Incentive Plans(219) (2,387) —
Contingent Consideration Paid(3,800) —
 —
Net Cash Provided by Financing Activities40,251
 184,507
 108,475
Net Increase (Decrease) in Cash and Cash Equivalents(43,958) 15,738
 32,218
Cash and Cash Equivalents at Beginning of the Year66,295
 50,557
 18,339
Cash and Cash Equivalents at End of the Year$22,337
 $66,295
 $50,557
Cash Paid for Interest$40,369
 $38,168
 $41,053
Non-Cash Investing Activity- Accrual for Property and Equipment, Net382
 1,483
 1,550
Non-Cash Investing Activity- Amount Payable for the Acquisition of Business$—
 $4,488
 $—
The accompanying notes are an integral part of these consolidated financial statements.


Prosper Marketplace, Inc.
Notes to Consolidated Financial Statements


1.Organization and Business
Prosper Marketplace, Inc. (“PMI”) was incorporated in the state of Delaware on March 22, 2005.  Except as the context requires otherwise, as used in these Notes to Consolidated Financial Statements of Prosper Marketplace, Inc., “Prosper,” “we,” “us,” and “our” refer to PMI and its wholly-owned subsidiaries, on a consolidated basis.
PMI developed a peer-to-peer online credit marketplace (the “marketplace”), and, in February 2013, transferred ownership of the marketplace to Prosper Funding LLC (“PFL”), its wholly-owned subsidiary.  All of the borrower payment dependent notes (“Notes”) issued and sold through the marketplace today are issued and sold by PFL.  PFL also operates the marketplace and facilitates the origination of unsecured, consumer loans by WebBank (“Borrower Loans”), an FDIC-insured, Utah-chartered industrial bank, through the marketplace.  Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the marketplace, as agent of WebBank, in connection with the submission of loan applications by potential borrowers, the origination of related loans by WebBank and the funding of such Borrower Loans by WebBank.  On February 1, 2013, PFL entered into an Administration Agreement with PMI in its capacity as licensee, corporate administrator, loan marketplace administrator and loan and note servicer, pursuant to which PMI provides certain back office support, loan platform administration and loan servicing to PFL.
The marketplace is designed to allow investors to invest in Borrower Loans in an open, transparent marketplace, with the aim of allowing both investors and borrowers to benefit financially as well as socially. Prosper believes marketplace lending represents a model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender.
A borrower who wishes to obtain a Borrower Loan through the marketplace must post a loan listing on the marketplace. Listings are allocated to one of two investor funding channels: (i) the “Note Channel,” which allows investors to commit to purchase Notes from PFL, the payments of which are dependent on PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows investors to commit to purchase 100% of a Borrower Loan directly from Prosper.
As of December 31, 2016, the marketplace is open to investors in 30 states and the District of Columbia. Additionally, as of December 31, 2016, the marketplace is open to borrowers in 45 states and the District of Columbia. Currently our marketplace does not operate internationally.
2.Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of PMI and its wholly owned subsidiaries including PFL, PHL and BillGuard. All intercompany balances and transactions between PMI and its subsidiaries have been eliminated in consolidation. PMI and PFL’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
On January 23, 2015, PMI acquired all of the outstanding limited liability company units of American HealthCare Lending, LLC (“American HealthCare Lending”), a company that operated a patient financing platform, and merged American HealthCare Lending with and into Prosper Healthcare Lending LLC (“PHL”), a newly established entity surviving the merger. Prosper’s consolidated financial statements include PHL’s results of operations and financial position from the date of acquisition forward (see Note 8 – American HealthCare Lending Acquisition).
On October 9, 2015, PMI acquired all of the outstanding stock of BillGuard, Inc. (“BillGuard”), a company incorporated in Delaware in 2010 that developed applications that help consumers manage their identity, finances and credit. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving


the merger. Prosper’s consolidated financial statements include BillGuard’s results of operations and financial position from the date of acquisition forward (see Note 9 – BillGuard Acquisition).
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures, including contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates, judgments and assumptions include but are not limited to the following: valuation of Loans Held for Sale, Borrower Loans and associated Notes, valuation of servicing rights, valuation allowance on deferred tax assets, stock-based compensation expense, intangible assets, goodwill, contingent consideration, restructuring liability, convertible preferred stock warrant liability and contingent liabilities. Actual results could differ from those estimates.
Certain Risks
In the normal course of its business, Prosper encounters significant credit risk. Financial instruments that potentially subject Prosper to significant credit risk consist primarily of cash, cash equivalents, available for sale investments, Borrower Loans held and restricted cash. Prosper places cash, cash equivalents, and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper performs periodic evaluations of the relative credit standing of these financial institutions and has not recognized any losses in earnings from instruments held at these financial institutions.
As a lending marketplace, Prosper believes its customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact its customers’ ability or desire to participate on its marketplace as borrowers or investors, and consequently could negatively affect its business and results of operations.
To the extent that payments on Borrower Loans (including Borrower Loans that have been sold) are not made, interest income and/or servicing income will be reduced. A series of Notes corresponding to a particular Borrower Loan is wholly dependent on the repayment of such Borrower Loan. As a result, Prosper does not bear the credit risk on such Borrower Loan.
Reclassifications
Due to the early adoption of ASU 2016-09 on January 1, 2016, reclassifications were made to the financing section of the consolidated statements of cash flows to reflect employee taxes paid to a tax authority to satisfy the employer's statutory income tax withholding obligation in relation to the exercise of stock awards.  Prior period amounts have been reclassified to conform to the current presentation.    
Consolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity. 
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain special purposes entities that purchase these Borrower Loans.   For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a potentially significant economic interest in the VIE.   In no case are we the primary beneficiary, therefore, we do not consolidate these entities.  


Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial statements.
Cash and Cash Equivalents
Cash includes various unrestricted deposits with highly rated financial institutions. Cash equivalents consist of highly liquid marketable securities with original maturities of three months or less at the time of purchase and consist primarily of money market funds, commercial paper, US treasury securities and US agency securities. Cash equivalents are recorded at cost, which approximates fair value. 
Restricted Cash
Restricted cash consists primarily of cash deposits and short term certificate of deposit accounts held as collateral as required for long term leases, loan funding and servicing activities, and cash that investors or Prosper has on our marketplace that has not yet been invested in Borrower Loans or disbursed to the investor.
Short Term Investments
Short Term Investments which are included in Prepaid and Other Assets consists of certificates of deposit with a term greater than three months but less than a year that are held as collateral as required for loan funding and servicing activities.
Available for Sale Investments
Available for sale securities consist of commercial paper with terms longer than three months, US treasury securities, US agency securities and corporate debt securities.  Available for sale investments are recorded at fair value with unrealized gains and losses reported, net of taxes, in accumulated other comprehensive income (loss) included in stockholders' equity unless management determines that an investment is other-than-temporarily impaired.   
Management evaluates whether impairment of available for sale debt securities are other than temporary impairment (“OTTI”) on a quarterly basis. Debt securities with unrealized losses are considered OTTI if Prosper intends to sell the investment or if it is more likely than not that it will be required to sell such investment before any anticipated recovery. If management determines that an investment is OTTI under these circumstances, the impairment recognized in earnings is measured as the entire difference between the amortized cost and then-current fair value.
An investment is also OTTI if management does not expect to recover all of the amortized cost of the investment. In this circumstance, the impairment recognized in earnings represents estimated credit losses, and is measured by the difference between the present value of expected cash flows and the amortized cost of the investment. Management utilizes cash flow models to estimate the expected future cash flow from the securities to estimate the credit loss. Expected cash flows are discounted using the investment's effective interest rate.   The evaluation of whether Prosper expects to recover the amortized cost of an investment is inherently judgmental. The evaluation includes the assessment of several bond performance indicators, including the current price and magnitude of the unrealized loss and whether Prosper has received all scheduled principal and interest payments. There were no impairment charges recognized during the years ended December 31, 2016 and December 31, 2015.
Fair Value Measurement
Prosper measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
We define fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The price used to measure the fair value is not adjusted for transaction costs. The fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity


for the asset. In determining the principal market for an asset or liability, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
Assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.
Financial instruments consist principally of Cash and Cash Equivalents, Restricted Cash, Available for Sale Investments, Borrower Loans, Loans Held for Sale, Accounts Receivable, Accounts Payable and Accrued Liabilities, Payable to Investors, Convertible Preferred Stock Warrant Liability and Notes. Servicing Assets and Liabilities are also subject to fair value measurement within the financial statements of Prosper. The estimated fair values of Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities, and Payable to Investors approximate their carrying values because of their short term nature.
As observable market prices are not available for the Borrower Loans, Loans Held for Sale and Notes, or for similar assets and liabilities, Prosper believes the Borrower Loans, Loans Held for Sale and Notes should be considered Level 3 financial instruments. In a hypothetical transaction as of the measurement date, Prosper believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which Prosper might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date. For Borrower Loans and Loans Held for Sale, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, default rates and discount rates based on the perceived credit risk within each credit grade.
The obligation to pay principal and interest on any series of Notes is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of our servicing fee which is generally 1.0% of the outstanding balance.  The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to investors that are dependent upon borrower payments. As such, the fair value of a series of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of loan purchase, note issuance and borrower payments subsequently disbursed to such Note holders.  As a result, the valuation of the Notes uses the same methodology and assumptions as the Borrower Loans, except that the Notes incorporate the 1% servicing fee and any differences in timing in payments. Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 4 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.


Restructuring Charges
Restructuring charges consist of severance costs and contract termination related costs and impairment charges associated with the severance actions. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. 
Borrower Loans and Notes
Through the Note Channel, Prosper purchases Borrower Loans from WebBank then issues Notes, and holds the Borrower Loans until maturity. The obligation to repay a series of Notes originated through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans and Notes originated through the Note Channel are carried on Prosper’s consolidated balance sheets as assets and liabilities, respectively. We choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. Prosper estimates the fair value of such Borrower Loans and Notes using discounted cash flow methodologies adjusted for the expected prepayment, loss, recovery and default rates.   The Borrower Loans are not derecognized when a corresponding Note is issued as Prosper maintains the ability to sell the Borrower Loans without the approval of the holders of the corresponding Notes.  
Loan Servicing Assets and Liabilities
Prosper records servicing assets and liabilities at their estimated fair values for servicing rights retained when Prosper sells Borrower Loans to unrelated third-party buyers. The change in fair value of servicing assets and liabilities is recognized in “Servicing Fees” revenue. The gain or loss on a loan sale is recorded in “Gain on Sale” while the fair value of the servicing rights, which is based on the degree to which the contractual loan servicing fee is above or below an estimated market servicing rate is recorded in servicing assets or liabilities. Servicing assets and liabilities are recorded in “Servicing Assets” and “Other Liabilities,” respectively, on the consolidated balance sheets.
On January 1, 2015, Prosper elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition.  Management believes that the fair value option is more meaningful for readers of the financial statements as it more accurately reflects the expected benefits and obligations of the servicing rights.  The adoption of the fair value method for a particular class is irrevocable.  Prior to January 1, 2015, Prosper measured the servicing assets and liabilities using the amortized cost method. This change resulted in a $574 thousand decrease to accumulated deficit, a $545 thousand increase in net servicing assets and a $29 thousand decrease in net servicing liabilities.
Prosper uses a discounted cash flow model to estimate the fair value of the loan servicing assets or liabilities which considers the contractual projected servicing fee revenue that Prosper earns on the Borrower Loans, estimated market servicing rates to service such loans, prepayment rates, default rates and the current principal balances of the Borrower Loans.
Loans Held for Sale
Loans Held for Sale are comprised of Borrower Loans held for short durations and are recorded at fair value. The fair value is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of other Borrower Loans. We measure Loans Held for Sale at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows for the Loans Held for Sale to be measured at fair value similar to Borrower Loans and Notes. The fair value election, with respect to an item, may not be revoked once an election is made. 


Property and Equipment
Property and equipment consists of computer equipment, office furniture and equipment, leasehold improvements, software purchased or developed for internal use and web site development costs. Property and equipment are stated at cost, less accumulated depreciation and amortization, and are computed using the straight-line method based upon estimated useful lives of the assets. Estimated useful lives of the assets are as follows:
Furniture and fixtures7 years
Office equipment5 years
Computers and equipment3 years
Leasehold improvements5-8 years
Software and website development costs1-5 years
The costs to develop software for the website and other internal uses are capitalized when management has authorized and committed project funding, preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software and website development costs primarily include software licenses acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the development efforts.
Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. Capitalized costs are included in property and equipment and amortized to expense using the straight-line method over their expected lives. Software and website development assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software and website development assets to be held and used is measured by a comparison of the carrying amount of the asset group to the future net undiscounted cash flows expected to be generated by the asset group. If such software and website development assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software and website development asset group.
Goodwill and Intangibles
Goodwill associated with business combinations is computed by recognizing the portion of the purchase price that is not tied to individually identifiable and separately recognizable assets. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. Our annual impairment testing date is October 1. Impairment exists whenever the carrying value of goodwill exceeds its implied fair value. Adverse changes in impairment indicators such as loss of key personnel, increased regulatory oversight, or unplanned changes in our operations could result in impairment. We did not recognize any goodwill impairments during the years ended December 31, 2016 and 2015.
Costs of internally developing any intangibles is expensed as incurred. Intangible assets identified through the acquisitions of American Healthcare Lending and BillGuard include customer relationships, technology and a brand name. The customer relationship intangible assets are amortized on an accelerated basis over three to ten year periods. The technology and brand name intangible assets are amortized on a straight line basis over three to five years and one year, respectively. Prosper values the customer relationships, technology and brand name assets using the income approach.  Significant assumptions in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and brand names from a market participant perspective, useful lives and discount rates.  
Business Combinations
We allocate the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant assumptions in valuing certain intangible assets include, but are not limited to, future expected cash flows from acquired users, acquired technology, and brand names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from


estimates. During the measurement period, which is one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value, whichever comes first, any subsequent adjustments are recorded to earnings. The measurement period has closed for all acquisitions.
Payable to Investors
Payable to investors primarily represents our obligation to investors related to cash held in an account for the benefit of investors and payments-in-process received from borrowers.
Convertible Redeemable Preferred Stock Warrant Liabilities
Freestanding warrants to acquire shares that may be redeemable are accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity "ASC" 480"). Under ASC 480, freestanding warrants to purchase the Company’s convertible redeemable preferred stock are classified as a liability on the consolidated balance sheets and carried at fair value because the warrants may conditionally obligate the Company to transfer assets at some point in the future. The Company initially measured the warrants at fair value on issuance. The warrants are subject to remeasurement to fair value at each balance sheet date, and any change in their fair value is recognized as a component of other expense, net, in the consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrants, the completion of a deemed liquidation event, or the conversion of convertible redeemable preferred stock into common stock.
Repurchase Liability for Unvested Restricted Stock Awards
Under the terms of PMI’s equity plans, at the Administrator’s discretion, certain equity awards issued to employees may be exercised before they have vested. When this occurs Prosper records a liability for the unvested portion of the exercised option. If the employee’s employment is terminated before all of the shares become vested PMI may repurchase the unvested shares at the original exercise price. The liability is released into equity as the shares become vested. Early exercises of options are not deemed to be substantive exercises for accounting purpose and are excluded from the basic earnings per share calculation and treated as unexercised options shares for stock compensation purposes.

Loan Trailing Fee
On July 1, 2016, Prosper signed a series of agreements with WebBank which, among other things, includes an additional program fee ( the "Loan Trailing Fee") paid to WebBank in connection with the performance of each loan sold to Prosper. These agreements are effective as of August 1, 2016. The Loan Trailing Fee is dependent on the amount and timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Prosper, and gives WebBank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper to WebBank over the term of the respective loans and is a function of the principal and interest payments made by borrowers of such loans. In the event that principal and interest payments are not made with respect to any loan, Prosper is not required to make the related Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee for any loan sold to Prosper is recorded at fair value at the time of the origination of such loan within Other Liabilities and recorded as a reduction of Transaction Fees, net. Any changes in the fair value of this liability are recorded in Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net on the consolidated statements of operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates.
Revenue Recognition
Revenue primarily results from fees and net interest income earned. Fees include transaction fees for our services performed on behalf of WebBank to originate a loan and servicing fees paid by investors. We also have other smaller sources of revenue reported as other revenue, this includes referral fees, securitization fees and subscription fees.
Transaction Fees


Prosper earns a transaction fee upon the successful origination of all Borrower Loans facilitated through Prosper’s marketplace.  Prosper receives payments from WebBank as compensation for the activities Prosper performs on behalf of WebBank. The transaction fee Prosper earns is determined by the term and credit grade of the Borrower Loan that is facilitated on Prosper’s marketplace, and ranges from 1.00% to 5.00% of the original principal amount of such Borrower Loan that WebBank originates.  Prosper records the transaction fee net of any fees paid to WebBank because Prosper does not receive an identifiable benefit from WebBank other than the Borrower Loan that has been recognized at fair value.  
Servicing Fees
Investors who purchase Borrower Loans from Prosper typically pay Prosper a servicing fee which is currently set at 1.075% per annum of the outstanding principal balance of the Borrower Loan prior to applying the current payment. Historically the servicing fee was set at 1.0% per annum and was increased to 1.075% per annum in August 2016 for loans originated after July 2016. The servicing fee compensates Prosper for the costs incurred in servicing the Borrower Loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Prosper records servicing fees from Investors as a component of operating revenue when received.
Gain on Sale of Borrower Loans
Prosper recognizes gains or losses on the sale of Borrower Loans when it is retained for the servicing of Borrower Loans by WebBank. Additionally, Prosper recognizes gains or losses on the sale of Borrower Loans when it sells Borrower Loans to third parties. Gains or losses on sales of Borrower Loans that are recognized at the time of sale and are determined by the difference between the net sales proceeds, fair value of any servicing rights retained and the carrying value of the Borrower Loans sold.
Interest Income on Borrower Loans, and Interest Expense on Notes
Prosper recognizes interest income on Borrower Loans originated through the Note Channel and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent Prosper believes it to be collectable.
Advertising Costs
Advertising costs are expensed when incurred and are included in sales and marketing expense in the accompanying Consolidated Statements of Operations. Prosper incurred advertising costs of $48.1 million, $60.1 million and 24.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Stock-Based Compensation
We determine the fair value of our stock options issued to employees on the date of grant using the Black-Scholes option pricing model, which is impacted by the fair value of our common stock, as well as changes in assumptions that include, but are not limited to, the expected common stock price volatility over the term of the option awards, the expected term of the awards, risk-free interest rates and the expected dividend yield.
We recognize compensation expense for our stock based awards on a straight-line basis over the period during which an employee is required to provide services in exchange for the award (the vesting period of the award). Stock-based compensation expense is recognized only for those awards expected to vest. We estimate future forfeitures at the date of grant and revise the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Stock-based awards issued to non-employees are marked-to-market up until the point that the awards measurement period has been achieved.  Compensation expense for stock options issued to nonemployees is calculated using the Black-Scholes option pricing model and is recorded over the vesting period of the award.
Foreign Currency Transactions
The functional currency of our international subsidiary is the U.S. dollar. For this subsidiary, foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign currency denominated


nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Gains or losses from foreign currency remeasurement and settlements are included in general and administrative expense in the Consolidated Statements of Operations.
Income Taxes
The asset and liability method is used to account for income taxes. Under this method, deferred income tax assets and liabilities are based on the differences between the financial statement carrying values and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
Prosper’s policy is to include interest and penalties related to gross unrecognized tax benefits within its provision for income taxes. U.S. Federal, Israel, California, and other state income tax returns are filed. Prosper is currently not undergoing any income tax examinations. Due to the net operating loss, generally all tax years remain open.
We recognize benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. 
Other (Income) Expense, net
Other (income) expense, net includes interest income from available for sale securities, accretion on available for sale securities, changes in fair value of contingent liabilities, realized gains and losses on the sale of available for sale securities, changes in fair value of convertible preferred stock warrant liabilities and contract termination costs that are expected to be non-recurring and not part of restructuring activities.
Comprehensive Income
Marketable debt securities are generally considered available-for-sale and are carried at fair value, based on quoted market prices or other readily available market information. Gains and losses are recognized when realized using the specific identification method and included in Other Income in the Consolidated Statements of Operations. Unrealized gains and losses, net of taxes, are included in Accumulated Other Comprehensive Income, which is reflected as a separate component of stockholders’ deficit in our Consolidated Balance Sheet. If we have determined that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to an identified loss is recognized in income. Prosper monitors its investment portfolio for potential impairment on a quarterly basis.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the “FASB” issued Accounting Standards Update (“ASU”) 2014-9, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper may adopt the standard in either Prosper’s fiscal year ending December 31, 2017 or 2018. Prosper intends to adopt the guidance for Prosper's fiscal year ending December 31, 2018. The guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Prosper expects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018.  Our evaluation of this ASU is ongoing and not complete. The FASB has issued and may issue in the future, interpretative guidance, which may cause our evaluation to change. Our preliminary results indicate that transaction fees are included in the scope of the new guidance, while servicing fees and gain or loss on the sale of


loans remain within the scope of ASC topic 860, Transfers and Servicing. While we anticipate some changes to revenue recognition for certain customer contracts, Prosper does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires management of a company to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern. This ASU is effective for the annual reporting period ending after December 15, 2016, and for interim and annual reporting periods thereafter, with early adoption permitted. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s financial statements.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity to eliminate the use of different methods in practice and thereby reduce existing diversity in the accounting for hybrid financial instruments issued in the form of a share. For hybrid financial instruments issued in the form of a share, an entity should determine the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s financial statements.
In February 2015, the FASB issued ASU 2015-2, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-2 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-2 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper’s financial statements.
In April 2015, the FASB issued ASU 2015-5 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which will be effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract.  Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s financial statements.
In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments". The new guidance simplifies the accounting for measurement period adjustments in connection with businesscombinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during themeasurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective forfinancial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. Prosper adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper’s financial statements. 
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)", which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures.  This guidance will be effective for us in the first quarter of our fiscal year 2019, and early adoption is permitted. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do expect that this guidance will have a material impact on Prosper's consolidated financial statements. As of December 31, 2016, Prosper has a total of $59.7 million in non-cancelable operating lease commitments.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting(Topic 718)".  This guidance makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax


withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. This guidance will be effective for us in the first quarter of our fiscal year 2017, and early adoption is permitted. Prosper has decided to early adopt this guidance effective January 1, 2016, the adoption of this standard did not have a material impact on Prosper’s consolidated financial statements. 
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for Prosper in the first quarter of our fiscal year 2018, and early adoption is permitted. Prosper is currently evaluating the impacts the adoption of this accounting standard will have on Prosper's statement of cash flows.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16)", which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. This guidance will be effective for us in the first quarter of 2018, with the option to adopt it in the first quarter of 2017. Prosper is currently evaluating the impact that this guidance will have on its consolidated financial statements, however we do not expect the standard to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance will be effective for us in the first quarter of 2018 and early adoption is permitted. Prosper is currently evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". The standard eliminates Step 2 from the goodwill impairment test, which requires a hypothetical purchase price allocation. Prosper will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The standard should be applied on a prospective basis. Prosper is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

3.Property and Equipment, Net
Property and equipment consist of the following (in thousands):
 December 31,
 2016 2015
Property and equipment: 
  
Computer equipment$14,107
 $10,522
Internal-use software and website development costs16,750
 10,990
Office equipment and furniture3,010
 2,442
Leasehold improvements7,038
 5,719
Assets not yet placed in service1,222
 3,242
Property and equipment42,127
 32,915
Less accumulated depreciation and amortization(17,274) (7,950)
Total property and equipment, net$24,853
 $24,965
Depreciation and amortization expense for property and equipment for 2016, 2015 and 2014 was $9,381 thousand, $6,080 thousand and 2,097 thousand, respectively. Prosper capitalized internal-use software and website development costs in the amount of $6,251 thousand, $7,348 thousand and $846 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. Prosper recorded impairment charges of $1,083 thousand, $0 thousand and $322 thousand for the years ended


December 31, 2016, 2015 and 2014 respectively, as a result of our decision to discontinue several software and website development projects and to cease the use of certain leased properties and related leasehold improvements, computer equipment and furniture at these locations.
4.Borrower Loans, Loans Held for Sale, and Notes Held at Fair Value
The fair value of the Borrower Loans originated and Notes issued through the Note Channel is estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value such Borrower Loans and Notes include default rates derived from historical performance, market conditions and discount rates applied to each credit grade based on the perceived credit risk of each credit grade. The obligation to pay principal and interest on any series of Notes is equal to the payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans originated through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.
At December 31, 2016 and 2015, Borrower Loans, Notes and Loans Held for Sale (in thousands) were:
 Borrower Loans Notes Loans Held for Sale
 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Aggregate principal balance
   outstanding
$319,143
 $296,945
 $(323,358) $(294,331) $641
 $42
Fair value adjustments(3,516) 328
 7,122
 (3,074) (17) (10)
Fair value$315,627
 $297,273
 $(316,236) $(297,405) $624
 $32
At December 31, 2016, outstanding Borrower Loans had original maturities between 36 and 60 months, had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2021. At December 31, 2015, Loans Held for Sale and Borrower Loans had original terms between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.
Within the change in fair value of Borrower Loans, Prosper recorded a loss of approximately $2.4 million that is attributable to changes in the credit risks related to Borrower Loans during the year ending December 31, 2016.
As of December 31, 2016 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $3.2 million and a fair value of $1.0 million. As of December 31, 2015 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. We place loans on non-accrual status when they are over 120 days due. As of December 31, 2016 and 2015, Borrower Loans in non-accrual status had a fair value of $0.5 million and $0.1 million, respectively.
5.Loan Servicing Assets and Liabilities
Prosper initially records servicing assets and liabilities at their estimated fair values when Prosper sells Borrower Loans in their entirety to unrelated third-party buyers. During 2014, the initial fair value of such servicing assets or liabilities was amortized in proportion to the estimated servicing income or loss and was amortized over the period of servicing income or loss. The total gains recognized on the sale of such Borrower Loans were $3.6 million and $14.2 million and $4.0 million for the years ended December 31, 2016 and 2015 and 2014 respectively.  For the years ended December 31, 2016 and 2015, servicing assets and liabilities were measured at fair value subsequent to the initial recognition.  For the year ended December 31, 2014, no impairment was recorded.
At December 31, 2016, Borrower Loans that were sold to unrelated third parties, but for which we retained servicing rights had a total outstanding principal balance of $3.5 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and maturity dates through December 2021.  At December 31, 2015, Borrower Loans that were sold but for which we retained servicing rights had a total outstanding principal balance of $3.8 billion,


original terms between 36 and 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and maturity dates through December 2020.
$38.9 million, $22.1 million and $5.3 million of contractually specified servicing fees, late charges and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the years ended December 31, 2016, 2015 and 2014, respectively.  
Fair value
Valuation method – Prosper uses a discounted cash flow valuation methodology generally consisting of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table within Note 7 below are those that Prosper considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.   
Market servicing rate – Prosper estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper’s servicing assets.
Default Rate – The default rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying Borrower Loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 7 is an annualized, average estimate considering all Borrower Loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans.  Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6.Available for Sale Investments, at Fair Value
Available for sale investments are recorded at fair value and unrealized gains and losses are reported, net of taxes, in Accumulated Other Comprehensive Loss included in Stockholders' Deficit unless management determines that an investment is OTTI.


The amortized cost, gross unrealized gains and losses, and fair value of available for sale investments as of December 31, 2016 and December 31, 2015, are as follows (in thousands):
December 31, 2016Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Fixed maturity securities: 
  
  
  
Corporate debt securities$21,762
 $1
 $(10) $21,753
US Treasury securities8,516
 3
 (3) 8,516
Agency bonds2,499
 1
 —
 2,500
Total Available for Sale Investments$32,777
 $5
 $(13) $32,769
December 31, 2015Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value
Fixed maturity securities:

  
  
  
Corporate debt securities$50,327
 $1
 $(94) $50,234
Commercial paper9,493
 —
 —
 9,493
US Treasury securities8,512
 —
 (41) 8,471
Agency bonds2,499
 —
 (8) 2,491
Total fixed maturity securities70,831
 1
 (143) 70,689
Short term bond funds2,500
 —
 (2) 2,498
Total Available for Sale Investments$73,331
 $1
 $(145) $73,187
A summary of available for sale investments with unrealized losses as of December 31, 2016, aggregated by category and period of continuous unrealized loss, is as follows (in thousands):
 Less than 12 months 12 months or longer Total
 Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Fixed maturity securities: 
  
  
  
  
  
Corporate debt securities$—
 $—
 $14,651
 $(10) $14,651
 $(10)
U.S. treasury securities—
 —
 4,499
 (3) 4,499
 (3)
Total Investments with Unrealized Losses$—
 $—
 $19,150
 $(13) $19,150
 $(13)
The maturities of available for sale investments at December 31, 2016, are as follows (in thousands):
  Within 1 year After 1 year through 5 years After 5 years to 10 years After 10 years Total
Corporate debt securities 21,753
 —
 —
 —
 21,753
US Treasury securities 8,516
 —
 —
 —
 8,516
Agency bonds 2,500
 —
 —
 —
 2,500
Total Fair Value $32,769
 $—
 $—
 $—
 $32,769
Total Amortized Cost $32,777
 $—
 $—
 $—
 $32,777


Prosper sold investments in available for sale securities in the amount of $12.4 million during the year ended December 31, 2016 which resulted in a gain of $12 thousand.
7.Fair Value of Assets and Liabilities
For a description of the fair value hierarchy and Prosper’s fair value methodologies, see Note 2 - Summary of Significant Accounting Policies. Prosper did not transfer any assets or liabilities in or out of level 3 during the year ended December 31, 2016.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each credit grade based on the perceived credit risk of each credit grade.
Investments held at fair value consist of available for sale investments.  The available for sale investments consist of corporate debt securities, US treasury securities and agency bonds.  When available, Prosper uses quoted prices in active markets to measure the fair value of available for sale securities. When utilizing market data and bid-ask spreads, Prosper uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
The Convertible Preferred Stock Warrant Liability is valued using a Black Scholes-Option pricing model. Refer to Note 13 for further details.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
December 31, 2016Level 1 Inputs Level 2 Inputs Level 3 Inputs Total
Assets: 
  
  
  
Borrower Loans$—
 $—
 $315,627
 $315,627
Loans Held for Sale—
 —
 624
 624
Available for Sale Investments, at Fair Value—
 32,769
 —
 32,769
Servicing Assets—
 —
 12,786
 12,786
Total Assets—
 32,769
 329,037
 361,806
Liabilities: 
  
  
  
Notes$—
 $—
 $316,236
 $316,236
Servicing Liabilities—
 —
 198
 198
Convertible Preferred Stock Warrant Liability—
 —
 21,711
 21,711
Loan Trailing Fee Liability—
 —
 665
 665
Total Liabilities$—
 $—
 $338,810
 $338,810


December 31, 2015Level 1 Inputs Level 2 Inputs Level 3 Inputs Total
Assets: 
  
  
  
Borrower Loans$—
 $—
 $297,273
 $297,273
Loans Held for Sale—
 —
 32
 32
Available for Sale Investments, at Fair Value—
 73,187
 —
 73,187
Servicing Assets—
 —
 14,363
 14,363
Total Assets—
 73,187
 311,668
 384,855
Liabilities: 
  
  
  
Notes$—
 $—
 $297,405
 $297,405
Servicing Liabilities$—
 $—
 $484
 $484
Contingent Consideration$—
 $—
 $4,801
 $4,801
Total Liabilities$—
 $—
 $302,690
 $302,690
As Prosper’s Borrower Loans, Loans Held for Sale, Notes, Servicing Assets, Servicing Liabilities and Loan Trailing Fee Liability, do not trade in an active market with readily observable prices, Prosper uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper’s level 3 fair value measurements at December 31, 2016:
Borrower Loans, Loans Held for Sale and Notes:
Range
Unobservable InputDecember 31, 2016December 31, 2015
Discount rate4.0% - 15.9%4.3% - 14.5%
Default rate1.7% - 14.9%1.4% - 14.4%
Servicing Assets and Liabilities:
  Range
Unobservable Input December 31, 2016 December 31, 2015
Discount rate 15% - 25%
 15% - 25%
Default rate 1.5% - 15.2%
 1.2% - 14.7%
Prepayment rate 13.6% - 26.6%
 14.3% - 25.6%
Market servicing rate (1)
 0.625% 0.625%
(1) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of December 31, 2016 and 2015, the market rate for collection fees and non-sufficient fund fees was assumed to be 12 basis points and 8 basis points for a weighted-average total market servicing rate of 74.5 basis points and 70.5 basis points respectively.
At December 31, 2016 and 2015, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments


for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis (in thousands): 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 Notes 
Loans Held
for Sale
 Total
Balance at January 1, 2016$297,273
 $(297,405) $32
 $(100)
Purchase of Borrower Loans/Issuance of Notes217,582
 (217,767) 1,979,952
 $1,979,767
Principal repayments(171,195) 173,958
 (447) $2,316
Borrower Loans sold to third parties(2,515) —
 (1,978,905) $(1,981,420)
Other changes416
 (591) (1) $(176)
Change in fair value(25,934) 25,569
 (7) $(372)
Balance at December 31, 2016$315,627
 $(316,236) $624
 $15
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Borrower
Loans
 Notes 
Loans Held
for Sale
 Total
Balance at January 1, 2015$273,243
 $(273,783) $8,463
 $7,923
Purchase of Borrower Loans/Issuance of Notes197,436
 (197,228) 3,517,467
 3,517,675
Principal repayments(151,038) 151,025
 (552) (565)
Borrower Loans sold to third parties(855) 813
 (3,525,207) (3,525,249)
Other changes81
 (6) (18) 57
Change in fair value(21,594) 21,774
 (121) 59
Balance at December 31, 2015$297,273
 $(297,405) $32
 $(100)
The following table presents additional information about the Level 3 servicing assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Servicing
Assets
 
Servicing
Liabilities
Amortized Cost at January 1, 2015$4,163
 $624
Adjustments to adopt fair value measurement$545
 $(29)
Fair Value at January 1, 2015$4,708
 $595
Additions14,909
 283
Less: Changes in fair value(5,254) (394)
Fair Value at January 1, 201614,363
 484
Additions9,833
 9
Less: Changes in fair value(11,410) (295)
Fair Value at December 31, 2016$12,786
 $198


The following table presents additional information about level 3 Preferred Stock Warrant Liability measured at fair value on a recurring basis (in thousands):
Balance at January 1, 2016$—
Add Issuances of Preferred Stock Warrant21,704
Change in fair value of the preferred stock warrant liability7
Balance at December 31, 2016$21,711
The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
Balance at January 1, 2016$—
Issuances647
Cash payment of Loan Trailing Fee(21)
Change in fair value39
Balance at December 31, 2016$665
Contingent Consideration:
On October 9, 2015, PMI, purchased 100% of the outstanding shares of BillGuard. The contingent consideration was primarily performance-based and was to be determined over a one-year period from the date of purchase. Total contingent consideration was due in October 2016 was based on revenues generated and other criteria.  Certain criteria were met that resulted in full payout of the contingent consideration. We measured the fair value of the contingent consideration using a probability-weighted discounted cash flow approach. Some of the significant inputs used for the valuation are not observable in the market and are thus Level 3 inputs. Contingent consideration is recorded in the consolidated balance sheet under "Other Liabilities." Significant increases or decreases in certain underlying assumptions used to value the contingent consideration could significantly increase or decrease the fair value estimates recorded in the Consolidated Balance Sheets.  On October 9, 2015, the fair value of the contingent consideration was $3.8 million, during the year ended December 31, 2015 there were fair value changes of $1.0 million resulting in a fair value of $4.8 million at December 31, 2015. During the year ended December 31, 2016 there were fair value changes of $0.2 million that increased the fair value. The contingent consideration was paid in 2016 and at December 31, 2016 had a balance of $0.     
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions and the sensitivity of the current fair value to immediate changes in those assumptions at December 31, 2016 for Borrower Loans, Loans Held for Sale and Notes originated through the Note Channel are presented in the following table (in thousands, except percentages):


 Borrower Loans / Loans Held for Sale Notes 
Discount rate assumption:7.30%*7.30%*
Resulting fair value from: 
  
 
100 basis point increase$312,424
 $313,022
 
200 basis point increase309,302
 309,888
 
Resulting fair value from: 
  
 
100 basis point decrease$318,913
 $319,535
 
200 basis point decrease322,288
 322,921
 
     
Default rate assumption:11.94%*11.94%*
Resulting fair value from: 
  
 
100 basis point increase$312,171
 $312,759
 
200 basis point increase308,833
 309,401
 
Resulting fair value from: 
  
 
100 basis point decrease$319,112
 $319,743
 
200 basis point decrease322,640
 323,294
 
* Represents weighted average assumptions considering all credit grades.
The following table presents the estimated impact on Prosper’s estimated fair value of servicing assets and liabilities, calculated using different market servicing rates and different default rates as of December 31, 2016 (in thousands, except percentages).
 
Servicing
Assets
 
Servicing
Liabilities
Weighted average market servicing rate assumptions0.625% 0.625%
Resulting fair value from: 
  
Market servicing rate increase to 0.65%$11,918
 $217
Market servicing rate decrease to 0.60%$13,654
 $177
    
Weighted average prepayment assumptions20.02% 20.02%
Resulting fair value from: 
  
Applying a 1.1 multiplier to prepayment rate$12,581
 $194
Applying a 0.9 multiplier to prepayment rate$12,992
 $201
    
Weighted average default assumptions11.59% 11.59%
Resulting fair value from: 
  
Applying a 1.1 multiplier to default rate$12,592
 $198
Applying a 0.9 multiplier to default rate$12,984
 $198
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.


8.American HealthCare Lending Acquisition
On January 23, 2015, PMI acquired all of the outstanding limited liability company interests of American HealthCare Lending, LLC, and merged American HealthCare Lending with and into PHL, with PHL surviving the merger (the “Merger”). Under the terms of the purchase agreement, the sellers of American HealthCare Lending received an aggregate of $20.2 million in cash on the closing date and received $0.8 million in cash in January 2016.
PHL operates a cloud-based patient financing company for healthcare providers in the cosmetic, dentistry, bariatric surgery, fertility, plastic surgery and other markets. PHL has relationships with a nationwide network of healthcare providers.  These healthcare providers refer individuals who would like to finance medical procedures through Prosper’s marketplace.  Through this acquisition Prosper expects to be able to more effectively offer affordable payment options to consumers who would like to finance elective medical procedures at the point of service.  Prosper has included the financial results of PHL in the consolidated financial statements from the date of acquisition. The amounts of gross revenue and net loss of PHL included in Prosper’s consolidated financial statements from the merger date of January 23, 2015 to December 31, 2015 were $2.8 million and $(5.8) million, respectively. Prosper recorded acquisition-related expenses of $0.2 million for the year ended December 31, 2015, which is included in general and administrative expense.  
The purchase price allocation is as follows (in thousands):
 Fair Value
Assets: 
Cash$1,219
Accounts receivable, net147
Property, equipment and software, net6
Other assets63
Identified intangible assets: 
Customer relationships2,650
Developed technology810
Brand name60
Goodwill16,825
  
Liabilities: 
Accrued expenses and other liabilities708
Total purchase consideration$21,072
The goodwill balance is primarily attributed to expected operational synergies and the assembled workforce. Goodwill is expected to be deductible for U.S. income tax purposes.
The impact was not material on Prosper’s revenue and net earnings on a pro forma basis for all periods presented.
9.BillGuard Acquisition
On October 9, 2015, PMI acquired all of the outstanding shares of BillGuard. PMI merged BillGuard with and into Beach Merger Sub, Inc., a newly established entity wholly owned by PMI, with BillGuard surviving the merger. Under the terms of the purchase agreement, the sellers of BillGuard received an aggregate of approximately $20 million in cash on the closing date and received $5 million in cash in October 2016 after the contingencies were met.   
BillGuard has developed applications that help consumers manage their identity, finances and credit. The acquisition will enable Prosper to offer borrowers and investors a full suite of powerful tools to help them make smarter financial decisions including obtaining loans through Prosper, and will give Prosper access to BillGuard’s engineering and product talent pool. Prosper has included the financial results of BillGuard in the consolidated financial statements from the date of acquisition. The amounts of gross revenue and net loss of BillGuard included in Prosper’s consolidated financial statements from October 9,


2015 to December 31, 2015 were $0.2 million and $2.6 million, respectively. Prosper recorded acquisition-related expenses of $0.9 million for the year ended December 31, 2015, which is included in General and Administrative Expense.  
The preliminary purchase price allocation as of the merger date is as follows (in thousands):
 Fair Value
Assets: 
Cash$811
Property and equipment82
Prepaid and other assets152
Identified intangible assets: 
Developed technology7,500
Customer relationships3,600
Goodwill19,543
  
Liabilities: 
Accounts payable and accrued expenses(1,635)
Long term debt(1,395)
Convertible loan(3,652)
Deferred revenue(1,400)
Total purchase consideration$23,606
The allocation of the purchase price has been finalized as the measurement period has ended.
Prosper believes the amount of goodwill resulting from the allocation of purchase consideration is attributable to expected operating synergies, assembled workforce, and the future development initiatives of the assembled workforce, which will position Prosper to be able to further expand its long-term growth strategy.  Goodwill is not expected to be deductible for U.S. or Israel income tax purposes.
The following unaudited pro forma financial information summarizes the combined results of operations for Prosper and BillGuard, as though the companies were combined as of January 1, 2014. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have resulted had the acquisition occurred as of January 1, 2015, nor is it indicative of future operating results. The pro forma results presented below include, amortization of acquired intangible assets and compensation expense related to the post-acquisition compensation arrangements entered into with the continuing employees (in thousands, except per share information):
Year Ended December 31, 2015 2014
Total net revenue $204,350
 $81,195
Net loss (1) (33,677) (16,728)
Basic and diluted net loss per share attributable to common stockholders $(0.61) $(0.71)
(1)Net loss for the year ended December 31, 2015 excludes $1.6 million of one-time acquisition-related costs expenses incurred in 2015.  
10.Goodwill and Other Intangible Assets
Goodwill


The following table presents the goodwill activity for the periods presented (in thousands):
Goodwill - January 1, 2015$—
2015 acquisitions$36,368
Goodwill - December 31, 2015$36,368
2016 acquisitions—
Goodwill - December 31, 2016$36,368
 We did not record any goodwill impairment expense for the years ended December 31, 2016, 2015 and 2014.   
Other Intangible Assets
The following table presents the detail of other intangible assets for the periods presented (dollars in thousands):
 December 31, 2016
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net
Carrying Value
 
Remaining
Useful Life
(In Years)
Developed technology$8,310
 $(2,393) $5,917
 3.8
User base and customer relationships6,250
 (2,955) 3,295
 8.3
Brand name60
 (60) —
 0.0
Total intangible assets subject to amortization$14,620
 $(5,408) $9,212
  
 December 31, 2015
 
Gross
Carrying Value
 
Accumulated
Amortization
 
Net
Carrying Value
 
Remaining
Useful Life
(In Years)
Developed technology$8,310
 $(622) $7,688
 4.8
User base and customer relationships6,250
 (892) 5,358
 9.1
Brand name60
 (55) 5
 0.1
Total intangible assets subject to amortization$14,620
 $(1,569) $13,051
  
We did not record any intangible additions for the year ended December 31, 2016.
The user base and customer relationship intangible assets are being amortized on an accelerated basis over a three to ten year period. The technology and brand name intangible assets are being amortized on a straight line basis over three to five years and one year, respectively.
Amortization expense for the years ended December 31, 2016, 2015 and 2014 was $3.8 million, $1.6 million and $0 million, respectively. Estimated amortization of purchased intangible assets for future periods is as follows (in thousands):
Year Ending December 31, 
2017$3,260
20182,329
20191,779
20201,344
Thereafter500
Total$9,212


11.Other Liabilities
Other Liabilities includes the following (in thousands):
 Year Ending December 31,
 2016 2015
Class action settlement liability$2,996
 $5,949
Repurchase liability for unvested restricted stock awards118
 473
Contingent consideration—
 4,801
Deferred revenue226
 1,591
Servicing liabilities198
 484
Deferred rent4,469
 5,240
Restructuring liability6,052
 —
Other3,114
 2,197
Total Other Liabilities$17,173
 $20,735
12.Net Loss Per Share
Prosper computes net loss per share in accordance with ASC Topic 260, Earnings Per Share (“ASC Topic 260”). Under ASC Topic 260, basic net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities.
We compute Earnings per Share (“EPS”) using the two-class method. The two-class method allocates earnings that otherwise would have been available to common shareholders to holders of participating securities. We consider all series of our convertible preferred stock to be participating securities due to their rights to participate in dividends with common stock. As such, earnings allocated to these participating securities, which include participation rights in undistributed earnings, are subtracted from net income to determine total undistributed earnings to be allocated to common stockholders. All participating securities are excluded from basic weighted-average common shares outstanding. Prior to any conversion to common shares, each series of PMI’s convertible preferred stock was entitled to participate on an if converted basis in distributions of earnings, when and if declared by the board of directors, that were made to common stockholders and as a result these shares were considered participating securities. During the year ended December 31, 2016, 2015 and 2014, certain shares issued as a result of the early exercise of stock options, which are subject to a repurchase right by PMI, were entitled to receive non-forfeitable dividends during the vesting period and as a result were considered participating securities.
The weighted average shares used in calculating basic and diluted net loss per share excludes certain shares that are disclosed as outstanding shares in the Consolidated Balance Sheets and Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit because such shares are restricted as they were associated with options that were early exercised and continue to remain unvested.
Basic and diluted net loss per share was calculated as follows (net loss in thousands):
 Year ended December 31,
 2016 2015 2014
Numerator: 
  
  
Net loss$(118,741) $(25,968) $(2,669)
Excess return to preferred shareholders on repurchase—
 —
 (14,892)
Net loss available to common stockholders for basic and diluted EPS(118,741) (25,968) (17,561)
Denominator: 
  
  
Weighted average shares used in computing basic and
   diluted net loss per share
64,196,537
 55,547,408
 44,484,005
Basic and diluted net loss per share$(1.85) $(0.47) $(0.39)


Due to losses attributable to PMI’s common shareholders for each of the periods below, the following potentially dilutive shares are excluded from the diluted net loss per share calculation because they were anti-dilutive under the treasury stock or if converted method:
 Year ended December 31,
 2016 2015 2014
 (shares) (shares) (shares)
Excluded securities: 
  
  
Convertible preferred stock issued and outstanding177,388,425
 177,388,425
 153,499,785
Stock options issued and outstanding44,099,577
 34,358,106
 24,974,990
Unvested stock options exercised1,126,210
 9,806,170
 20,571,345
Restricted Stock Units351,721
 190,517
 —
Warrants issued and outstanding988,513
 588,660
 884,435
Series E Convertible Preferred Stock warrants1,254,111
 —
 —
Total common stock equivalents excluded from diluted
   net loss per common share computation
225,208,557
 222,331,878
 199,930,555
The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
13.Convertible Preferred Stock, Warrant Liability and Stockholders’ Deficit
Convertible Preferred Stock
Under PMI’s amended and restated certificate of incorporation, preferred stock is issuable in series, and the board of directors is authorized to determine the rights, preferences, and terms of each series.
In January 2013, PMI issued and sold 69,340,760 shares of New Series A (“New Series A”) convertible preferred stock in a private placement at a purchase price of $0.29 per share for $19.8 million, net of issuance costs. In connection with that sale, PMI issued 25,585,910 shares at par value $0.01 per share of Series A-1 (“Series A-1”) convertible preferred stock to the holders of shares of PMI’s convertible preferred stock that was outstanding immediately prior to the sale (“Old Preferred Shares”) in consideration for such stockholders participating in the sale. In connection with the New Series A sale, Old Preferred Shares were converted into shares of common stock at a ratio of 1:1 if the holder of the Old Preferred Shares participated in the New Series A sale or at a 10:1 ratio if the holder of the Old Preferred Shares did not so participate. In addition, each such participating holder received a share of New Series A-1 convertible preferred stock for every dollar of liquidation preference associated with an Old Preferred Share held by such holder. Each share of Series A-1 preferred stock has a liquidation preference of $2.00 and converts into common stock at a ratio of 1,000,000:1. The New Series A and Series A-1 convertible preferred stock were sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering.
In September 2013, PMI issued and sold 41,443,670 shares of New Series B (“New Series B”) convertible preferred stock in a private placement at a purchase price of $0.60 per share for approximately $24.9 million, net of issuance costs.  The New Series B convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering.
In May 2014, PMI issued and sold 24,404,770 shares of New Series C (“New Series C”) convertible preferred stock in a private placement at a purchase price of $2.87 per share for approximately $69.9 million, net of issuance costs. The Series C convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series C private placement was to raise funds for general corporate needs and for the tender offer discussed below.


On June 18, 2014, PMI issued a Tender Offer Statement to purchase up to 6,963,785 shares, in the aggregate, of its New Series A convertible preferred Stock and New Series B convertible preferred Stock, at a price equal to $2.87 per share. Upon closure of the tender offer on July 16, 2014, 782,540 shares of New Series A convertible preferred Stock and 5,667,790 share of New Series B convertible preferred Stock were purchased for an aggregate price of $18.5 million
In April 2015, PMI issued and sold 23,888,640 shares of New Series D (“New Series D”) convertible preferred stock in a private placement at a purchase price of $6.91 per share for proceeds of approximately $164.8 million, net of issuance costs. The New Series D convertible preferred stock was sold in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act and Regulation D promulgated thereunder regarding sales by an issuer not involving a public offering. The purpose of the New Series D private placement was to raise funds for general corporate needs and for the share repurchase discussed below.  
In December 2016, PMI authorized 40,000,000 shares of New Series E ("New Series E") convertible preferred stock. These shares are reserved for the convertible preferred stock warrants that were also issued in December 2016.
The number of authorized, issued and outstanding shares, their par value and liquidation preference for each series of convertible preferred stock as of December 31, 2016 are disclosed in the table below (dollar amounts in thousands, except per share information):
Convertible Preferred Stock Par Value 
Authorized
shares
 Outstanding and Issued
shares		 
Liquidation
Preference
New Series A $0.01
 68,558,220
 68,558,220
 $19,774
Series A-1 0.01
 24,760,915
 24,760,915
 49,522
New Series B 0.01
 35,775,880
 35,775,880
 21,581
New Series C 0.01
 24,404,770
 24,404,770
 70,075
New Series D 0.01
 23,888,640
 23,888,640
 165,000
New Series E 0.01
 40,000,000
 —
 —
   
 217,388,425
 177,388,425
 $325,952
The number of shares issued and outstanding reflect a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Dividends
Dividends on shares of the New Series A, New Series B, New Series C, New Series D and New Series E convertible preferred stock are payable only when, as, and if declared by the Board of Directors. No dividends will be paid with respect to the common stock until any declared dividends on the New Series A, New Series B, New Series C, New Series D and New Series E convertible preferred stock have been paid or set aside for payment to the New Series A, New Series B, New Series C New Series D and New Series E convertible preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. The Series A-1 convertible preferred shares have no dividend rights.  To date, no dividends have been declared on any of the PMI’s preferred stock or common stock.  
Conversion
Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an Initial Public Offering (“IPO”) that values Prosper at least at $2 billion and that results in aggregate proceeds to Prosper of at least $100 million or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis) including at least 14% of the voting power of the outstanding Series A-1 convertible preferred stock. In addition, if a holder of the New Series A convertible preferred stock has converted any of the New Series A convertible preferred stock, then all of such holder’s shares of Series A-1 convertible


preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by its Board of Directors. At present, the New Series A, New Series B, New Series C, the New Series D and the New Series E convertible preferred stock converts into PMI common stock at a 1:1 ratio while the Series A-1 convertible preferred stock converts into common stock at a 1,000,000:1 ratio.
Liquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however, upon in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of New Series E convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of New Series A, New Series B, New Series C, New Series D and Series A-1 preferred stock or common stock, an amount per share for each share of New Series E convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share
After the payment or setting aside for payment to the holders of New Series E convertible preferred stock, each holder of New Series A, New Series B, New Series C and New Series D convertible preferred stock is entitled to receive, on a pari passu basis, prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, an amount per share for each share of New Series A, New Series B, New Series C and New Series D convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of New Series A, New Series B, New Series C and New Series D convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share. After the payment or setting aside for payment to the holders of New Series A, New Series B, New Series C and New Series D convertible preferred stock and Series A-1 preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of New Series A preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the New Series A preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of New Series A convertible preferred stock which the holders of New Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the New Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the New Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the New Series B convertible preferred stock, $2.87 per share for the New Series C convertible preferred stock, $6.91 for the New Series D convertible preferred stock and $1.48 for the New Series E convertible preferred stock.
Voting
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the bylaws of PMI.
Convertible Preferred Stock Warrant Liability
In connection with the Settlement and Release Agreement (as described in Note 17) that Prosper signed on November 17, 2016, PMI issued warrants to purchase 20,267,135 shares of PMI's New Series E convertible redeemable preferred stock at $0.01 per share. The warrants expire ten years from the date of issuance. For the year ended December 31, 2016, Prosper


recognized expense from the fair value measurement of the warrants of $21.7 million, of which $7 thousand was from the remeasurement of the fair value of the warrants. The expense is recorded through other expenses in the statement of operations.
To determine the fair value of the New Series Convertible Preferred Stock Warrants, the Company first determined the value of a share of a New Series E convertible redeemable preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the business enterprise value (“BEV”) of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the probability weighted expected return method (“PWERM”) was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the New Series E convertible redeemable preferred stock warrants utilized the Black-Scholes option pricing model.
As of December 31, 2016, the Company determined the fair value of the outstanding convertible preferred stock warrants utilizing the following assumptions:
As of December 31, 2016
Volatility40.0%
Risk-free interest rate2.45%
Remaining contractual term (in years)9.96
Dividend yield0%
The above assumptions were determined as follows: 
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of December 31, 2016, and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant. 
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant. 
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Common Stock
PMI, through its amended and restated certificate of incorporation, is the sole issuer of common stock and related options, RSUs and warrants. On May 15, 2014, PMI amended and restated its certificate of incorporation to effect an increase in the number of authorized shares of stock. The total number of shares of stock which PMI has the authority to issue is 555,610,528, consisting of 338,222,425 shares of common stock, $0.01 par value per share, and 217,388,425 shares of preferred stock, $0.01 par value per share, 68,558,220 of which are designated as New Series A preferred stock, 24,760,915 of which are designated as Series A-1 preferred stock, 35,775,880 of which are designated New Series B preferred stock, 24,404,770 of which are designated as Series C preferred stock, 23,888,640 of which are designated New Series D preferred stock, and 40,000,000 of which are designated New Series E preferred stock. As of December 31, 2016, 70,843,044 shares of common stock were issued and 69,907,109 shares of common stock were outstanding. As of December 31, 2015, 70,367,425 shares of common stock were issued and 69,431,490 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.  
During 2015, PMI repurchased 4,225,490 shares of common stock from certain employees at a price equal to 6.91 per share for an aggregate purchase price of $29.2 million. As the purchase price exceeded the fair value of common stock


at the time of repurchase, Prosper recognized compensation costs of $6.2 million of which $0.33 million is recorded in Origination and Servicing, $0.07 million in Sales and Marketing and $5.7 million in General and Administrative on the Consolidated Statements of Operations. As part of the transactions, PMI repurchased 3,607,095 shares for a total of $24.9 million from Prosper’s executive officers.
Common Stock Issued upon Exercise of Stock Options
During the year ended December 31, 2016 and 2015, PMI issued 466,300 and 3,211,935 shares of common stock, respectively, upon the exercise of options for cash proceeds of $0.31 million and $0.88 million, respectively, of which 76,045 were unvested in 2015. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At December 31, 2016 and 2015, there were 1,126,210 and 9,806,170 shares respectively of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.
Common Stock Issued upon Exercise of Warrants
For the year ended December 31, 2016 and 2015, PMI issued 56,480 and 207,065 shares of common stock upon the exercise of warrants, for $0.38 per share and $0.61 per share respectively.
14.Stock-based Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2, which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. As of December 31, 2016, under the 2015 Plan, options to purchase up to 50,458,108 shares of PMI's common stock are reserved and may be granted to employees, directors, and consultants by PMI’s Board of Directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/48th per month thereafter or vest 50% two years from the vesting commencement date and 1/48 per month thereafter or vest 1/36th per month from the vesting commencement date.  In no event are options exercisable more than ten years after the date of grant.
The number of options, restricted stock units and amounts per share reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “Reprice”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel. Prosper believes the repricing of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of this repricing. The financial statement impact of this repricing is $2.2 million in the period ended December 31, 2016 and $2.0 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 2.5 years.
Early Exercised Stock Options
With the approval of its Board of Directors, PMI allows certain employees and directors to exercise stock options granted under the 2005 Plan prior to vesting. The unvested shares are subject to a repurchase right held by PMI at the original exercise price. Early exercises of options are not deemed to be substantive exercises for accounting purposes and therefore, amounts received for early exercises are initially recorded in repurchase liability for unvested restricted stock awards which is included in


Other Liabilities on the Consolidated Balance Sheets. Such amounts are reclassified to common stock and additional paid-in capital as the underlying shares vest. The activity of options that were early exercised under the 2005 Plan follow for the years below:
 
Early exercised
options, unvested
 
Weighted average
exercise price
 
Weighted Average
Contractual Term
(in years)
Balance as of January 1, 20169,806,170
 0.05
  
Repurchase of restricted stock(673,750) 0.12
  
Restricted stock vested(8,006,210) 0.03
  
Balance as of December 31, 20161,126,210
 0.11
 0.42
Options expected to vest1,086,592
 $0.11
 0.42
Additional information regarding the unvested early exercised stock options outstanding as of December 31, 2016 is as follows:
  Options Outstanding
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted –Avg.
Remaining Life
 
Weighted –Avg.
Exercise Price
$0.02 881,295
 0.20 $0.02
0.11 171,855
 1.05 0.11
1.13 73,060
 1.61 1.13
$0.02 - $1.13 1,126,210
 0.42 $0.11
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized as follows for the years below:
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted Average
Contractual Term
(in years)
Balance as of January 1, 201640,425,605
 $2.64
  
Options granted19,655,338
 $2.14
  
Options exercised – vested(466,300) $0.65
  
Options forfeited(18,218,924) $2.43
  
Balance as of December 31, 201641,395,719
 $1.48
 8.28
Options vested and expected to vest as of December 31, 201633,019,875
 $1.48
 8.28
Options vested and exercisable at December 31, 201624,589,730
 $1.06
 7.65
For the year ended December 31, 2016, we granted stock options to purchase 19,655,338 shares of common stock at a weighted average grant date fair value of $2.04 per share.


Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of December 31, 2016 is as follows:
  Options Outstanding Options Vested and Exercisable
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted –
Avg.
Remaining
Life
 
Weighted –
Avg.
Exercise
Price
 
Number
Vested
 
Weighted -
Avg.
Exercise
Price
0.02 - $0.99 12,236,805
 6.88 $0.12
 12,236,805
 $0.12
1.00 - 1.99 2,788,790
 7.61 1.13
 1,987,935
 1.13
2.00 - 3.62 26,370,124
 9.00 2.14
 10,364,990
 2.14
0.02 - 3.62 41,395,719
 8.28 $1.48
 24,589,730
 $1.06
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) the prices for PMI’s preferred stock sold to outside investors; (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock; (iv) the lack of marketability of PMI’s common stock; (v) developments in the business; (vi) secondary transactions of PMI’s common and preferred shares and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publically traded volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.
Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience.  To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for stock options that do not vest.
The fair value of PMI’s stock option awards for the year ended December 31, 2016, 2015 and 2014 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 Year ended December 31,
 2016 2015 2014
Volatility of common stock50.88% 55.69% 68.28%
Risk-free interest rate1.29% 1.74% 1.79%
Expected life5.8 years
 6.0 years
 5.7 years
Dividend yield—% —% —%
 PMI did not grant any performance-based options in 2015 or 2016. Under the 2005 Stock Plan certain executive officers of PMI were granted performance-based stock options during 2014.  The vesting of these performance-based stock options was contingent upon the achievement of certain revenue targets or target ratios of marketing expenditures to revenues for the year ended December 31, 2014.   
PMI granted 10,164,480 performance-based stock options with an exercise price of $0.11 per share during 2014. The contractual term of these options is 10 years. Since the performance targets were achieved, 9,624,480 performance-based stock options became fully vested and 540,000 performance-based stock options were forfeited on the termination of


employment. The aggregate expense recognized during 2014 related to these performance-based stock options was $587 thousand.
The fair value of the performance-based stock options was estimated on the date of grant using the Black-Scholes option valuation model. Prosper used the following assumptions in measuring the fair value of these performance-based stock options: a 66% rate for expected volatility, 0% rate for expected dividends, 5.23 years for the expected term and a 1.66% risk-free rate.  
Restricted Stock Unit Activity
During the year ended December 31, 2015, PMI began granting restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or a four year vesting terms and the occurrence of a liquidity event.
The aggregate fair value of the RSUs granted was $7.8 million. The following table summarizes the activities for PMI’s RSUs during 2016:
 Number of Shares Weighted-Average Grant Date Fair Value
Unvested at January 1, 20161,835,510
 5.52
Granted3,818,225
 2.07
Vested(444,553) 5.52
Forfeited(3,214,023) 3.45
Unvested - December 31, 20161,995,159
 2.16
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s consolidated statements of operations during the periods presented (in thousands):
 December 31,
 2016 2015 2014
Origination and Servicing$2,004
 $1,231
 $104
Sales and Marketing2,914
 2,561
 767
General and Administrative14,824
 9,219
 1,150
Restructuring45
 —
 —
Total stock based compensation$19,787
 $13,011
 $2,021
During the year ended December 31, 2016, 2015 and 2014, Prosper capitalized $718 thousand, $623 thousand and $21 thousand, respectively, of stock-based compensation as internal use software and website development costs. As of December 31, 2016, the unamortized stock-based compensation expense related to Prosper employees’ unvested stock-based awards was approximately $28.8 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.3 years.
15.     Restructuring
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring is intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location.  As a result of this restructuring, Prosper terminated 167 employees across all locations.  In December 2016, Prosper shut down its Tel Aviv location, resulting in the termination of 31 employees. In connection with the restructuring, Prosper has recognized employee severance and benefits charges of approximately $7.3 million during the year ended December 31, 2016, which were included in “Restructuring Charges” within the consolidated statements of operations.
In addition to the employment costs associated with the restructuring, Prosper is also engaged in marketing for sublease, space in our existing office space that is no longer needed due to the reduction in headcount. In total, the losses incurred


on the leases in San Francisco, Salt Lake City, Delaware, Tel Aviv and Phoenix totaled $8.7 million which has been included in “Restructuring Charges” within the consolidated statement of operations. Prosper wrote off $0.8 million in property plant and equipment related to these locations and incurred $0.2 million of other restructuring charges. Other than accretion and changes in sub lease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
 Severance Related Facilities Related Total
Balance January 1, 2016$—
 $—
 $—
   Adjustments to expense7,256
 8,735
 15,991
   Transfer from deferred rent—
 764
 764
   Less: Cash paid(6,659) (3,447) (10,106)
Balance December 31, 2016$597
 $6,052
 $6,649

16.Income Taxes
The components of income tax are as follows (in thousands):
 Year Ended December 31,
 2016 2015 2014
Current:     
Federal$—
 $—
 $—
State—
 —
 —
Foreign124
 (5) —
Total Current Income Tax (Benefit)124
 (5) —
Deferred: 
  
  
Federal394
 320
 —
State28
 25
 —
Foreign

 —
 —
Total Deferred Income Tax422
 345
 —
Total Income Tax$546
 $340
 $—


The income tax expense (benefit) differed from the amount computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following:
 Year Ended December 31,
 2016 2015 2014
Federal tax at statutory rate34 % 34 % 34 %
State tax at statutory rate (net of federal benefit)7 % 12 % 1 %
Change to Uncertain Tax Position— % 10 % — %
Permanent Items(1)% — % (11)%
Incentive Stock Options(2)% (9)% (9)%
Acquisition Related Costs— % (3)% — %
Change in valuation allowance(37)% (46)% (25)%
Credits and Reserves— % — % 9 %
Other(1)% 1 % 1 %
 — % (1)% — %
Temporary items that give rise to significant portions of deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows (in thousands):
 December 31,
 2016 2015
Net operating loss carry forwards$85,759
 $44,632
Research & other credits626
 502
Settlement liability1,230
 2,466
Stock compensation7,300
 3,193
Accrued liabilities4,884
 5,794
Restructuring liability2,424
 —
Other62
 126
Deferred tax assets102,285
 56,713
Fair value of loans(1,045) (1,406)
Net servicing rights(4,895) (5,752)
Fixed assets(1,226) (721)
Intangible assets(3,226) (4,246)
Foreign Earnings(270) —
Deferred tax liabilities(10,662) (12,125)
Net deferred tax assets91,623
 44,588
Valuation allowance(92,389) (44,933)
Net deferred tax liabilities$(766) $(345)
Prosper has determined that its net deferred tax asset did not satisfy the recognition criteria set forth in ASC Topic 740 and, accordingly, established a full valuation allowance against the net deferred tax asset. The valuation allowance as of December 31, 2016, increased by $47.5 million to $92.4 million from $44.9 million in the prior fiscal year. Under ASC 740, Accounting for Income Taxes (“ASC Topic 740”), a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The amount of valuation allowance would be based upon management’s best estimate of Prosper’s ability to realize the net deferred tax assets. A valuation allowance can subsequently be reduced when management believes that the assets are realizable on a more-likely-than-not basis.
The Internal Revenue Code imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, Prosper’s ability to utilize net operating losses and credit carryforwards may be limited in the future as the result of such an “ownership change.”


Prosper files Federal and various state income tax returns. Prosper has net operating loss carryforwards for both federal and state income tax purposes of approximately $233.6 million and $257.1 million respectively as of December 31, 2016, available to reduce future income subject to income taxes. The federal net operating loss carryforwards will begin to expire in 2025. The state net operating loss carryforwards will begin to expire in 2017. Prosper has federal and California research and development tax credits of approximately $428 thousand and $450 thousand, respectively. The federal research credits will begin to expire in 2034 and the California research credits have no expiration date.  Prosper also has California enterprise zone credits of $1.1 million that will begin to expire in 2024.
The following table summarizes Prosper’s activity related to its unrecognized tax benefits (in thousands):
 December 31,
2016		 December 31,
2015
Balance at January 1,$913
 $4,927
Decrease related to current year tax position

 (4,014)
Balance at December 31,$913
 $913
None of the unrecognized tax benefits would affect Prosper’s effective tax rate if these amounts are recognized due to the full valuation allowance. 
Prosper’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2016, Prosper has not incurred any interest or penalties.
All tax returns will remain open for examination by the federal and most state taxing authorities for 3 years and 4 years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.
17.Colchis Agreement
Prosper and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis.
On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis has agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment by PMI and an agreement by PMI to issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI’s capitalization on a fully diluted basis as of the date of the issuance of the warrant (the “New Series”) for $.01 per share (the “Equity Payment”). This transaction has been accounted for as a termination of a contract and is included in other expense for $30.7 million.

18.Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Future Minimum Lease Payments
Prosper has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2027. Prosper recognized total rental expenses under operating leases of $6.9 million, $4.1 million and $2.0 million during the years ended December 31, 2016, 2015 and 2014, respectively.


Future minimum rental payments under these leases as of December 31, 2016 are as follows (in thousands):
2017$7,660
20188,129
20198,538
20208,781
20218,835
Thereafter17,767
Total future operating lease obligations$59,710
The payments in the above table include amounts that have been accrued for as part of the restructuring liability in Note 15 Restructuring. Restructuring accrual balances related to operating facility leases were $6.1 million at December 31, 2016.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the year ended December 31, 2017 is $1.7 million. The minimum fee is $1.7 million and $0.9 million in each of the years 2018 and 2019, respectively. Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2016 the Company was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase $18.6 million of Borrower Loans that WebBank originated during the last two business days of the year ended December 31, 2016 and the first business day of the quarter ending March 31, 2017. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending March 31, 2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made.  The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans sold through the Whole Loan channels, which at December 31, 2016 is $3.5 billion. Prosper had accrued $0.6 million and $0.5 million as of December 31, 2016 and 2015 respectively in regard to this obligation.      
Securities Law Compliance
From inception of Prosper through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investors through the old platform structure, whereby Prosper assigned promissory notes directly to investors. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the


operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.
In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and at the effective time of the Settlement (June 16, 2014), the defendants will have been released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit. The reserve for the class action settlement liability is $3.0 million in the Consolidated Balance Sheets as of December 31, 2016.
19.Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers and certain affiliates participate on Prosper’s marketplace by purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper as of December 31, 2016 and 2015 are summarized below (in thousands):
Related Party 
Aggregate Amount of
Notes Purchased
 
Interest Earned on
Notes
  2016 2015 2016 2015
Executive officers and management $1,065
 $1,361
 $225
 $206
Directors 508
 244
 34
 9
Total $1,573
 $1,605
 $259
 $215
Related Party Notes balance as of December 31,
  2016 2015
Executive officers and management $1,620
 $1,912
Directors 537
 325
  $2,157
 $2,237
20.Postretirement Benefit Plans
Prosper has a 401(k) plan that covers all employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service.  Prosper’s contributions to the plan are discretionary. During the years ended December 31, 2016, 2015 and 2014, Prosper has contributed $2.6 million, $1.9 million and $0.7 million, respectively to the 401(k) plan, respectively.
21.Significant Concentrations  
Prosper is dependent on third party funding sources such as banks and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans


originated in the year ended December 31, 2016, 20%, 16% and 9% were purchased by three different parties. This compares to 37%, 19% and 11% for the year ended December 31, 2015.  Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 90% and 95% of Borrower Loans were originated through the Whole Loan Channel in the years ended December 31, 2016 and 2015, respectively.  
Prosper receives all of its transaction fee revenue from WebBank.  Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank.  The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan.  No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.    
22.Segments
Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, we have a single reporting and operating segment.
23.Subsequent Events
On February 27, 2017, PFL entered into a Loan Purchase Agreement (the “Purchase Agreement”) with PF LoanCo Funding LLC (the “Beneficiary”) and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee (the “Trustee”) of PF LoanCo Trust (the “Purchaser”). The Purchase Agreement sets forth the terms and conditions pursuant to which PFL may sell eligible consumer loans in an aggregate amount of up to $5.0 billion (including certain loans purchased by an affiliate of the Beneficiary prior to the date of the Purchase Agreement (the “Pre-Purchased Loans”)) to the Purchaser for the benefit of the Beneficiary over a two-year period. Under the Purchase Agreement, PFL will be obligated to (i) offer for purchase minimum monthly volumes of eligible loans to the Purchaser, and (ii) deliver a minimum percentage of the monthly volume of such loans that the Purchaser elects to purchase for the benefit of the Beneficiary, if any (together, the “Volume Requirements”).
In connection with the Purchase Agreement, on February 27, 2017, PMI entered into a Warrant Agreement with PF WarrantCo Holdings, LP, an affiliate of the Beneficiary (the “Warrant Holder”), and, for certain limited purposes, New Residential Investment Corp. (the “Warrant Agreement”). Pursuant to the Warrant Agreement, PMI issued to Warrant Holder three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
Warrant Holder’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Purchase Agreement based upon the volume of loans Purchaser elects to purchase (if any) in each month, subject to certain cure rights (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of the Pre-Purchased Loans). Additionally, certain portions of the Series F Warrant may automatically vest for a given month in the event that PFL fails to meet its Volume Requirements under the Purchase Agreement for such month. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI and upon the occurrence of certain events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the tenth anniversary of their date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
Additionally, on February 27, 2017, PMI issued to Pinecone Investments LLC, a warrant (the “Series E Warrant”) to purchase 15,277,006 shares of PMI’s Series E-1 Preferred Stock at an exercise price of $0.01 per share. The Series E Warrant is immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of the number of shares purchased. The Series E Warrant was issued pursuant to the Warrant Agreement, dated December 16, 2016, between PMI and Colchis Capital Management, L.P., previously described in PMI’s Current Report on Form 8-K as filed with the Commission on December 22, 2016.



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Board of Directors and ShareholdersStockholders of
of Prosper Marketplace, Inc.Funding LLC
San Francisco, CA

We have audited the accompanying consolidated balance sheetsheets of Prosper Marketplace, Inc.Funding LLC and subsidiary (the "Company") as of December 31, 20122016 and 2015, and the related consolidated statementstatements of operations, shareholders’member’s equity, and cash flows for the yearyears then ended. These consolidated financial statements are the responsibility of PMI’sthe Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.
In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prosper Marketplace, Inc.Funding LLC and subsidiary as of December 31, 20122016, and 2015, and the results of itstheir operations and itstheir cash flows for the yearyears then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, Prosper Marketplace, Inc.
/s/ OUM
DELOITTE & Co.TOUCHE LLP
San Francisco, CaliforniaCA
March 18, 201317, 2017




F-2
Schedule I

Prosper Marketplace, Inc.Funding LLC
Consolidated Balance Sheets
(in thousands, except for share and per share amounts)thousands)

  December 31,  December 31, 
ASSETS 2013  2012 
Cash and cash equivalents $18,339  $2,300 
Restricted cash  15,473   5,949 
Short term investments  -   1,000 
Accounts receivable  218   92 
Loans held for investment  3,917   175 
Borrower loans receivable at fair value  226,238   166,900 
Property and equipment, net  3,396   1,530 
Prepaid and other assets  708   376 
Total Assets $268,289  $178,322 
 
        
LIABILITIES AND STOCKHOLDERS' EQUITY        
Accounts payable and accrued liabilities $6,737  $4,766 
Class action settlement liability  10,000   - 
Notes at fair value  226,794   167,478 
Repurchase liability for unvested restricted stock awards  609   - 
Repurchase and indemnification obligation  32   41 
Total Liabilities  244,172   172,285 
 
        
Commitments and contingencies (see Note 12)        
 
        
Stockholders' Equity        
Convertible preferred stock – Series A-F, ($0. 01 par value; zero and 7,195,813 shares authorized, issued and outstanding as of December 31, 2013 and December 31, 2012. Aggregate liquidation preferences of zero and $51 as of December 31, 2013 and December 31, 2012, respectively  -   72 
Convertible preferred stock – Series A ’13, A-1 ’13 and B ’13, $0.01 par value; 27,274,068 and zero shares authorized, issued and outstanding as of December 31, 2013 and December 31, 2012, respectively.  Aggregate liquidation preference of $96 and zero as of December 31, 2013 and December 31, 2012, respectively.  273   - 
Common stock --$0.01 par value; 41,487,465 shares authorized; 13,720,214 shares issued and outstanding as of December 31, 2013; 8,263,000 shares authorized; 300,674 issued and outstanding as of December 31, 2012  75   5 
Additional paid-in capital  128,140   83,150 
Less: treasury stock  (291)  (291)
Accumulated deficit  (104,080)  (76,899)
Total stockholders' equity  24,117   6,037 
Total Liabilities and Stockholders' Equity $268,289  $178,322 

The number of shares issued and outstanding reflects a 10-for-1 reverse stock split effected by the Company on October 29, 2013.

 December 31,
2016		 December 31,
2015
Assets 
  
Cash and Cash Equivalents$6,929
 $15,026
Restricted Cash147,983
 139,937
Short Term Investments1,280
 1,277
Loans Held for Sale at Fair Value624
 32
Borrower Loans Receivable at Fair Value315,627
 297,273
Property and Equipment, Net10,095
 8,419
Servicing Assets12,461
 13,605
Other Assets186
 122
Total Assets$495,185
 $475,691
Liabilities and Member's Equity 
  
Accounts Payable and Accrued Liabilities$2,223
 $2,122
Payable to Related Party1,899
 2,989
Payable to Investors141,625
 135,661
Notes at Fair Value316,236
 297,405
Other Liabilities1,877
 1,209
Total Liabilities463,860
 439,386
Member's Equity 
  
Member's Equity30,704
 —
Retained Earnings621
 36,305
Total Member's Equity31,325
 36,305
Total Liabilities and Member's Equity$495,185
 $475,691
The accompanying notes are an integral part of these consolidated financial statements.

Prosper Marketplace, Inc.Funding LLC
Consolidated Statements of Operations
(amounts in thousands, except for share amounts)thousands)

  
For the Twelve Months
Ended
December 31,
 
  2013  2012 
Revenues 
  
 
Origination fees $16,471  $6,918 
Interest income on borrower  loans  35,526   23,101 
Interest expense on  notes  (33,072)  (21,889)
Rebates and promotions  (1,534)  (1,322)
Total Revenues  17,391   6,808 
 
        
Cost of revenues        
Cost of services  (2,056)  (1,421)
Provision for repurchase and indemnification obligation  (118)  (26)
Net revenues  15,217   5,361 
 
        
Operating expenses        
Compensation and benefits  13,079   10,334 
Marketing and advertising  14,851   5,683 
Depreciation and amortization  961   679 
Professional services  1,979   3,307 
Facilities and maintenance  1,764   1,228 
Class action settlement  10,000   - 
Loss on impairment of fixed assets  62   - 
Other  1,733   1,580 
Total Expenses  44,429   22,811 
Loss Before Other Income and Expenses  (29,212)  (17,450)
 
        
Other Income and Expenses        
Interest income  3   14 
Change in fair value on borrower loans, loans held for investment and notes, net  877   957 
Other income  1,151   369 
Total Other Income and Expenses  2,031   1,340 
 
        
Loss Before Income Taxes  (27,181)  (16,110)
Provision for income taxes  -   - 
Net Loss $(27,181) $(16,110)
 
        
Net loss per share – basic and diluted  (4.14)  (5.51)
Weighted – average shares – basic and diluted net loss per share  6,567,201   2,925,611 

The weighted average number of shares and the net loss per share reflects a 10-for-1 reverse stock split effected by the Company on October 29, 2013.

 Year ended December 31,
 2016 2015
Revenues   
Operating Revenues   
Administration Fee Revenue – Related Party$36,630
 $57,919
Servicing Fees, Net28,604
 16,218
Gain on Sale of Borrower Loans3,637
 14,151
Other Revenues478
 1,500
Total Operating Revenues69,349
 89,788
Interest Income on Borrower Loans44,649
 41,380
Interest Expense on Notes(41,187) (38,174)
Net Interest Income3,462
 3,206
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net(372) 59
Total Net Revenues72,439
 93,053
Expenses 
  
Administration Fee – Related Party62,203
 62,786
Servicing5,395
 3,705
General and Administrative1,321
 1,227
Other Expenses, Net30,704
 —
Total  Expenses99,623
 67,718
Total Net Income (Loss)$(27,184) $25,335
The accompanying notes are an integral part of these consolidated financial statements.

Prosper Marketplace, Inc.Funding LLC
Consolidated Statements of Stockholders'Member’s Equity
 (in thousands, except for share and per share amounts)(amounts in thousands)
  Preferred Stock  Common Stock  Treasury Stock  
Additional
Paid-In
  Accumulated  
 
  Shares  Amount  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
 
                           
Balance as of January 1, 2012  7,195,813  $72   469,550  $5   (182,264) $(291) $82,733  $(60,789) $21,730 
 
                                    
Exercise of vested stock options  -   -   13,388   -   -   -   19   -   19 
 
                                    
Exercise of nonvested stock options  -   -   -   -   -   -   -   -   - 
 
                                    
Issuance of common stock warrants  -   -   -   -   -   -   58   -   58 
 
                                    
Repurchase of restricted stock  -   -   -   -   -   -   -   -   - 
 
                                    
Stock-based compensation expense  -   -   -   -   -   -   340   -   340 
 
                                    
Net loss  -   -   -   -   -   -       (16,110)  (16,110)
                                    
Balance as of December 31, 2012  7,195,813  $72   482,938  $5   (182,264) $(291) $83,150  $(76,899) $6,037 
 
                                    
Issuance of convertible preferred stock, new Series A, net of issuance cost  13,868,152   139   -   -   -   -   19,702   -   19,841 
 
                                    
Issuance of convertible preferred stock, Series A-1  5,117,182   51   -   -   -   -   -   -   51 
 
                                    
Issuance of convertible preferred stock, new Series B, net of issuance costs  8,288,734   83   -   -   -   -   24,847   -   24,930 
 
                                    
Conversion of Preferred Series A-F  (7,195,813)  (72)  6,191,270   62   -   -   10   -   - 
 
                                    
Exercise of vested stock options  -   -   828,496   8   -   -   202   -   210 
 
                                    
Exercise of nonvested  stock options  -   -   6,499,463   -   -   -       -   - 
 
                                    
Repurchase of restricted stock  -   -   (100,509)  -   -   -   -   -   - 
 
                                    
Cashless exercise of common stock warrants  -   -   820   -   -   -   -   -   - 
 
                                    
Stock-based compensation expense  -   -   -   -   -   -   229   -   229 
 
                                    
Net loss  -   -   -   -   -   -   -   (27,181)  (27,181)
 
                                    
Balance as of December 31, 2013  27,274,068  $273   13,902,478  $75   (182,264) $(291) $128,140  $(104,080) $24,117

The number of shares reflects a 10-for-1 reverse stock split effected by the Company on October 29, 2013.
 
Member’s
Equity
 
Retained
Earnings
(Accumulated
Deficit)
 Total
Balance as of January 1, 2015$29,619
 $16,672
 $46,291
Capital Infusion from Parent(29,370) (6,130) (35,500)
Transfer of Servicing Rights to Parent(249) —
 (249)
Adjustment to Servicing Rights on Transition to Fair Value—
 428
 428
Net Income—
 25,335
 25,335
Balance as of December 31, 2015$—
 $36,305
 $36,305
Distributions to Parent—
 (8,500) (8,500)
Contributions by Parent30,704
 —
 30,704
Net Income (Loss)—
 (27,184) (27,184)
Balance as of December 31, 2016$30,704
 $621
 $31,325
The accompanying notes are an integral part of these consolidated financial statements.

Prosper Marketplace, Inc.Funding LLC
Consolidated Statements of Cash Flows
(amounts in thousands, except for share and per share amounts)thousands)

 
 
For the Twelve Months
Ended December 31,
 
  2013  2012 
Cash flows from Operating Activities: 
  
 
Net loss $(27,181) $(16,110)
Adjustments to reconcile net loss to net cash used in operating activities:        
Change in fair value of borrower loans  4,856   (4,801)
Change in fair value of notes  (5,734)  3,833 
Depreciation and amortization  961   679 
Provision for repurchase and indemnification obligation  (9)  19 
Stock-based compensation expense  229   340 
Loss on impairment of fixed assets  62   - 
Change in fair value of loans held for investment  1   11 
Issuance of common stock warrants  -   58 
Changes in operating assets and liabilities:        
Restricted cash  (9,524)  (1,585)
Accounts receivable  (126)  (79)
Prepaid and other assets  (332)  (142)
Accounts payable and accrued liabilities  1,971   1,615 
Class action settlement liability  10,000   - 
Net cash used in operating activities  (24,826)  (16,162)
 
        
Cash Flows from Investing Activities:        
Origination of borrower loans held at fair value  (341,176)  (153,175)
Repayment of borrower loans held at fair value  105,692   66,840 
Proceeds from sale of borrower loans held at fair value  171,290   - 
Purchases of property and equipment  (2,889)  (872)
Maturities of short term investments  1,000   11,998 
Repayment of loans held for investment at fair value  143   133 
Origination of loans held for investment at fair value  (14,296)  (182)
Proceeds from sale of loans held for investment at fair value  10,410   - 
Purchases of short-term investments  -   (3,000)
Net cash used in investing activities  (69,826)  (78,257)
 
        
Cash Flows from Financing Activities:        
Proceeds from issuance of notes held at fair value  169,742   153,175 
Payment of notes held at fair value  (104,692)  (65,690)
Proceeds from issuance of convertible preferred stock  45,000   - 
Proceeds from early exercise of stock options  650   - 
Purchase of restricted stock from stockholders  (41)  - 
Proceeds from exercise of vested stock options  210   19 
Issuance costs of convertible preferred stock  (178)  - 
Net cash provided by financing activities  110,691   87,504 
 
        
Net increase (decrease) in cash and cash equivalents  16,039   (6,916)
Cash and cash equivalents at beginning of the year  2,300   9,216 
Cash and cash equivalents at end of the year $18,339  $2,300 

 For the Twelve Months Ended
December 31,
 2016 2015
Cash flows from operating activities: 
  
Net Income (Loss)$(27,184) $25,335
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: 
  
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes372
 (59)
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes176
 (57)
Gain on Sale of Borrower Loans(9,634) (14,561)
Change in Fair Value of Servicing Rights10,620
 4,176
Depreciation and Amortization4,083
 3,161
Loss on Contract Termination30,704
 —
Other, Net(128) —
Changes in Operating Assets and Liabilities: 
  
Purchase of Loans Held for Sale at Fair Value(1,979,952) (3,517,467)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value1,979,352
 3,525,759
Restricted Cash Except for those Related to Investing Activities(5,268) (68,776)
Other Assets(64) (118)
Accounts Payable and Accrued Liabilities101
 1,510
Payable to Investors5,964
 71,852
Net Related Party Receivable/Payable(1,260) 2,880
Other Liabilities954
 539
Net Cash Provided by Operating Activities8,836
 34,174
Cash Flows From Investing Activities: 
  
Purchase of Borrower Loans Held at Fair Value(217,582) (197,436)
Principal Payment of Borrower Loans Held at Fair Value173,710
 151,893
Purchase of Short Term Investments(1,280) (1,277)
Maturities of Short Term Investments1,277
 1,274
Purchases of Property and Equipment(5,589) (9,211)
Changes in Restricted Cash Related to Investing Activities(2,778) 1,942
Net Cash Used in Investing Activities(52,242) (52,815)
Cash Flows from Financing Activities: 
  
Proceeds from Issuance of Notes Held at Fair Value217,767
 197,228
Payments of Notes Held at Fair Value(173,958) (151,838)
Cash Distributions to Parent(8,500) (35,500)
Loan Advances to Parent—
 (10,000)
Loan Repayments from Parent—
 10,000
Net Cash Provided by Financing Activities35,309
 9,890
Net Increase (Decrease) in Cash and Cash Equivalents(8,097) (8,751)
Cash and Cash Equivalents at Beginning of the Year15,026
 23,777
Cash and Cash Equivalents at End of the Year$6,929
 $15,026
Supplemental Disclosure of Cash Flow Information: 
  
Cash Paid for Interest$40,597
 $38,168
Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment—
 428
Non-Cash Investing Activity- Accrual for Property and Equipment, Net1,606
 1,436
Non-Cash Financing Activity, Distribution to Parent$—
 $249
Non-Cash Financing Activity, Contribution by Parent$30,704
 $—
The accompanying notes are an integral part of these consolidated financial statements.

Prosper Marketplace, Inc.Funding LLC
Notes to Consolidated Financial Statements
 (in thousands, except for share and per share amounts)

1.Organization and Business

1.Organization and Business
Prosper Marketplace, Inc.Funding LLC (“PMI” or the “Company”PFL”) was incorporatedformed in the state of Delaware in February 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”).  Except as the context otherwise requires, as used in these Notes to Consolidated Financial Statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on March 22, 2005.a consolidated basis.
PFL was formed by PMI developed a platform (the “platform”)to hold Borrower Loans and prior to February 1, 2013, owned the proprietary technology that made operation of the platform possible, operated the platform, facilitated the origination of unsecured, consumer loans by WebBank, an FDIC-insured, Utah-chartered industrial bank,issue Notes through the platformmarketplace. Although Prosper Funding is consolidated with PMI for accounting and issuedtax purposes, Prosper Funding has been organized and sold borrower payment dependent notes correspondingis operated in a manner that is intended to those loans. On February 1, 2013,minimize the likelihood that it would be substantively consolidated with PMI transferred ownership ofin a bankruptcy proceeding. Prosper Funding’s intention is to minimize the platform, including all of the rights relatedlikelihood that its assets would be subject to the operation of the platform,claims by PMI’s creditors if PMI were to file for bankruptcy, as well as all then-outstanding Borrower Loans, to its wholly-owned subsidiary,minimize the likelihood that Prosper Funding (“Prosper Funding”). At that same time,will become subject to bankruptcy proceedings directly. Prosper Funding assumed all of PMI’s obligations with respectseeks to all then-outstanding Notes.  achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct entity from PMI.
Since February 1, 2013, all Notes issued and sold through the platformmarketplace are issued, sold and soldserviced by Prosper Funding.PFL. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the platform,marketplace, as agent of WebBank, in connection with the submission of loanBorrower Loan applications by potential borrowers, the makingorigination of related loansBorrower Loans by WebBank and the funding of such loansBorrower Loans by WebBank. On February 1, 2013, Prosper Funding entered intoPursuant to an Administration Agreement withbetween PFL and PMI, in its capacity as licensee, corporate administrator, loan platform administrator and loan and note servicer, pursuant to which PMI provides certain back office support, loan platform administration and loan and note servicing to Prosper Funding.  In this Annual Report, any actions taken by PMI pursuant to the Loan Account Program Agreement or the Administration Agreement are described as actions taken by PMI, in spitemanages all other aspects of the fact that such actions are being taken by PMImarketplace on behalf of WebBank orPFL. As a result Prosper Funding respectively. In these notesearns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, PMI.
A borrower who wishes to financial statements, the unsecured, consumer loans originatedobtain a loan through the platform,marketplace must post a loan listing, or listing, on the marketplace. PFL allocates listings to one of two investor funding channels: (i) the “Note Channel,” which allows investors to commit to purchase Notes from PFL, the payments of which are referreddependent PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows investors to elsewhere in this Annual Report as “PMIcommit to purchase 100% of a Borrower Loans”Loan directly from PFL.
All loans requested and “Prosper Funding Borrower Loans”, are referred to collectively as “Borrower Loans”, and the borrower payment dependent notes issuedobtained through the platform, whichmarketplace are referredunsecured obligations of individual borrowers with a fixed interest rate and loan terms set at three or five years as of December 31, 2016. All loans made through the marketplace are funded by WebBank, an FDIC-insured, Utah chartered industrial bank. After funding a loan, WebBank sells the loan to elsewherePFL, without recourse to WebBank, in this Annual Report as “PMI Notes” and “Prosper Funding Notes”, are referredexchange for the principal amount of the loan. WebBank does not have any obligation to collectively as “Notes”.purchasers of the Notes.

The platformProsper Funding’s marketplace is designed to allow peopleinvestors to invest money in peopleBorrower Loans in an open transparent marketplace, with the aim of allowing both lender membersinvestors and borrower membersborrowers to profitbenefit financially as well as socially. The CompanyProsper Funding believes peer-to-peermarketplace lending represents a new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender. The platform
As of December 31, 2016, Prosper Funding’s marketplace was launchedopen to investors in 30 states and the public in 2006 and had attracted over two million members and facilitated over $801,000 in Borrower LoansDistrict of Columbia. Additionally, as of December 31, 2013.2016 Prosper Funding’s marketplace was open to borrowers in 45 states and the District of Columbia. Currently, the marketplace does not operate internationally.

As reflected in the accompanying consolidated financial statements, PMI has incurred net losses and negative cash flows from operations since inception, and has an accumulated deficit of $104,080 as of December 31, 2013. At December 31, 2013, PMI had $18,339 in cash and cash equivalents. Since its inception, PMI has financed its operations primarily through equity financing from various sources. PMI is dependent upon raising additional capital or debt financing to fund its current operating plan. Failure to obtain sufficient debt and equity financings and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect PMI’s ability to achieve its business objectives and continue as a going concern. Further, there can be no assurances as to the availability or terms upon which the required financing and capital might be available. In January 2013, PMI issued and sold to investors 13,868,152 shares of new Series A preferred stock in a private placement at a purchase price of $1.44 per share for approximately $19,844, net of issuance costs. In connection with that sale, PMI issued 5,117,182 shares at par value $.01 per share, of Series A-1 convertible preferred stock to the holders of shares of PMI’s preferred stock that was outstanding immediately prior to the sale in consideration for such stockholders participating in the sale. In September 2013, PMI issued and sold to investors 8,288,784 shares of new Series B preferred stock in a private placement at a purchase price of $3.02 per share for approximately $24,880, net of issuance costs.  See Note 9, Stockholders’ Equity, for additional information.

2.      Summary of Significant Accounting Policies

2.Significant Accounting Policies
Basis of Presentation

The accompanyingProsper Funding’s consolidated financial statements include the accounts of PMIPFL and its wholly ownedwholly-owned subsidiary Prosper Funding.PAH. All intercompany balances and transactions between Prosper FundingPFL and PMIPAH have been eliminated in consolidation. PMI and Prosper Funding's


Funding’s financial statements have been prepared in accordanceconformity with U.Saccounting principles generally accepted accounting principles (U.S. GAAP).

F-7
America (“U.S. GAAP”).
Use of Estimates

The preparation of Prosper Funding’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates, judgments and assumptions include but are not limited to the following: valuation of borrower loans receivableLoans Held for Sale, Borrower Loans and associated member payment dependent notes,Notes, valuation of servicing rights, valuation allowance on deferred tax assets, valuation and amortization periods of intangible assets, repurchase and idemnificationindemnification obligation, stock-based compensation expense, and contingent liabilities. Estimates are basedProsper Funding bases its estimates on historical experience from all Borrower Loans, and on various other assumptions that are  believedit believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Certain Risks and Concentrations

In the normal course of its business, PMIProsper encounters two significant types of risk: credit and regulatory.risk. Financial instruments that potentially subject PMIProsper Funding to significant concentrations of credit risk consist primarily of cash, cash equivalents, borrower loans held and restricted cash and short term investments. PMIcash. Prosper Funding places cash, cash equivalents and restricted cash and short term investments with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. PMIProsper Funding also performs periodic evaluations of the relative credit standing of these financial institutions and has not sustainedrecognized any credit losses in earnings from instruments held at these financial institutions.

As a lending marketplace, Prosper Funding believes its customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact its customers’ ability or desire to participate on its marketplace as borrowers or investors, and consequently could negatively affect its business and results of operations.
To the extent that Borrower Loan (including Borrower Loans that have been sold) payments are not made, servicing income will be reduced. A group of Notes corresponding to a particular Borrower Loan is wholly dependent on the repayment of such Borrower Loan. As a result, PMIProsper Funding does not bear the credit risk on such Borrower Loan.
PMIConsolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is subjecta VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to various regulatory requirements. The failureallow the entity to appropriately identify and address these regulatory requirements couldfinance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity. 
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain discretionary actions by regulatorsspecial purposes entities that couldpurchase these Borrower Loans.   For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a material effect on PMI'spotentially significant economic interest in the VIE.   In no case are we the primary beneficiary, therefore, we do not consolidate these entities. .  
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial position and results of operations (See Note 12—Commitments and Contingencies—Securities Law Compliance).statements.


Cash and Cash Equivalents

PMI invests its excess cash primarily inCash includes various unrestricted deposits with highly rated financial institutions. Cash equivalents consist of highly liquid debt instruments of the U.S. government and its agencies. All highly liquid investmentsmarketable securities with statedoriginal maturities of three months or less from dateat the time of purchase are classified as cash equivalents.and consist primarily of money market funds, commercial paper, US treasury securities and US agency securities. Cash equivalents are recorded at cost, which approximates fair value. Cash and cash equivalents include various unrestricted deposits with highly rated financial institutions in checking, money market and short-term certificate of deposit accounts.

Restricted Cash

Restricted cash consists primarily of cash deposits and short term certificates of deposit held as collateral as required for loan funding and servicing activities.activities, and cash that investors or Prosper Funding has on the platform that has not yet been invested in Borrower Loans or disbursed to the investor.


Short Term InvestmentsLiquidation Rights
PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however, upon in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of New Series E convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of New Series A, New Series B, New Series C, New Series D and Series A-1 preferred stock or common stock, an amount per share for each share of New Series E convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share
After the payment or setting aside for payment to the holders of New Series E convertible preferred stock, each holder of New Series A, New Series B, New Series C and New Series D convertible preferred stock is entitled to receive, on a pari passu basis, prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, an amount per share for each share of New Series A, New Series B, New Series C and New Series D convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of New Series A, New Series B, New Series C and New Series D convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share. After the payment or setting aside for payment to the holders of New Series A, New Series B, New Series C and New Series D convertible preferred stock and Series A-1 preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of New Series A preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the New Series A preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of New Series A convertible preferred stock which the holders of New Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the New Series A convertible preferred stock.
At present, the liquidation preferences are equal to $0.29 per share for the New Series A convertible preferred stock, $2.00 per share for the Series A-1 convertible preferred stock, $0.60 per share for the New Series B convertible preferred stock, $2.87 per share for the New Series C convertible preferred stock, $6.91 for the New Series D convertible preferred stock and $1.48 for the New Series E convertible preferred stock.
Voting
Each holder of shares of convertible preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and are entitled to notice of any stockholders’ meeting in accordance with the bylaws of PMI.
Convertible Preferred Stock Warrant Liability
In connection with the Settlement and Release Agreement (as described in Note 17) that Prosper signed on November 17, 2016, PMI issued warrants to purchase 20,267,135 shares of PMI's New Series E convertible redeemable preferred stock at $0.01 per share. The warrants expire ten years from the date of issuance. For the year ended December 31, 2016, Prosper

PMI's short term investments consists of highly liquid debt instruments
recognized expense from the fair value measurement of the warrants of $21.7 million, of which $7 thousand was from the remeasurement of the fair value of the warrants. The expense is recorded through other expenses in the statement of operations.
To determine the fair value of the New Series Convertible Preferred Stock Warrants, the Company first determined the value of a share of a New Series E convertible redeemable preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the business enterprise value (“BEV”) of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the probability weighted expected return method (“PWERM”) was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the New Series E convertible redeemable preferred stock warrants utilized the Black-Scholes option pricing model.
As of December 31, 2016, the Company determined the fair value of the outstanding convertible preferred stock warrants utilizing the following assumptions:
As of December 31, 2016
Volatility40.0%
Risk-free interest rate2.45%
Remaining contractual term (in years)9.96
Dividend yield0%
The above assumptions were determined as follows: 
Volatility: The volatility is derived from historical volatilities of several unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. governmentTreasury yield in effect as of December 31, 2016, and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant. 
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant. 
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Common Stock
PMI, through its amended and restated certificate of incorporation, is the sole issuer of common stock and related options, RSUs and warrants. On May 15, 2014, PMI amended and restated its certificate of incorporation to effect an increase in the number of authorized shares of stock. The total number of shares of stock which PMI has the authority to issue is 555,610,528, consisting of 338,222,425 shares of common stock, $0.01 par value per share, and 217,388,425 shares of preferred stock, $0.01 par value per share, 68,558,220 of which are designated as New Series A preferred stock, 24,760,915 of which are designated as Series A-1 preferred stock, 35,775,880 of which are designated New Series B preferred stock, 24,404,770 of which are designated as Series C preferred stock, 23,888,640 of which are designated New Series D preferred stock, and 40,000,000 of which are designated New Series E preferred stock. As of December 31, 2016, 70,843,044 shares of common stock were issued and 69,907,109 shares of common stock were outstanding. As of December 31, 2015, 70,367,425 shares of common stock were issued and 69,431,490 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.  
During 2015, PMI repurchased 4,225,490 shares of common stock from certain employees at a price equal to 6.91 per share for an aggregate purchase price of $29.2 million. As the purchase price exceeded the fair value of common stock


at the time of repurchase, Prosper recognized compensation costs of $6.2 million of which $0.33 million is recorded in Origination and Servicing, $0.07 million in Sales and Marketing and $5.7 million in General and Administrative on the Consolidated Statements of Operations. As part of the transactions, PMI repurchased 3,607,095 shares for a total of $24.9 million from Prosper’s executive officers.
Common Stock Issued upon Exercise of Stock Options
During the year ended December 31, 2016 and 2015, PMI issued 466,300 and 3,211,935 shares of common stock, respectively, upon the exercise of options for cash proceeds of $0.31 million and $0.88 million, respectively, of which 76,045 were unvested in 2015. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the same vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At December 31, 2016 and 2015, there were 1,126,210 and 9,806,170 shares respectively of restricted stock outstanding that remain unvested and subject to PMI’s right of repurchase.
Common Stock Issued upon Exercise of Warrants
For the year ended December 31, 2016 and 2015, PMI issued 56,480 and 207,065 shares of common stock upon the exercise of warrants, for $0.38 per share and $0.61 per share respectively.
14.Stock-based Compensation
PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and restated by its stockholders on December 1, 2010; and its agencies2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2, which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. As of December 31, 2016, under the 2015 Plan, options to purchase up to 50,458,108 shares of PMI's common stock are reserved and may be granted to employees, directors, and consultants by PMI’s Board of Directors and stockholders to promote the success of Prosper’s business. Options generally vest 25% one year from the vesting commencement date and 1/48th per month thereafter or vest 50% two years from the vesting commencement date and 1/48 per month thereafter or vest 1/36th per month from the vesting commencement date.  In no event are options exercisable more than ten years after the date of grant.
The number of options, restricted stock units and amounts per share reflects a 5-for-1 forward stock split effected by PMI on February 16, 2016.
Stock Option Reprice
On May 3, 2016, the Compensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “Reprice”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel. Prosper believes the repricing of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of this repricing. The financial statement impact of this repricing is $2.2 million in the period ended December 31, 2016 and $2.0 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 2.5 years.
Early Exercised Stock Options
With the approval of its Board of Directors, PMI allows certain employees and directors to exercise stock options granted under the 2005 Plan prior to vesting. The unvested shares are subject to a repurchase right held by PMI at the original exercise price. Early exercises of options are not deemed to be substantive exercises for accounting purposes and therefore, amounts received for early exercises are initially recorded in repurchase liability for unvested restricted stock awards which is included in


Other Liabilities on the Consolidated Balance Sheets. Such amounts are reclassified to common stock and additional paid-in capital as the underlying shares vest. The activity of options that were early exercised under the 2005 Plan follow for the years below:
 
Early exercised
options, unvested
 
Weighted average
exercise price
 
Weighted Average
Contractual Term
(in years)
Balance as of January 1, 20169,806,170
 0.05
  
Repurchase of restricted stock(673,750) 0.12
  
Restricted stock vested(8,006,210) 0.03
  
Balance as of December 31, 20161,126,210
 0.11
 0.42
Options expected to vest1,086,592
 $0.11
 0.42
Additional information regarding the unvested early exercised stock options outstanding as of December 31, 2016 is as follows:
  Options Outstanding
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted –Avg.
Remaining Life
 
Weighted –Avg.
Exercise Price
$0.02 881,295
 0.20 $0.02
0.11 171,855
 1.05 0.11
1.13 73,060
 1.61 1.13
$0.02 - $1.13 1,126,210
 0.42 $0.11
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized as follows for the years below:
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted Average
Contractual Term
(in years)
Balance as of January 1, 201640,425,605
 $2.64
  
Options granted19,655,338
 $2.14
  
Options exercised – vested(466,300) $0.65
  
Options forfeited(18,218,924) $2.43
  
Balance as of December 31, 201641,395,719
 $1.48
 8.28
Options vested and expected to vest as of December 31, 201633,019,875
 $1.48
 8.28
Options vested and exercisable at December 31, 201624,589,730
 $1.06
 7.65
For the year ended December 31, 2016, we granted stock options to purchase 19,655,338 shares of common stock at a weighted average grant date fair value of $2.04 per share.


Other Information Regarding Stock Options
Additional information regarding common stock options outstanding as of December 31, 2016 is as follows:
  Options Outstanding Options Vested and Exercisable
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted –
Avg.
Remaining
Life
 
Weighted –
Avg.
Exercise
Price
 
Number
Vested
 
Weighted -
Avg.
Exercise
Price
0.02 - $0.99 12,236,805
 6.88 $0.12
 12,236,805
 $0.12
1.00 - 1.99 2,788,790
 7.61 1.13
 1,987,935
 1.13
2.00 - 3.62 26,370,124
 9.00 2.14
 10,364,990
 2.14
0.02 - 3.62 41,395,719
 8.28 $1.48
 24,589,730
 $1.06
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) the prices for PMI’s preferred stock sold to outside investors; (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock; (iv) the lack of marketability of PMI’s common stock; (v) developments in the business; (vi) secondary transactions of PMI’s common and preferred shares and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publically traded volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with original maturitycharacteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods greatercorresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.
Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience.  To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for stock options that do not vest.
The fair value of PMI’s stock option awards for the year ended December 31, 2016, 2015 and 2014 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 Year ended December 31,
 2016 2015 2014
Volatility of common stock50.88% 55.69% 68.28%
Risk-free interest rate1.29% 1.74% 1.79%
Expected life5.8 years
 6.0 years
 5.7 years
Dividend yield—% —% —%
 PMI did not grant any performance-based options in 2015 or 2016. Under the 2005 Stock Plan certain executive officers of PMI were granted performance-based stock options during 2014.  The vesting of these performance-based stock options was contingent upon the achievement of certain revenue targets or target ratios of marketing expenditures to revenues for the year ended December 31, 2014.   
PMI granted 10,164,480 performance-based stock options with an exercise price of $0.11 per share during 2014. The contractual term of these options is 10 years. Since the performance targets were achieved, 9,624,480 performance-based stock options became fully vested and 540,000 performance-based stock options were forfeited on the termination of


employment. The aggregate expense recognized during 2014 related to these performance-based stock options was $587 thousand.
The fair value of the performance-based stock options was estimated on the date of grant using the Black-Scholes option valuation model. Prosper used the following assumptions in measuring the fair value of these performance-based stock options: a 66% rate for expected volatility, 0% rate for expected dividends, 5.23 years for the expected term and a 1.66% risk-free rate.  
Restricted Stock Unit Activity
During the year ended December 31, 2015, PMI began granting restricted stock units (“RSUs”) to certain employees that are subject to three-year vesting terms or a four year vesting terms and the occurrence of a liquidity event.
The aggregate fair value of the RSUs granted was $7.8 million. The following table summarizes the activities for PMI’s RSUs during 2016:
 Number of Shares Weighted-Average Grant Date Fair Value
Unvested at January 1, 20161,835,510
 5.52
Granted3,818,225
 2.07
Vested(444,553) 5.52
Forfeited(3,214,023) 3.45
Unvested - December 31, 20161,995,159
 2.16
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s consolidated statements of operations during the periods presented (in thousands):
 December 31,
 2016 2015 2014
Origination and Servicing$2,004
 $1,231
 $104
Sales and Marketing2,914
 2,561
 767
General and Administrative14,824
 9,219
 1,150
Restructuring45
 —
 —
Total stock based compensation$19,787
 $13,011
 $2,021
During the year ended December 31, 2016, 2015 and 2014, Prosper capitalized $718 thousand, $623 thousand and $21 thousand, respectively, of stock-based compensation as internal use software and website development costs. As of December 31, 2016, the unamortized stock-based compensation expense related to Prosper employees’ unvested stock-based awards was approximately $28.8 million, which will be recognized over the remaining weighted-average vesting period of approximately 2.3 years.
15.     Restructuring
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring is intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location.  As a result of this restructuring, Prosper terminated 167 employees across all locations.  In December 2016, Prosper shut down its Tel Aviv location, resulting in the termination of 31 employees. In connection with the restructuring, Prosper has recognized employee severance and benefits charges of approximately $7.3 million during the year ended December 31, 2016, which were included in “Restructuring Charges” within the consolidated statements of operations.
In addition to the employment costs associated with the restructuring, Prosper is also engaged in marketing for sublease, space in our existing office space that is no longer needed due to the reduction in headcount. In total, the losses incurred


on the leases in San Francisco, Salt Lake City, Delaware, Tel Aviv and Phoenix totaled $8.7 million which has been included in “Restructuring Charges” within the consolidated statement of operations. Prosper wrote off $0.8 million in property plant and equipment related to these locations and incurred $0.2 million of other restructuring charges. Other than three monthsaccretion and changes in sub lease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
 Severance Related Facilities Related Total
Balance January 1, 2016$—
 $—
 $—
   Adjustments to expense7,256
 8,735
 15,991
   Transfer from deferred rent—
 764
 764
   Less: Cash paid(6,659) (3,447) (10,106)
Balance December 31, 2016$597
 $6,052
 $6,649

16.Income Taxes
The components of income tax are as follows (in thousands):
 Year Ended December 31,
 2016 2015 2014
Current:     
Federal$—
 $—
 $—
State—
 —
 —
Foreign124
 (5) —
Total Current Income Tax (Benefit)124
 (5) —
Deferred: 
  
  
Federal394
 320
 —
State28
 25
 —
Foreign

 —
 —
Total Deferred Income Tax422
 345
 —
Total Income Tax$546
 $340
 $—


The income tax expense (benefit) differed from the amount computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following:
 Year Ended December 31,
 2016 2015 2014
Federal tax at statutory rate34 % 34 % 34 %
State tax at statutory rate (net of federal benefit)7 % 12 % 1 %
Change to Uncertain Tax Position— % 10 % — %
Permanent Items(1)% — % (11)%
Incentive Stock Options(2)% (9)% (9)%
Acquisition Related Costs— % (3)% — %
Change in valuation allowance(37)% (46)% (25)%
Credits and Reserves— % — % 9 %
Other(1)% 1 % 1 %
 — % (1)% — %
Temporary items that give rise to significant portions of deferred tax assets and liabilities at December 31, 2016 and 2015 are as follows (in thousands):
 December 31,
 2016 2015
Net operating loss carry forwards$85,759
 $44,632
Research & other credits626
 502
Settlement liability1,230
 2,466
Stock compensation7,300
 3,193
Accrued liabilities4,884
 5,794
Restructuring liability2,424
 —
Other62
 126
Deferred tax assets102,285
 56,713
Fair value of loans(1,045) (1,406)
Net servicing rights(4,895) (5,752)
Fixed assets(1,226) (721)
Intangible assets(3,226) (4,246)
Foreign Earnings(270) —
Deferred tax liabilities(10,662) (12,125)
Net deferred tax assets91,623
 44,588
Valuation allowance(92,389) (44,933)
Net deferred tax liabilities$(766) $(345)
Prosper has determined that its net deferred tax asset did not satisfy the recognition criteria set forth in ASC Topic 740 and, accordingly, established a full valuation allowance against the net deferred tax asset. The valuation allowance as of December 31, 2016, increased by $47.5 million to $92.4 million from $44.9 million in the prior fiscal year. Under ASC 740, Accounting for Income Taxes (“ASC Topic 740”), a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The amount of valuation allowance would be based upon management’s best estimate of Prosper’s ability to realize the net deferred tax assets. A valuation allowance can subsequently be reduced when management believes that the assets are realizable on a more-likely-than-not basis.
The Internal Revenue Code imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, Prosper’s ability to utilize net operating losses and credit carryforwards may be limited in the future as the result of such an “ownership change.”


Prosper files Federal and various state income tax returns. Prosper has net operating loss carryforwards for both federal and state income tax purposes of approximately $233.6 million and $257.1 million respectively as of December 31, 2016, available to reduce future income subject to income taxes. The federal net operating loss carryforwards will begin to expire in 2025. The state net operating loss carryforwards will begin to expire in 2017. Prosper has federal and California research and development tax credits of approximately $428 thousand and $450 thousand, respectively. The federal research credits will begin to expire in 2034 and the California research credits have no expiration date.  Prosper also has California enterprise zone credits of $1.1 million that will begin to expire in 2024.
The following table summarizes Prosper’s activity related to its unrecognized tax benefits (in thousands):
 December 31,
2016		 December 31,
2015
Balance at January 1,$913
 $4,927
Decrease related to current year tax position

 (4,014)
Balance at December 31,$913
 $913
None of the unrecognized tax benefits would affect Prosper’s effective tax rate if these amounts are recognized due to the full valuation allowance. 
Prosper’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2016, Prosper has not incurred any interest or penalties.
All tax returns will remain open for examination by the federal and most state taxing authorities for 3 years and 4 years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.
17.Colchis Agreement
Prosper and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis.
On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis has agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment by PMI and an agreement by PMI to issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI’s capitalization on a fully diluted basis as of the date of the issuance of the warrant (the “New Series”) for $.01 per share (the “Equity Payment”). This transaction has been accounted for as a termination of a contract and is included in other expense for $30.7 million.

18.Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Future Minimum Lease Payments
Prosper has entered into various non-cancelable operating leases for certain offices with contractual lease periods expiring between 2022 and 2027. Prosper recognized total rental expenses under operating leases of $6.9 million, $4.1 million and $2.0 million during the years ended December 31, 2016, 2015 and 2014, respectively.


Future minimum rental payments under these leases as of December 31, 2016 are as follows (in thousands):
2017$7,660
20188,129
20198,538
20208,781
20218,835
Thereafter17,767
Total future operating lease obligations$59,710
The payments in the above table include amounts that have been accrued for as part of the restructuring liability in Note 15 Restructuring. Restructuring accrual balances related to operating facility leases were $6.1 million at December 31, 2016.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans originated during any month is less than 12 months.  PMI had no short$143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the year ended December 31, 2017 is $1.7 million. The minimum fee is $1.7 million and $0.9 million in each of the years 2018 and 2019, respectively. Additionally, under the agreement with WebBank, Prosper is required to maintain a minimum net liquidity of $15 million at all times during the term investmentsof the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2016 the Company was in compliance with the covenant.
Loan Purchase Commitments
Prosper has entered into an agreement with WebBank to purchase $18.6 million of Borrower Loans that WebBank originated during the last two business days of the year ended December 31, 2013.

2016 and the first business day of the quarter ending March 31, 2017. Prosper will purchase these Borrower Loans and Notes

On July 13, 2009, PMI implementedwithin the operating structure it employed through January 31, 2013 and began issuing Notes. That operating structure resulted in PMI purchasing loans from WebBank and holding the loans until maturity. PMI issued new securities, the Notes, to the winning lender members. PMI’s obligation to repay the Notes was conditioned upon the repaymentfirst three business days of the associated Borrower Loan owned by PMI. As a result of those changes, PMI carried the Borrower Loansquarter ending March 31, 2017.
Repurchase and the Notes on its balance sheet as assets and liabilities, respectively. In conjunction with that operating structure, PMI adopted the provisions of ASC Topic 825, Financial Instrument. ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. The fair value election, with respect to an item, may not be revoked once an election is made.Indemnification Contingency

In applying the provisions of ASC Topic 825, PMI recorded assets and liabilities measured using the fair value option in a way that separates these reported fair values from the carrying values of similar assets and liabilities measured with a different measurement attribute. PMI does not record a specific allowance account related to the Borrower Loans and Notes in which PMI has elected the fair value option, but rather estimates the fair value of the Borrower Loans and Notes using discounted cash flow methodologies adjusted for PMI’s historical payment, loss and recovery rates. An account is considered to be a loss, or charged-off, when it reaches more than 120 days past due. PMI has reported the aggregate fair value of the Borrower Loans and Notes as separate line items in the assets and liabilities sections of the accompanying balance sheets using the methods described in ASC Topic 820, Fair Value Measurements and Disclosures—See Fair Value Measurement.
Member Loans Sold Directly to Third Party Purchasers
For loans sold to unrelated third party purchasers on a servicing retained basis, a gain or loss is recorded on the sale date. In order to calculate the gain or loss, PMI first determines whetherUnder the terms of the servicing arrangement withloan purchase agreements between Prosper and investors that participate in the purchaser resultsWhole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a net servicing asset (i.e., when contractual/expected servicing revenues adequately compensate PMI)Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a net servicing liability (i.e., when contractual/expected servicing revenues do not adequately compensate PMI). When contractual/expected servicing revenues do not adequately compensate PMI, a portionviolation of the gross proceeds of the loans sold on a servicing retained basis are allocated to the recording of a net servicing liability. Conversely, when contractual/expected servicing revenues provide more than adequate compensation to PMI, the excess servicing compensation is allocated to the gross proceeds of the loans sold and results in the recording of a net servicing asset.
PMI estimates the fair value of the loan servicing asset or liability considering the contractual servicing fee revenue, adequate compensation for PMI's servicing obligation, the current principal balances of the loans and projected servicing revenues given projected defaults and prepayments (if significant) over the remaining lives of the loans. At December 31, 2013, PMI recorded $144 as a servicing asset related to these loans, which is included in Borrower Loans Receivable at fair value on the consolidated balance sheets.
Loans held for investment
Loans held for investment are primarily comprised of loans held for short durations and are recorded at cost which approximates fair value.

Property and Equipment

Property and equipment consists of computer equipment, office furniture and equipment, and software purchased or developed for internal use. Property and equipment are stated at cost, less accumulated depreciation and amortization. PMI capitalizes expenditures for replacements and betterments and recognizes as expenses amounts for maintenance and repairs as incurred.  Depreciation and amortization commences once the asset is placed in service. Depreciation and amortization are computed using the straight-line method based upon estimated useful lives of the assets as follows:

Furniture and fixtures7 years
Office equipment5 years
Computers and equipment3 years
Leasehold improvements3 years
Software3 years

Earned Vacations

The Company has a flexible vacation plan for its employees under which employees are entitled to take vacations for such periods of time that do not interfere with the orderly performance of their job responsibilities. Accordingly, no accrual for unpaid vacation pay has been included in the consolidated financial statements.
Internal Use Software and Website Development

PMI accounts for internal use software costs, including website development costs, in accordance with ASC Topic 350-40, Internal Use Software and ASC Topic 350-50, Website Development Costs. In accordance with ASC Topic 350-40 and 350-50, the costs to develop software for the website and other internal uses are capitalized when management has authorized and committed project funding, preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software development costs primarily include software licenses acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the development efforts.

Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. Capitalized costs are included in property and equipment and amortized to expense using the straight-line method over their expected lives. PMI evaluates its software assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.  Recoverability of software assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset.  If such software assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset.

Impairment of Long-Lived Assets Including Acquired Intangible Assets

In accordance with ASC Topic 360, Property Plant and Equipment, PMI reviews property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying values of those assets may not be recoverable.  Recoverability of assets to be held and used is measured by comparing the carrying value of the asset to future net undiscounted cash flows that the assets are expected to generate. If an asset is considered to be impaired, the impairment to be recognized equals the amount by which the asset’s carrying value exceeds its fair value. Fair value is estimated using discounted net cash flows.

During 2013 management made the decision to discontinue the development of certain of its planned software development projects and to dispose of obsolete computer software and hardware. The assets PMI's capitalized in prior years were deemed to be impaired in accordance with ASC Topic 360, Property, Plant, and Equipment. An impairment charge for obsolete equipment of $62 is included in operating expenses in PMI's consolidated statement of operations for the year ended December 31, 2013.  During 2012, no asset disposals resulted in a loss on impairment of fixed assets.

Repurchase and Indemnification Obligation

PMI is obligated to indemnify lenders and repurchase certain Notes and member loans sold directly to third party purchasers in the event of violation of applicable federal, state, or local lending laws, or verifiable identify theft.laws. The loanfair value of the indemnification and repurchase obligation is estimated based on historical experience. PMI accruesexperience and the initial fair value is insignificant. Prosper recognizes a provisionliability for the repurchase and indemnification obligation when the Notes or member loansBorrower Loans are issued. Indemnified or repurchased Notes and member loansBorrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theftstheft are written off at the time of repurchase or at the time an indemnification payment is made.  The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans sold through the Whole Loan channels, which at December 31, 2016 is $3.5 billion. Prosper had accrued $0.6 million and $0.5 million as of December 31, 2016 and 2015 respectively in regard to this obligation.      
Securities Law Compliance
Revenue RecognitionFrom inception of Prosper through October 16, 2008, Prosper sold approximately $178.0 million of Borrower Loans to investors through the old platform structure, whereby Prosper assigned promissory notes directly to investors. Prosper did not register the offer and sale of the promissory notes corresponding to these Borrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. Prosper believes that the question of whether or not the

Revenue
operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, Prosper would have failed to comply with the registration and qualification requirements of federal and state laws.
In 2008, plaintiffs filed a class action lawsuit against Prosper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation agreed to enter into a settlement to resolve all claims related thereto (the “Settlement”). In connection with the Settlement, Prosper agreed to pay an aggregate amount of $10 million into a settlement fund, split into four annual installments of $2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order and judgment entered by the Superior Court on April 16, 2014. Pursuant to the final order and judgment, the claims in the class action were dismissed, and at the effective time of the Settlement (June 16, 2014), the defendants will have been released by the plaintiffs from all claims that were or could have been asserted concerning the issues alleged in the class action lawsuit. The reserve for the class action settlement liability is recognized$3.0 million in the Consolidated Balance Sheets as of December 31, 2016.
19.Related Parties
Since Prosper’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 10% stockholders. Prosper believes that all of the transactions described below were made on terms no less favorable to Prosper than could have been obtained from unaffiliated third parties.
Prosper’s executive officers, directors who are not executive officers and certain affiliates participate on Prosper’s marketplace by purchasing Notes. The aggregate amount of the Notes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper as of December 31, 2016 and 2015 are summarized below (in thousands):
Related Party 
Aggregate Amount of
Notes Purchased
 
Interest Earned on
Notes
  2016 2015 2016 2015
Executive officers and management $1,065
 $1,361
 $225
 $206
Directors 508
 244
 34
 9
Total $1,573
 $1,605
 $259
 $215
Related Party Notes balance as of December 31,
  2016 2015
Executive officers and management $1,620
 $1,912
Directors 537
 325
  $2,157
 $2,237
20.Postretirement Benefit Plans
Prosper has a 401(k) plan that covers all employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with ASC Topic 605, Revenue Recognition.  Under ASC Topic 605, PMI recognizes revenue when persuasive evidencethe provisions of an arrangement exists, services have been rendered, the priceSection 401(k) of the servicesInternal Revenue Code. Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service.  Prosper’s contributions to the plan are discretionary. During the years ended December 31, 2016, 2015 and 2014, Prosper has contributed $2.6 million, $1.9 million and $0.7 million, respectively to the 401(k) plan, respectively.
21.Significant Concentrations  
Prosper is fixeddependent on third party funding sources such as banks and determinable, and collectability is reasonably assured.
Origination feesinvestment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans


originated in the year ended December 31, 2016, 20%, 16% and 9% were purchased by three different parties. This compares to 37%, 19% and 11% for the year ended December 31, 2015.  Further, a significant portion of our business is dependent on funding through the Whole Loan Channel, for which 90% and 95% of Borrower Loans were originated through the Whole Loan Channel in the years ended December 31, 2016 and 2015, respectively.  
Prosper receives all of its transaction fee revenue from WebBank.  Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank.  The company earns an origination fee upon the successful closing of a loan. The borrower receives an amount equal to the loan amount netrate of the loan origination fee. The loan originationtransaction fee for each individual Borrower Loan is determined bybased on the term and credit grade of the loan, and ranges from 1.00% to 4.95%Borrower Loan.  No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the original principal amount. Since PMI accountsperiods presented.    
22.Segments
Our chief operating decision maker reviews financial information presented on a consolidated basis for borrowerpurposes of allocating resources and evaluating financial performance. As such, we have a single reporting and operating segment.
23.Subsequent Events
On February 27, 2017, PFL entered into a Loan Purchase Agreement (the “Purchase Agreement”) with PF LoanCo Funding LLC (the “Beneficiary”) and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee (the “Trustee”) of PF LoanCo Trust (the “Purchaser”). The Purchase Agreement sets forth the terms and conditions pursuant to which PFL may sell eligible consumer loans in an aggregate amount of up to $5.0 billion (including certain loans held for investment and Notes at fair value, origination fees are not deferred but are recognized at originationpurchased by an affiliate of the loan, and direct costsBeneficiary prior to originate loans are recorded as expenses as incurred.

Loan servicing fees

Loan servicing revenue includes monthly loan servicing fees and non-sufficient funds (“NSF”) fees. Loan servicing fees are accrued daily based on the current outstanding loan principal balance of the Borrower Loans but are not recognized until payment is received due to the uncertainty of collection of borrower loan payments. NSF fees are charged to borrowers on the first failed payment of each billing period.  NSF fees are charged to the customer and collected and recognized immediately.

Interest income on Borrower Loans Receivable and Interest Expense on Notes

PMI recognizes interest income on Borrower Loans and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent PMI believes it to be collectable.  Below is a table which summarizes the gross interest income and expense for the twelve months ended December 31, 2013 and 2012.

 December 31, 
 2013 2012 
Interest income on borrower loans$35,526 $23,101 
Interest expense on notes (33,072) (21,889)
Net interest income$2,454 $1,212 
Marketing and Advertising Expense

Under the provisions of ASC Topic 720, Other Expenses, the costs of advertising are expensed as incurred. Marketing and advertising costs were approximately $14,851 and $5,683 for the years ended December 31, 2013 and 2012, respectively.

Rebate and Promotional Expenses

PMI accounts for rebates and promotions in accordance with ASC Topic 605, Revenue Recognition.  From time to time PMI offers rebates and promotions to borrower and lender members.  PMI records these rebates and promotions as an offset to revenue if a particular rebate or promotion is earned upon origination of the loan. PMI's rebate and promotions have in the past been in the form of cash back and other incentives paid to lender and borrower members.

Stock-Based Compensation

PMI accounts for its stock-based compensation for employees using fair-value-based accounting in accordance with ASC Topic 718, Stock Compensation.  ASC Topic 718 requires companies to estimate the fair value of stock-based awards on the date of grant usingthe Purchase Agreement (the “Pre-Purchased Loans”)) to the Purchaser for the benefit of the Beneficiary over a two-year period. Under the Purchase Agreement, PFL will be obligated to (i) offer for purchase minimum monthly volumes of eligible loans to the Purchaser, and (ii) deliver a minimum percentage of the monthly volume of such loans that the Purchaser elects to purchase for the benefit of the Beneficiary, if any (together, the “Volume Requirements”).
In connection with the Purchase Agreement, on February 27, 2017, PMI entered into a Warrant Agreement with PF WarrantCo Holdings, LP, an option-pricing model. The stock-based compensation relatedaffiliate of the Beneficiary (the “Warrant Holder”), and, for certain limited purposes, New Residential Investment Corp. (the “Warrant Agreement”). Pursuant to awards that are expectedthe Warrant Agreement, PMI issued to vestWarrant Holder three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
Warrant Holder’s right to exercise the Series F Warrant is amortized usingsubject to monthly vesting during the straight line method over the vesting term of the stock-based award, which is generally four years. Expected forfeituresPurchase Agreement based upon the volume of unvested options are estimated at the time of grant and reduce the recognized stock-based compensation expense. PMI estimated its annual forfeiture rate to be 17.2% and 18.2% for the years ended December 31, 2013 and 2012, respectively.

PMI has granted optionsloans Purchaser elects to purchase shares(if any) in each month, subject to certain cure rights (except that a certain portion of common stock to nonemployees in exchange for services performed. PMI accounts for stock options and restricted stock issued to nonemployees in accordance with the provisions of ASC Topic 505-50, Equity-Based Payments to Non-Employees, which requires that equity awards be recorded at their fair value.  Under ASC Topic 718 and 505-50, PMI uses the Black-Scholes model to estimate the fair value of options granted to nonemployees at each vesting date until performance is complete to determine the appropriate charge for the services provided. The volatility of PMI's common stock was based on comparative company volatility.

Total stock-based compensation expense for employees reflected in PMI's statements of operations for the years ended December 31, 2013 and 2012 is approximately $229 and $340, respectively.  As of December 31, 2013, the unamortized stock-based compensation expense related to unvested stock-based awards was approximately $991, whichSeries F Warrant will be recognized overimmediately exercisable as a result of the remaining weighted average vesting periodPre-Purchased Loans). Additionally, certain portions of approximately 4.2 years.

Net Loss Per Share

PMI computes net loss per share in accordance with ASC Topic 260 Earnings Per Share. Under ASC Topic 260, basic net loss per share is computed by dividing net loss per share available to common shareholders by the weighted average number of common shares outstandingSeries F Warrant may automatically vest for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. At December 31, 2013, there were outstanding convertible preferred stock, warrants and options convertible into 27,274,068, 218,810 and 938,585 common shares, respectively, which may dilute future earnings per share. At December 31, 2012 there were outstanding convertible preferred stock, warrants and options convertible into 6,195,813, 260,987 and 1,173,816. Because PMI is reporting a net loss for the years ended December 31, 2013 and 2012, potentially dilutive securities are excluded from the computation of net loss per share, as their effect would be antidilutive.

Income Taxes

PMI uses the liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are based on the differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amountsgiven month in the future based on enacted tax laws and rates applicableevent that PFL fails to meet its Volume Requirements under the periods in whichPurchase Agreement for such month. Under the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Under ASC Topic 740, Income Taxes, PMI's policy to include interest and penalties related to gross unrecognized tax benefits within PMI's provision for income taxes did not change.

Fair Value Measurement

PMI adopted ASC Topic 820, Fair Value Measurements and Disclosures, on January 1, 2008. ASC Topic 820 provides a framework for measuring the fair value of assets and liabilities. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation.  ASC Topic 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.

ASC Topic 820 defines fair value in terms of the price that would be receivedWarrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI and upon the saleoccurrence of an asset or paid to transfer a liabilitycertain events set forth in an orderly transaction between market participants at the measurement date.

Warrant Agreement.
The price usedSeries F Warrant will be exercisable with respect to measure the fair value is not adjusted for transaction costs while the cost basis of certain financial instruments may include initial transaction costs. Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

Under ASC Topic 820, assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.

Fair value of financial instruments are determined based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation techniques are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models.  When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.

Financial instruments consist principally of cash and cash equivalents, restricted cash, short term investments, Borrower Loans receivable, accounts payable and accrued liabilities, Notes and long-term debt.  The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature.

The following tables present the assets and liabilities measured at fair value on a recurring basis at December 31, 2013 and 2012:

December 31, 2013 
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  Fair Value 
Assets 
  
  
  
 
Borrower loans receivable $-  $-  $226,238  $226,238 
Certificates of deposit & restricted cash  14,032   1,441   -   15,473 
Loans held for investment  -   -   3,917   3,917 
Liabilities  -   -   -   - 
Notes $-  $-  $226,794  $226,794 

December 31, 2012 
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  Fair Value 
Assets 
  
  
  
 
Short term investments $1,000  $-  $-  $1,000 
Certificates of deposit & restricted cash  4,331   1,618   -   5,949 
Borrower loans receivable  -   -   166,900   166,900 
Loans held for investment  -   -   175   175 
Liabilities                
Notes $-  $-  $167,478  $167,478 

Short term investments consist of United States Treasuries with maturity periods greater than three months and less than 12 months.  In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PMI has the ability to access. PMI classifies United States Treasuries as Level 1 assets.  PMI intends to hold these investments until maturity.

As observable market prices are not available for the Borrower Loans and Notes, or for similar assets and liabilities, PMI believes the Borrower Loans and Notes should be considered Level 3 financial instruments under ASC Topic 820.  In a hypothetical transaction as of the measurement date, PMI believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which PMI might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date.  For Borrower Loans, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, roll rates, recovery rates and discount rates based on the perceived credit risk within each credit grade.

The obligation to pay principal and interest on any group of Notes is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of its 1.0% servicing fee.  The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to lenders that are dependent upon borrower payments.  As such, the fair value of a group of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders.  Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations.  The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee.  See Note 6 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.
Servicing rights related to Borrower Loans originated prior to October 16, 2008 do not trade in an active open market with readily observable prices. Although sales of servicing assets do occur, the nature and character of the assets underlying those transactions are not similar to those held by PMI and, therefore, the precise terms and conditions typically seen in the marketplace would likely not be available to PMI. Accordingly, management determined the fair value of its servicing rights using a discounted cash flow model to project future expected cash flows based upon a set of valuation assumptions PMI believes market participants would use for similar rights. The primary assumptions PMI uses for valuing its servicing asset include default rates, estimated servicing income, cost to service, profit margin, and discount rate.

PMI reviewed these assumptions to ensure they were consistent with market conditions. Inaccurate assumptions in valuing the servicing rights could affect PMI's results of operations. Due to the nature of the valuation inputs, servicing assets are classified as Level 3. The change in the fair-value of servicing rights is included in cost of services in the statement of operations. Servicing rights decreased to zero as loans originated prior to October 16, 2008 had fully matured or charged off as of December 31, 2013.

The changes in Level 3 assets measured at fair value on a recurring basis are as follows:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 
  
Borrower
Loans
  Notes  
Loans
Held for
Investment
  Total 
Balance at January 1, 2012 $75,764  $(76,160) $137  $(259)
Originations  153,175   (153,175)  182   182 
Principal repayments  (66,840)  65,690   (133)  (1,283)
Change in fair value on Borrower Loans and  Notes  4,801   (3,833)  -   968 
Change in fair value of Loans held for investment  -   -   (11)  (11)
Balance at December 31, 2012 $166,900  $(167,478) $175  $(403)
Originations  341,176   (169,742)  14,296   185,730 
Principal repayments and credit losses  (105,692)  104,692   (143)  (1,143)
Borrower Loans sold to third parties  (171,290)  -   (10,410)  (181,700)
Change in fair value on Borrower Loans and  Notes  (4,856)  5,734   -   878 
Change in fair value of Loans held for investment  -   -   (1)  (1)
Balance at December 31, 2013 $226,238  $(226,794) $3,917  $3,361 

The changes in fair value would directly impact the change in fair value on Borrower Loans, loans held for investment and Notes in the consolidated statements of operations.

Quantitative information about PMI's Level 3 fair value measurements of its Borrower Loans and Notes as of December 31, 2013 is provided below.  The table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to PMI's fair value measurements.

Assets and Liabilities
Fair
Value as of
December 31
 
Valuation
Technique
Unobservable Inputs
 
        
Borrower loans receivable at fair value$226,238 Discounted CashflowDefault rates and discount rates
 
             
Notes at fair value$(226,794)Discounted CashflowDefault rates and discount rates

3.      Cash and Cash Equivalents and Short Term Investments

Cash and cash equivalents and short term investments consist of the following:

  December 31, 
Cash and cash equivalents and short term investments 2013  2012 
Cash $18,339  $2,300 
Restricted cash  15,473   5,949 
Short term investments  -   1,000 
Total cash and cash equivalents and short term investments $33,812  $9,249 

4.      Property and Equipment

Property and equipment consist of the following:

  December 31, 
  2013  2012 
Property and equipment: 
  
 
Computer equipment $2,115  $1,630 
Internal-use software  3,454   1,656 
Purchased software  375   369 
Office equipment and furniture  39   125 
Leasehold improvements  -   41 
Assets not yet placed in service  651   134 
Property and equipment  6,634   3,955 
Less accumulated depreciation and amortization  (3,238)  (2,425)
Total property and equipment, net $3,396  $1,530 

Depreciation expense for 2013 and 2012 was $961 and $679, respectively. PMI capitalized internal-use software costs in the amount of $1,798 and $530 for the years ended December 31, 2013 and 2012, respectively.

5.      Loans Held for Investment

During the year ended December 31, 2013, a total of $14,296 of Borrower Loans originated through the platform as Loans held for investment. During the year ended December 31, 2013, $10,410 of these loans were sold to an unrelated third party. The Company services the Borrower Loans that are sold to a third party. Loans held for investment on the consolidated balance sheets as of December 31, 2013 and 2012 was $3,917 and $175, respectively. When a Borrower Loan has been funded by PMIvested Warrant Shares, in whole or in part, at any time prior to the portiontenth anniversary of their date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
Additionally, on February 27, 2017, PMI issued to Pinecone Investments LLC, a warrant (the “Series E Warrant”) to purchase 15,277,006 shares of PMI’s Series E-1 Preferred Stock at an exercise price of $0.01 per share. The Series E Warrant is immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of the borrower’s monthly loan payment that correspondsnumber of shares purchased. The Series E Warrant was issued pursuant to the percentageWarrant Agreement, dated December 16, 2016, between PMI and Colchis Capital Management, L.P., previously described in PMI’s Current Report on Form 8-K as filed with the Commission on December 22, 2016.



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Prosper Funding LLC
San Francisco, CA

We have audited the accompanying consolidated balance sheets of Prosper Funding LLC and subsidiary (the "Company") as of December 31, 2016 and 2015, and the related consolidated statements of operations, member’s equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Borrower Loan thatCompany's management. Our responsibility is funded is retained. In these cases, interest income is recordedto express an opinion on these Borrower Loans.consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Prosper Funding LLC and subsidiary as of December 31, 2016, and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, Prosper Marketplace, Inc.
DELOITTE & TOUCHE LLP
San Francisco, CA
March 17, 2017




Prosper Funding LLC
Consolidated Balance Sheets
(in thousands)
 December 31,
2016		 December 31,
2015
Assets 
  
Cash and Cash Equivalents$6,929
 $15,026
Restricted Cash147,983
 139,937
Short Term Investments1,280
 1,277
Loans Held for Sale at Fair Value624
 32
Borrower Loans Receivable at Fair Value315,627
 297,273
Property and Equipment, Net10,095
 8,419
Servicing Assets12,461
 13,605
Other Assets186
 122
Total Assets$495,185
 $475,691
Liabilities and Member's Equity 
  
Accounts Payable and Accrued Liabilities$2,223
 $2,122
Payable to Related Party1,899
 2,989
Payable to Investors141,625
 135,661
Notes at Fair Value316,236
 297,405
Other Liabilities1,877
 1,209
Total Liabilities463,860
 439,386
Member's Equity 
  
Member's Equity30,704
 —
Retained Earnings621
 36,305
Total Member's Equity31,325
 36,305
Total Liabilities and Member's Equity$495,185
 $475,691
The fair valueaccompanying notes are an integral part of the Borrower Loans held for investment is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of Borrower Loans, which are set forth in Note 2, as they have similar characteristics and PMI expects these loans to behave in a comparable manner.  The valuation assumptions used to value these loans include prepayment rates, default rates and recovery rates derived from historical loan performance data and discount rates based on the credit grade applied to each loan.consolidated financial statements.


Prosper Funding LLC
Consolidated Statements of Operations
(amounts in thousands)
 Year ended December 31,
 2016 2015
Revenues   
Operating Revenues   
Administration Fee Revenue – Related Party$36,630
 $57,919
Servicing Fees, Net28,604
 16,218
Gain on Sale of Borrower Loans3,637
 14,151
Other Revenues478
 1,500
Total Operating Revenues69,349
 89,788
Interest Income on Borrower Loans44,649
 41,380
Interest Expense on Notes(41,187) (38,174)
Net Interest Income3,462
 3,206
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net(372) 59
Total Net Revenues72,439
 93,053
Expenses 
  
Administration Fee – Related Party62,203
 62,786
Servicing5,395
 3,705
General and Administrative1,321
 1,227
Other Expenses, Net30,704
 —
Total  Expenses99,623
 67,718
Total Net Income (Loss)$(27,184) $25,335
The fair value adjustment onaccompanying notes are an integral part of these loans held for investment was $(1) and ($11), which is included in earnings for the year ended December 31, 2013 and 2012, respectively.  During the year ended December 31, 2013 and 2012, PMI has received $143 and $127 in payments on these loans.  During the year ended December 31, 2013 and 2012, there was $14 and $29 in loans held for investment that were charged-off.consolidated financial statements.


Prosper Funding LLC
F-15Consolidated Statements of Member’s Equity
(amounts in thousands)
Table of Contents
6.
 
Member’s
Equity
 
Retained
Earnings
(Accumulated
Deficit)
 Total
Balance as of January 1, 2015$29,619
 $16,672
 $46,291
Capital Infusion from Parent(29,370) (6,130) (35,500)
Transfer of Servicing Rights to Parent(249) —
 (249)
Adjustment to Servicing Rights on Transition to Fair Value—
 428
 428
Net Income—
 25,335
 25,335
Balance as of December 31, 2015$—
 $36,305
 $36,305
Distributions to Parent—
 (8,500) (8,500)
Contributions by Parent30,704
 —
 30,704
Net Income (Loss)—
 (27,184) (27,184)
Balance as of December 31, 2016$30,704
 $621
 $31,325
The accompanying notes are an integral part of these consolidated financial statements.


Prosper Funding LLC
Consolidated Statements of Cash Flows
(amounts in thousands)
 For the Twelve Months Ended
December 31,
 2016 2015
Cash flows from operating activities: 
  
Net Income (Loss)$(27,184) $25,335
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: 
  
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes372
 (59)
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes176
 (57)
Gain on Sale of Borrower Loans(9,634) (14,561)
Change in Fair Value of Servicing Rights10,620
 4,176
Depreciation and Amortization4,083
 3,161
Loss on Contract Termination30,704
 —
Other, Net(128) —
Changes in Operating Assets and Liabilities: 
  
Purchase of Loans Held for Sale at Fair Value(1,979,952) (3,517,467)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value1,979,352
 3,525,759
Restricted Cash Except for those Related to Investing Activities(5,268) (68,776)
Other Assets(64) (118)
Accounts Payable and Accrued Liabilities101
 1,510
Payable to Investors5,964
 71,852
Net Related Party Receivable/Payable(1,260) 2,880
Other Liabilities954
 539
Net Cash Provided by Operating Activities8,836
 34,174
Cash Flows From Investing Activities: 
  
Purchase of Borrower Loans Held at Fair Value(217,582) (197,436)
Principal Payment of Borrower Loans Held at Fair Value173,710
 151,893
Purchase of Short Term Investments(1,280) (1,277)
Maturities of Short Term Investments1,277
 1,274
Purchases of Property and Equipment(5,589) (9,211)
Changes in Restricted Cash Related to Investing Activities(2,778) 1,942
Net Cash Used in Investing Activities(52,242) (52,815)
Cash Flows from Financing Activities: 
  
Proceeds from Issuance of Notes Held at Fair Value217,767
 197,228
Payments of Notes Held at Fair Value(173,958) (151,838)
Cash Distributions to Parent(8,500) (35,500)
Loan Advances to Parent—
 (10,000)
Loan Repayments from Parent—
 10,000
Net Cash Provided by Financing Activities35,309
 9,890
Net Increase (Decrease) in Cash and Cash Equivalents(8,097) (8,751)
Cash and Cash Equivalents at Beginning of the Year15,026
 23,777
Cash and Cash Equivalents at End of the Year$6,929
 $15,026
Supplemental Disclosure of Cash Flow Information: 
  
Cash Paid for Interest$40,597
 $38,168
Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment—
 428
Non-Cash Investing Activity- Accrual for Property and Equipment, Net1,606
 1,436
Non-Cash Financing Activity, Distribution to Parent$—
 $249
Non-Cash Financing Activity, Contribution by Parent$30,704
 $—
The accompanying notes are an integral part of these consolidated financial statements.



Prosper Funding LLC
Notes to Consolidated Financial Statements
1.Organization and Business
Prosper Funding LLC (“PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”).  Except as the context otherwise requires, as used in these Notes to Consolidated Financial Statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis.
PFL was formed by PMI to hold Borrower Loans and issue Notes Heldthrough the marketplace. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct entity from PMI.
Since February 1, 2013, all Notes issued and sold through the marketplace are issued, sold and serviced by PFL. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the marketplace, as agent of WebBank, in connection with the submission of Borrower Loan applications by potential borrowers, the origination of related Borrower Loans by WebBank and the funding of such Borrower Loans by WebBank. Pursuant to an Administration Agreement between PFL and PMI, PMI manages all other aspects of the marketplace on behalf of PFL. As a result Prosper Funding earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, PMI.
A borrower who wishes to obtain a loan through the marketplace must post a loan listing, or listing, on the marketplace. PFL allocates listings to one of two investor funding channels: (i) the “Note Channel,” which allows investors to commit to purchase Notes from PFL, the payments of which are dependent PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows investors to commit to purchase 100% of a Borrower Loan directly from PFL.
All loans requested and obtained through the marketplace are unsecured obligations of individual borrowers with a fixed interest rate and loan terms set at Fair Valuethree or five years as of December 31, 2016. All loans made through the marketplace are funded by WebBank, an FDIC-insured, Utah chartered industrial bank. After funding a loan, WebBank sells the loan to PFL, without recourse to WebBank, in exchange for the principal amount of the loan. WebBank does not have any obligation to purchasers of the Notes.
Prosper Funding’s marketplace is designed to allow investors to invest in Borrower Loans in an open transparent marketplace, with the aim of allowing both investors and borrowers to benefit financially as well as socially. Prosper Funding believes marketplace lending represents a new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender.
As of December 31, 2016, Prosper Funding’s marketplace was open to investors in 30 states and the District of Columbia. Additionally, as of December 31, 2016 Prosper Funding’s marketplace was open to borrowers in 45 states and the District of Columbia. Currently, the marketplace does not operate internationally.
2.Significant Accounting Policies
Basis of Presentation
Prosper Funding’s consolidated financial statements include the accounts of PFL and its wholly-owned subsidiary PAH. All intercompany balances and transactions between PFL and PAH have been eliminated in consolidation. Prosper


Funding’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The Companypreparation of Prosper Funding’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates, judgments and assumptions that affect the fair valuereported amounts of assets and liabilities and the related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates, judgments and assumptions include but are not limited to the following: valuation of Loans Held for Sale, Borrower Loans and associated Notes, using discounted cash flow methodologies based upon a setvaluation of valuation assumptions. The primary assumptions used to value theservicing rights, repurchase and indemnification obligation, and contingent liabilities. Prosper Funding bases its estimates on historical experience from all Borrower Loans, and Notes includeon various other assumptions that it believes to be reasonable under the circumstances. Actual results could differ from those estimates.
Certain Risks
In the normal course of its business, Prosper encounters significant credit risk. Financial instruments that potentially subject Prosper Funding to significant credit risk consist primarily of cash, cash equivalents, borrower loans held and restricted cash. Prosper Funding places cash, cash equivalents and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default rates derived from historical performance and discount rates appliedby these institutions to each Prosper Rating tranche basedthe extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper Funding also performs periodic evaluations of the relative credit standing of these financial institutions and has not recognized any losses in earnings from instruments held at these financial institutions.
As a lending marketplace, Prosper Funding believes its customers are highly susceptible to uncertainties and negative trends, real or perceived, credit riskin the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact its customers’ ability or desire to participate on its marketplace as borrowers or investors, and consequently could negatively affect its business and results of each such Prosper Rating. If PMI does not receive payments on aoperations.
To the extent that Borrower Loan PMI is(including Borrower Loans that have been sold) payments are not obligated to and does not make payments on the corresponding Notes. The aggregate fair value of amade, servicing income will be reduced. A group of Notes corresponding to a particular Borrower Loan is approximately equal to the fair value of that Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to Note holders. The effective interest rate associated with the Notes is less than the interest rate earnedwholly dependent on the correspondingrepayment of such Borrower Loan dueLoan. As a result, Prosper Funding does not bear the credit risk on such Borrower Loan.  
Consolidation of Variable Interest Entities
The determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the 1.0% servicing fee.
Keyprimary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic assumptionsperformance and a potentially significant economic interest in the sensitivityVIE. The determination of whether an entity is a VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to allow the entity to finance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the current fair valuefollowing characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to immediate adverse changes in those assumptions at December 31, 2013 for Borrower Loans and Notes are presented inmake decisions about a legal entity’s activities that have a significant effect on the following table:

  Borrower Loans  Notes 
Discount rate assumption:  9.77%*  9.77%*
Resulting fair value from:        
100 basis point increase $222,989  $220,362 
200 basis point increase  220,363   217,756 
Resulting fair value from:        
100 basis point decrease $228,465  $225,784 
200 basis point decrease  231,282   228,560 
 
        
 
        
Default rate assumption:  7.2%*  7.2%*
Resulting fair value from:        
10% higher default rates $223,233  $220,620 
20% higher default rates  220,039   217,439 
Increase in fair value  and income (loss) to earnings from:        
10% lower default rates $228,151  $225,477 
20% lower default rates  230,554   227,866 

* Represents weighted average assumptions considering all Prosper Ratings.
The changes in fair value would directly impactentity’s success, the change in fair value on loans, loans held for investment and Notes inobligation to absorb the consolidated statements of operations.

Due to the recent originationexpected losses of the Borrower Loans and Notes,entity or the change in fair value attributableright to instrument-specific credit risk is immaterial.  Ofreceive the Borrower Loans originated from July 13, 2009 to December 31, 2013, 332 loans were 90 days or more delinquent for an aggregate principal amount of $1,941 and a fair value of $175 as of December 31, 2013.

7.      Repurchase and Indemnification Obligation

Changes in repurchase and indemnification obligations are summarized below:

  Years Ended December 31, 
  2013  2012 
Beginning of year balance: $41  $22 
Provision for repurchases and indemnifications  67   19 
Amounts repurchased and immediately charged off or charged off and indemnified (net of recoveries)  (76)  - 
End of year balance: $32  $41 

For the years ended December 31, 2013 and 2012, the provision for repurchase and indemnification obligation was $118 and $26, respectively.
8.      Net Loss Per Share

PMI computes net loss per share in accordance with ASC Topic 260. Under ASC Topic 260, basic net loss per share is computed by dividing net loss per share available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The weighted average number of shares and the loss per share reflect a 10-for-1 reverse stock split effected by the Company on October 29, 2013.

The Company uses the two-class method to compute net loss per share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earningsexpected residual returns of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Prior to their conversion to common shares, each series of the Company’s convertible preferred stock was entitled to participate on an as-if-converted basis in distributions, when and if declared by the board of directors, that were made to common stockholders and as a result these shares were considered participating securities. During the year ended December 31, 2013, certain shares issued aslegal entity. 
As a result of the early exercisenature of stock options, whichthe retained servicing rights on the sale of Borrower Loans, we are subjecta variable interest holder in certain special purposes entities that purchase these Borrower Loans.   For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a repurchase right bypotentially significant economic interest in the Company, were entitled to receive non-forfeitable dividends duringVIE.   In no case are we the vesting periodprimary beneficiary, therefore, we do not consolidate these entities. .  
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a result were considered participating securities.VIE and whether we are required to consolidate such VIE in the consolidated financial statements.

Under the two-class method, for periods
Cash and Cash Equivalents
Cash includes various unrestricted deposits with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted average numberhighly rated financial institutions. Cash equivalents consist of shareshighly liquid marketable securities with original maturities of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss, as the holders of the participating securities have no obligation to fund losses. Diluted net loss per common share is computed under the two-class method by using the weighted average number of shares of common stock outstanding, plus, for periods with net income attributable to common stockholders, the potential dilutive effects of stock options and warrants. In addition, the Company analyzes the potential dilutive effect of the outstanding participating securities under the “if-converted” method when calculating diluted earnings per share, in which it is assumed that the outstanding participating securities convert into common stockthree months or less at the beginningtime of purchase and consist primarily of money market funds, commercial paper, US treasury securities and US agency securities. Cash equivalents are recorded at cost, which approximates fair value.
Restricted Cash
Restricted cash consists primarily of cash deposits and short term certificates of deposit held as collateral as required for loan funding and servicing activities, and cash that investors or Prosper Funding has on the period. The Company reports the more dilutive of the approaches (two classplatform that has not yet been invested in Borrower Loans or “if-converted”) as its diluted net income per share during the period. Due to net losses for the years ended December 31, 2013 and 2012, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.
Basic and diluted net loss per share was calculated as follows:

 Years Ended December 31, 
 2013 2012 
Numerator:
 
 
Net loss$(27,181)$(16,110)
Denominator:      
Weighted average shares used in computing basic and diluted net loss per share 6,567,201  2,925,611 
 
      
Basic and diluted net loss per share$(4.14)$(5.51)

Due to losses attributable to PMI's common shareholders for each of the periods below, the following potentially dilutive shares are excluded from the diluted net loss per share calculation because they were anti-dilutive under the treasury stock method, in accordance with ASC Topic 260:

 Years Ended December 31, 
 2013 2012 
Excluded securities:(shares) (shares) 
Convertible preferred stock issued and outstanding 27,274,068  6,195,813 
Stock options issued and outstanding 938,585  1,173,817 
Unvested stock options exercised 6,499,463  - 
Warrants  issued and outstanding 218,810  260,987 
Total common stock equivalents excluded from diluted net loss per common share computation 34,930,926  7,630,617 

9.      Stockholders’ Equity

Preferred Stock

Under PMI's amended and restated certificate of incorporation, preferred stock is issuable in series, and the board of directors is authorized to determine the rights, preferences, and terms of each series.
In January 2013, PMI issued and sold to investors 13,868,152 shares of new Series A (“new Series A”) preferred stock in a private placement at a purchase price of $1.44 per share for approximately $19,844, net of issuance costs. In connection with that sale, PMI issued 5,117,182 shares at par value $.01 per share, of Series A-1 (“Series A-1”) convertible preferred stockdisbursed to the holders of shares of PMI’s preferred stock that was outstanding immediately prior to the sale (“Old Preferred Shares”) in consideration for such stockholders participating in the sale. In connection with the new Series A sale, Old Preferred Shares were converted into shares of PMI common stock at a ratio of 1:1 if the holder of the Old Preferred Shares participated in the new Series A sale or at a 10:1 ratio if the holder of the Old Preferred Shares did not so participate. In addition, each such participating holder received a share of PMI’s new Series A-1 preferred stock for every dollar of liquidation preference associated with an Old Preferred Share held by such holder. Each share of Series A-1 preferred stock has a liquidation preference of $1.00 and converts into common stock at a ratio of 1,000,000:1.investor.

In September 2013, PMI issued and sold 8,288,734 shares of new Series B (“new Series B”) preferred stock in a private placement at a purchase price of $3.02 per share for approximately $24,880, net of issuance costs.

Convertible Preferred Stock Par Value  
Authorized,
Issued and
Outstanding
shares as of
December 31,
2013
  
Balance
December
31, 2013
  
Liquidation
Preference
 
New Series A  0.010   13,868,152   139  $20,000 
Series A-1  0.010   5,117,182   51   51,172 
New Series B  0.010   8,288,734   83   25,000 
       27,274,068  $273  $96,172 
The number of shares issued and outstanding reflect a 10-for-1 reverse stock split effected by the Company on October 29, 2013.
Dividends

Dividends on shares of the new Series A and new Series B preferred stock are payable only when, as, and if declared by the board of directors. No dividends will be paid with respect to the common stock until any declared dividends on the new Series A preferred stock and new Series B preferred stock have been paid or set aside for payment to the new Series A preferred stockholders and the new Series B preferred stockholders. After payment of any such dividends, any additional dividends or distributions will be distributed among all holders of common stock and preferred stock in proportion to the number of shares of common stock that would be held by each such holder if all shares of preferred stock were converted to common stock at the then effective conversion rate. To date, no dividends have been declared on any of PMI’s preferred stock or common stock, and there are no dividends in arrears at December 31, 2013.

The holders of Series D, Series E and Series F preferred stock were entitled to receive an annual dividend per share in an amount equal to 8% times the liquidation preference for such share, payable in preference and priority to any declaration or payment of any distribution on common stock in such calendar year. The right to receive dividends on shares of Series D, Series E and Series F preferred stock was cumulative from and after the date of issuance of such shares and were payable only when, as, and if declared by the board of directors. Holders of Series E-1 preferred stock were not entitled to receive dividends in preference and priority to, or on a pari passu basis with, the other preferred stock or the common stock. Dividends on shares of Series E-1 preferred stock were payable only when, as, and if declared by the board of directors. All shares of PMI’s Series D, E, E-1 and F preferred stock were converted to common stock in connection with the January 2013 sale of PMI’s new Series A preferred stock and A-1 preferred stock.

Conversion

Under the terms of PMI’s amended and restated certificate of incorporation, the holders of preferred stock have the right to convert such preferred stock into common stock at any time. In addition, all preferred stock automatically converts into common stock (i) immediately prior to the closing of an IPO that values PMI at least at $200,000 and that results in aggregate proceeds to PMI of at least $40,000 or (ii) upon a written request from the holders of at least 60% of the voting power of the outstanding preferred stock (on an as-converted basis) including at least 14% of the voting power of the outstanding Series A-1 preferred stock. In addition, if a holder of the new Series A preferred stock has converted any of the new Series A preferred stock, then all of such holder’s shares of Series A-1 preferred stock also will be converted upon a liquidation event. In lieu of any fractional shares of common stock to which a holder would otherwise be entitled, PMI shall pay such holder cash in an amount equal to the fair market value of such fractional shares, as determined by PMI’s board of directors. At present, the new Series A preferred stock and new Series B preferred stock converts into PMI common stock at a 1:1 ratio while the Series A-1 preferred stock converts into PMI common stock at a 1,000,000:1 ratio.

Liquidation Rights

PMI’s convertible preferred stock has been classified as temporary equity on the Consolidated Balance Sheets. The preferred stock is not redeemable; however, upon in the event of a voluntary or involuntary liquidation, dissolution, change in control or winding up of PMI, holders of the convertible preferred stock may have the right to receive its liquidation preference under the terms of PMI’s certificate of incorporation.
Each holder of newNew Series E convertible preferred stock is entitled to receive prior and in preference to any distribution of proceeds from a liquidation event to the holders of New Series A, New Series B, New Series C, New Series D and Series A-1 preferred stock or common stock, an amount per share for each share of New Series E convertible preferred stock equal to the sum of the liquidation preference specified for such share and newall declared but unpaid dividends, if any, on such share
After the payment or setting aside for payment to the holders of New Series E convertible preferred stock, each holder of New Series A, New Series B, New Series C and New Series D convertible preferred stock is entitled to receive, on a pari passu basis, prior and in preference to any distribution of proceeds from a liquidation event to the holders of Series A-1 preferred stock or common stock, an amount per share for each share of newNew Series A, New Series B, New Series C and New Series D convertible preferred stock equal to the sum of the liquidation preference specified for such share and newall declared but unpaid dividends, if any, on such share.
After the payment or setting aside for payment to the holders of New Series A, New Series B, New Series C and New Series D convertible preferred stock, the holders of Series A-1 convertible preferred stock are entitled to receive, prior and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share of Series A-1 convertible preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share. After the payment or setting aside for payment to the holders of newNew Series A, preferred stock and newNew Series B, preferred stock, the holders ofNew Series A-1 preferred stock are entitled to receive, priorC and in preference to any distribution of proceeds to the holders of common stock an amount per share for each such share ofNew Series A-1 preferred stock equal to the sum of the liquidation preference specified for such share and all declared but unpaid dividends, if any, on such share. After the payment or setting aside for payment to the holders of new Series A preferred stock, new Series BD convertible preferred stock and Series A-1 preferred stock, the entire remaining proceeds legally available for distribution will be distributed pro rata to the holders of newNew Series A preferred stock and common stock in proportion to the number of shares of common stock held by them assuming the newNew Series A preferred stock has been converted into shares of common stock at the then effective conversion rate, provided that the maximum aggregate amount per share of newNew Series A convertible preferred stock which the holders of newNew Series A convertible preferred stock shall be entitled to receive is three times the original issue price for the newNew Series A convertible preferred stock.
At present, the liquidation preferences are equal to $1.44215155$0.29 per share for the newNew Series A convertible preferred stock, $10.00$2.00 per share for the Series A-1 convertible preferred stock, and $3.01613647$0.60 per share for the newNew Series B convertible preferred stock, $2.87 per share for the New Series C convertible preferred stock, $6.91 for the New Series D convertible preferred stock and $1.48 for the New Series E convertible preferred stock.

Voting

Each holder of shares of convertible preferred stock shall beis entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted and shall havehas voting rights and powers equal to the voting rights and powers of the common stock. The holders of convertible preferred stock and the holders of common stock shall vote together as a single class (except with respect to certain matters that require separate votes or as required by law), and shall beare entitled to notice of any stockholders’ meeting in accordance with the bylaws of PMI.
Convertible Preferred Stock Warrant Liability
In connection with the Settlement and Release Agreement (as described in Note 17) that Prosper signed on November 17, 2016, PMI issued warrants to purchase 20,267,135 shares of PMI's New Series E convertible redeemable preferred stock at $0.01 per share. The warrants expire ten years from the date of issuance. For the year ended December 31, 2016, Prosper


recognized expense from the fair value measurement of the warrants of $21.7 million, of which $7 thousand was from the remeasurement of the fair value of the warrants. The expense is recorded through other expenses in the statement of operations.
To determine the fair value of the New Series Convertible Preferred Stock Warrants, the Company first determined the value of a share of a New Series E convertible redeemable preferred stock. To determine the fair value of the convertible preferred stock, the Company first derived the business enterprise value (“BEV”) of the Company using valuation methods, including a combination of methods, as deemed appropriate under the circumstances applicable at the valuation date. Once the Company determined an estimated BEV, the probability weighted expected return method (“PWERM”) was used to allocate the BEV to the various classes of the Company’s equity, including the Company’s preferred stock. The concluded per share value for the New Series E convertible redeemable preferred stock warrants utilized the Black-Scholes option pricing model.
As of December 31, 2016, the Company determined the fair value of the outstanding convertible preferred stock warrants utilizing the following assumptions:
F-19
As of December 31, 2016
Volatility40.0%
Risk-free interest rate2.45%
Remaining contractual term (in years)9.96
Dividend yield0%
The above assumptions were determined as follows: 
TableVolatility: The volatility is derived from historical volatilities of Contentsseveral unrelated publicly listed peer companies over a period approximately equal to the term of the warrant because the Company has limited information on the volatility of the preferred stock since there is currently no trading history. When making the selections of industry peer companies to be used in the volatility calculation, the Company considered the size, operational, and economic similarities to the Company’s principal business operations.
Risk-Free Interest Rate: The risk-free interest rate is based on the U.S. Treasury yield in effect as of December 31, 2016, and for zero coupon U.S. Treasury notes with maturities approximately equal to the term of the warrant. 
Remaining Contractual Term: The remaining contractual term represents the time from the date of the valuation to the expiration of the warrant. 
Dividend Yield: The expected dividend assumption is based on the Company’s current expectations about the Company’s anticipated dividend policy.
Common Stock
PMI, through its amended and restated certificate of incorporation, is the sole issuer of common stock and related options, RSUs and warrants. On October 29, 2013,May 15, 2014, PMI amended and restated its certificate of incorporation to effect a 10-for-1 reverse stock split.an increase in the number of authorized shares of stock. The total number of shares of stock which PMI has the authority to issue is 68,761,533,555,610,528, consisting of 41,487,465338,222,425 shares of common stock, $0.01 par value per share, and 27,274,068217,388,425 shares of preferred stock, $0.01 par value per share, 13,868,15268,558,220 of which are designated as newNew Series A preferred stock, 5,117,18224,760,915 of which are designated as Series A-1 preferred stock, and 8,288,73435,775,880 of which are designated newNew Series B preferred stock, 24,404,770 of which are designated as Series C preferred stock, 23,888,640 of which are designated New Series D preferred stock, and 40,000,000 of which are designated New Series E preferred stock. As of December 31, 2016, 70,843,044 shares of common stock were issued and 69,907,109 shares of common stock were outstanding. As of December 31, 2015, 70,367,425 shares of common stock were issued and 69,431,490 shares of common stock were outstanding. Each holder of common stock is entitled to one vote for each share of common stock held.  
During 2015, PMI repurchased 4,225,490 shares of common stock from certain employees at a price equal to 6.91 per share for an aggregate purchase price of $29.2 million. As the purchase price exceeded the fair value of common stock

Common Stock Issued
at the time of repurchase, Prosper recognized compensation costs of $6.2 million of which $0.33 million is recorded in Origination and Servicing, $0.07 million in Sales and Marketing and $5.7 million in General and Administrative on the Consolidated Statements of Operations. As part of the transactions, PMI repurchased 3,607,095 shares for Services

Nonemployees

In August 2013, PMI granted an immediately vested option to purchase 47,601 common shares to a nonemployee for services.

PMI did not grant any immediately vested common shares to nonemployees for services during the year ended December 31, 2012.

total of $24.9 million from Prosper’s executive officers.
Common Stock Issued upon Exercise of Stock Options

ForDuring the yearsyear ended December 31, 20132016 and 2012,2015, PMI issued 7,327,959466,300 and 13,3883,211,935 shares of common stock, respectively, upon the exercise of options for cash proceeds of $864$0.31 million and $19,$0.88 million, respectively, of which 6,499,463 and zero76,045 were unvested respectively
Forin 2015. Certain options are eligible for exercise prior to vesting. These unvested options may be exercised for restricted shares of common stock that have the years endedsame vesting schedule as the options. Prosper records a liability for the exercise price paid upon the exercise of unvested options, which is reclassified to common stock and additional paid-in capital as the shares vest. Should the holder’s employment be terminated, the unvested restricted shares are subject to repurchase by PMI at an amount equal to the exercise price paid for such shares. At December 31, 20132016 and 2012, PMI repurchased 100,5092015, there were 1,126,210 and zero9,806,170 shares respectively of restricted stock for approximately $41outstanding that remain unvested and zero, respectively, upon terminationsubject to PMI’s right of employment of various employees.repurchase.

The number of shares reflects a 10-for-1 reverse stock split effected by PMI on October 29, 2013.

Common Stock Issued upon Exercise of Warrants

For the yearsyear ended December 31, 20132016 and 20122015, PMI issued 82056,480 and zero207,065 shares of common stock upon the exercise of warrants, respectively for $0.01$0.38 per share.share and $0.61 per share respectively.

14.Stock-based Compensation
The number of shares reflects a 10-for-1 reverse stock split effected by the Company on October 29, 2013.

10.PMI grants equity awards primarily through its Amended and Restated 2005 Stock Option Plan (the “2005 Plan”), which was approved as amended and Compensation
restated by its stockholders on December 1, 2010; and its 2015 Equity Incentive Plan, which was approved by its stockholders on April 7, 2015 and subsequently amended by an Amendment No. 1 and Amendment No. 2, which were approved by PMI's stockholders on February 15, 2016 and May 31, 2016, respectively (as amended, the "2015 Plan"). In March 2015, the 2005 Plan expired, except that any awards granted under the 2005 Plan prior to its expiration remain in effect pursuant to their terms. As of December 31, 2016, under the 2015 Plan, options to purchase up to 50,458,108 shares of PMI's common stock options are reserved and may be granted to employees, at an exercise price not less than 100%directors, and consultants by PMI’s Board of Directors and stockholders to promote the fair valuesuccess of PMI’s common stock on the date of grant. Non-statutory stock options are granted to consultants and directors at an exercise price not less than 85% of the fair value of PMI’s common stock on the date of grant. If options are granted to stockholders who hold 10% or more of PMI’s common stock on the option grant date, then the exercise price shall not be less than 110% of the fair value of PMI’s common stock on the date of grant. The fair value is based on a good faith estimate by the board of directors at the time of each grant. As there is no active trading market for these options, such estimate may ultimately differ from valuations completed by an independent party. The optionsProsper’s business. Options generally vest over four25% one year from the vesting commencement date and 1/48th per month thereafter or vest 50% two years which isfrom the same asvesting commencement date and 1/48 per month thereafter or vest 1/36th per month from the performance period.vesting commencement date.  In no event are options exercisable more than ten years after the date of grant.

In 2005, PMI’s stockholders approved the adoption of the 2005 Plan. On December 1, 2010, PMI’s stockholders approved the adoption of the Amended and Restated 2005 Stock Plan (as amended and restated, the “Plan”). Under the Plan, options to purchase up to 187,946 shares of common stock were reserved and may be granted to employees, directors, and consultants by the board of directors and stockholders to promote the success of PMI’s business. During 2011, the board of directors and stockholders increased the totalThe number of options, under the Plan by an additional 455,087 for a total of 135,396 available for grant. During 2012, the board of directors, either directly or through the compensation committee,restricted stock units and stockholders increased the total number of options under the Plan by an additional 170,000 for a total of 1,523,966, available for grant. During 2013, the board of directors, either directly or through the compensation committee, and stockholders increased the total number of options under the Plan by an additional 11,110,825 for a total of 12,634,791 available for grant.

At December 31, 2013, there were 5,414,052 stock options available for grant under the Plan. The number of sharesamounts per share reflects a 10-for-1 reverse5-for-1 forward stock split effected by PMI on February 16, 2016.
Stock Option Reprice
On May 3, 2016, the CompanyCompensation Committee of the Board of Directors of PMI approved a stock option repricing program, (the “Reprice”) authorizing PMI’s officers to reprice certain outstanding stock options held by employees and directors that have exercise prices above the current fair market value of PMI’s common stock.  The repricing was effected on October 29, 2013.May 16, 2016 for eligible directors and employees located in the United States and on May 19, 2016 for eligible employees located in Israel. Prosper believes the repricing of such stock options will encourage the continued service of valued employees and directors, and motivate such service providers to perform at high levels, both of which are critical to Prosper’s continued success. Prosper expects to incur additional stock based compensation charges as a result of this repricing. The financial statement impact of this repricing is $2.2 million in the period ended December 31, 2016 and $2.0 million (net of forfeitures) that will be recognized over the remaining weighted average vesting period of 2.5 years.
Early Exercised Stock Options
With the approval of its Board of Directors, PMI allows certain employees and directors to exercise stock options granted under the 2005 Plan prior to vesting. The unvested shares are subject to a repurchase right held by PMI at the original exercise price. Early exercises of options are not deemed to be substantive exercises for accounting purposes and therefore, amounts received for early exercises are initially recorded in repurchase liability for unvested restricted stock awards which is included in


Other Liabilities on the Consolidated Balance Sheets. Such amounts are reclassified to common stock and additional paid-in capital as the underlying shares vest. The activity of options that were early exercised under the 2005 Plan follow for the years below:
 
Early exercised
options, unvested
 
Weighted average
exercise price
 
Weighted Average
Contractual Term
(in years)
Balance as of January 1, 20169,806,170
 0.05
  
Repurchase of restricted stock(673,750) 0.12
  
Restricted stock vested(8,006,210) 0.03
  
Balance as of December 31, 20161,126,210
 0.11
 0.42
Options expected to vest1,086,592
 $0.11
 0.42
Additional information regarding the unvested early exercised stock options outstanding as of December 31, 2016 is as follows:
  Options Outstanding
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted –Avg.
Remaining Life
 
Weighted –Avg.
Exercise Price
$0.02 881,295
 0.20 $0.02
0.11 171,855
 1.05 0.11
1.13 73,060
 1.61 1.13
$0.02 - $1.13 1,126,210
 0.42 $0.11
Stock Option Activity
Stock option activity under the 2005 Plan and 2015 Plan is summarized as follows for the years below:

The share amounts and share price reflect
 
Options
Issued and
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted Average
Contractual Term
(in years)
Balance as of January 1, 201640,425,605
 $2.64
  
Options granted19,655,338
 $2.14
  
Options exercised – vested(466,300) $0.65
  
Options forfeited(18,218,924) $2.43
  
Balance as of December 31, 201641,395,719
 $1.48
 8.28
Options vested and expected to vest as of December 31, 201633,019,875
 $1.48
 8.28
Options vested and exercisable at December 31, 201624,589,730
 $1.06
 7.65
For the year ended December 31, 2016, we granted stock options to purchase 19,655,338 shares of common stock at a 10-for-1 reverse stock split effected by the Company on October 29, 2013.

  
Options
Issued
and
Outstanding
  
Weighted-
Average
Exercise
Price
 
  
  
 
Balance as of January 1, 2012  1,208,762  $2.08 
Options granted (weighted average fair value of $1.05)  288,796   1.70 
Options exercised - vested  (13,389)  1.42 
Options exercised - nonvested  -   - 
Options canceled  (310,353)  1.90 
Balance as of December 31, 2012  1,173,816  $2.03 
 
        
Balance as of January 1, 2013  1,173,816  $2.03 
Options granted (weighted average fair value of $0. 07)  7,912,933   0.10 
Options exercised - vested  (828,496)  0.20 
Options exercised - nonvested  (6,499,463)  0.10 
Options canceled  (820,205)  1.77 
Balance as of December 31, 2013  938,585  $1.39 
 
        
Options outstanding and exercisable at December 31, 2013  575,258  $1.87 

Theweighted average grant date fair value of stock option awards for the years 2013 and 2012 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 Years Ended December 31, 
 2013 2012 
Volatility of common stock 73.3% 73.3%
Risk-free interest rate 1.90% 1.3%
Expected life*5.8 years 4.6 years 
Dividend yield 0% 0%
Weighted-average fair value of grants$0.07 $0.10 
$2.04 per share.

* For nonemployee stock option awards, the expected life is the contractual term of the award, which is generally ten years.

The Black-Scholes model requires the input of highly subjective assumptions, including the expected stock price volatility. Because PMI's equity awards have characteristics significantly different from those of traded options, the changes in the subjective input assumptions can materially affect the fair value estimate.
Other Information Regarding Stock Options

Additional information regarding common stock options outstanding as of December 31, 20132016 is as follows:

   Options Outstanding  Options Vested and Exercisable 
Exercise
Prices
  
Number
Outstanding
  
Weighted
Avg.
Remaining
Life
  
Weighted Avg.
Exercise Price
  
Intrinsic
Value
  
Number
Exercisable
  
Weighted
Avg.
Exercise
Price
  
Intrinsic
Value
 
$0.10   288,689   9.62  $0.10  $-   57,721  $0.10  $- 
 1.20   171,181   7.71   1.20   –   126,007   1.20   – 
 1.70   144,791   8.37   1.70   –   64,934   1.70   – 
 2.00   300,074   6.56   2.00   –   292,746   2.00   – 
 2.50   1,500   1.55   2.50   –   1,500   2.50   – 
 5.00   11,000   2.67   5.00   –   11,000   5.00   – 
 5.60   18,250   5.71   5.60   –   18,250   5.60   – 
 19.40   3,100   5.04   19.40   –   3,100   19.40   – 
    ��938,585   7.91  $1.39  $–   575,258  $1.36  $– 
  Options Outstanding Options Vested and Exercisable
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted –
Avg.
Remaining
Life
 
Weighted –
Avg.
Exercise
Price
 
Number
Vested
 
Weighted -
Avg.
Exercise
Price
0.02 - $0.99 12,236,805
 6.88 $0.12
 12,236,805
 $0.12
1.00 - 1.99 2,788,790
 7.61 1.13
 1,987,935
 1.13
2.00 - 3.62 26,370,124
 9.00 2.14
 10,364,990
 2.14
0.02 - 3.62 41,395,719
 8.28 $1.48
 24,589,730
 $1.06
The fair value of options granted to employees is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires Prosper to make assumptions and judgments about the variables used in the calculation, including the fair value of PMI’s common stock, the expected term (the period of time that the options granted are expected to be outstanding), the volatility of PMI’s common stock, a risk-free interest rate, and expected dividends. Given the absence of a publicly traded market, Prosper considered numerous objective and subjective factors to determine the fair value of PMI’s common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous valuations of common stock performed by unrelated third-party specialists; (ii) the prices for PMI’s preferred stock sold to outside investors; (iii) the rights, preferences and privileges of PMI’s preferred stock relative to PMI’s common stock; (iv) the lack of marketability of PMI’s common stock; (v) developments in the business; (vi) secondary transactions of PMI’s common and preferred shares and (vii) the likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of Prosper, given prevailing market conditions. As PMI’s stock is not publically traded volatility for stock options is based on an average of the historical volatilities of the common stock of several entities with characteristics similar to those of Prosper. The expected term assumptions were determined based on the vesting terms, exercise terms and contractual lives of the options using the simplified method. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Prosper uses an expected dividend yield of zero as it does not anticipate paying any dividends in the foreseeable future.
Prosper also estimates forfeitures of unvested stock options. Expected forfeitures are based on Prosper’s historical experience.  To the extent actual forfeitures differ from the estimates, the difference will be recorded as a cumulative adjustment in the period estimates are revised. No compensation cost is recorded for stock options that do not vest.
The fair value of PMI’s stock option awards for the year ended December 31, 2016, 2015 and 2014 was estimated at the date of grant using the Black-Scholes model with the following average assumptions:
 Year ended December 31,
 2016 2015 2014
Volatility of common stock50.88% 55.69% 68.28%
Risk-free interest rate1.29% 1.74% 1.79%
Expected life5.8 years
 6.0 years
 5.7 years
Dividend yield—% —% —%
 PMI did not grant any performance-based options in 2015 or 2016. Under the 2005 Stock Plan certain executive officers of PMI were granted performance-based stock options during 2014.  The vesting of these performance-based stock options was contingent upon the achievement of certain revenue targets or target ratios of marketing expenditures to revenues for the year ended December 31, 2014.   
PMI granted 10,164,480 performance-based stock options with an exercise price of $0.11 per share during 2014. The contractual term of these options is 10 years. Since the performance targets were achieved, 9,624,480 performance-based stock options became fully vested and 540,000 performance-based stock options were forfeited on the termination of


employment. The numberaggregate expense recognized during 2014 related to these performance-based stock options was $587 thousand.
The fair value of the performance-based stock options reflectswas estimated on the date of grant using the Black-Scholes option valuation model. Prosper used the following assumptions in measuring the fair value of these performance-based stock options: a 10-for-1 reverse66% rate for expected volatility, 0% rate for expected dividends, 5.23 years for the expected term and a 1.66% risk-free rate.  
Restricted Stock Unit Activity
During the year ended December 31, 2015, PMI began granting restricted stock split effected byunits (“RSUs”) to certain employees that are subject to three-year vesting terms or a four year vesting terms and the Company on October 29, 2013.
occurrence of a liquidity event.
The numberaggregate fair value of options outstanding, vestedthe RSUs granted was $7.8 million. The following table summarizes the activities for PMI’s RSUs during 2016:
 Number of Shares Weighted-Average Grant Date Fair Value
Unvested at January 1, 20161,835,510
 5.52
Granted3,818,225
 2.07
Vested(444,553) 5.52
Forfeited(3,214,023) 3.45
Unvested - December 31, 20161,995,159
 2.16
The following table presents the amount of stock-based compensation related to stock-based awards granted to employees recognized in Prosper’s consolidated statements of operations during the periods presented (in thousands):
 December 31,
 2016 2015 2014
Origination and Servicing$2,004
 $1,231
 $104
Sales and Marketing2,914
 2,561
 767
General and Administrative14,824
 9,219
 1,150
Restructuring45
 —
 —
Total stock based compensation$19,787
 $13,011
 $2,021
During the year ended December 31, 2016, 2015 and expected to vest2014, Prosper capitalized $718 thousand, $623 thousand and $21 thousand, respectively, of stock-based compensation as internal use software and website development costs. As of December 31, 2013 was 777,148 and2016, the weighted-average remaining contractual life was 10.86 years.

The intrinsic value is calculated as the difference between the value of PMI 's common stock at December 31, 2013, which was $0.01 per share, and the exercise price of the options.

No compensation expense is recognized for unvested shares that are forfeited upon termination of service, and theunamortized stock-based compensation expense forrelated to Prosper employees’ unvested stock-based awards was approximately $28.8 million, which will be recognized over the yearsremaining weighted-average vesting period of approximately 2.3 years.
15.     Restructuring
On May 3, 2016, Prosper adopted a strategic restructuring of its business. This restructuring is intended to streamline our operations and support future growth efforts. Under this restructuring, Prosper closed its Salt Lake City, Utah location.  As a result of this restructuring, Prosper terminated 167 employees across all locations.  In December 2016, Prosper shut down its Tel Aviv location, resulting in the termination of 31 employees. In connection with the restructuring, Prosper has recognized employee severance and benefits charges of approximately $7.3 million during the year ended December 31, 2013 and 2012 reflect2016, which were included in “Restructuring Charges” within the expensesconsolidated statements of operations.
In addition to the employment costs associated with the restructuring, Prosper is also engaged in marketing for sublease, space in our existing office space that PMI expectsis no longer needed due to recognize after the consideration of estimated forfeitures.reduction in headcount. In total, the losses incurred

11.    Income Taxes
on the leases in San Francisco, Salt Lake City, Delaware, Tel Aviv and Phoenix totaled $8.7 million which has been included in “Restructuring Charges” within the consolidated statement of operations. Prosper wrote off $0.8 million in property plant and equipment related to these locations and incurred $0.2 million of other restructuring charges. Other than accretion and changes in sub lease loss estimates, Prosper does not expect any additional restructuring charges related to this restructuring.
The following table summarizes the activities related to Prosper's restructuring plan (in thousands):
 Severance Related Facilities Related Total
Balance January 1, 2016$—
 $—
 $—
   Adjustments to expense7,256
 8,735
 15,991
   Transfer from deferred rent—
 764
 764
   Less: Cash paid(6,659) (3,447) (10,106)
Balance December 31, 2016$597
 $6,052
 $6,649

PMI did not have any current or deferred federal or state
16.Income Taxes
The components of income tax expense for the years ended December 31, 2013 and 2012.  are as follows (in thousands):
 Year Ended December 31,
 2016 2015 2014
Current:     
Federal$—
 $—
 $—
State—
 —
 —
Foreign124
 (5) —
Total Current Income Tax (Benefit)124
 (5) —
Deferred: 
  
  
Federal394
 320
 —
State28
 25
 —
Foreign

 —
 —
Total Deferred Income Tax422
 345
 —
Total Income Tax$546
 $340
 $—


The income tax expense (benefit) differed from the amount computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following:

 Years Ended December 31, Year Ended December 31,
 2013  2012 2016 2015 2014
Federal tax at statutory rate  34%  34%34 % 34 % 34 %
State tax at statutory rate (net of federal benefit)  2%  2%7 % 12 % 1 %
Change to Uncertain Tax Position— % 10 % — %
Permanent Items(1)% — % (11)%
Incentive Stock Options(2)% (9)% (9)%
Acquisition Related Costs— % (3)% — %
Change in valuation allowance  (38)%  (36)%(37)% (46)% (25)%
Credits and Reserves— % — % 9 %
Other  2%  0%(1)% 1 % 1 %
  0%  0%— % (1)% — %
Temporary items that give rise to significant portions of deferred tax assets and liabilities (tax-effected) at December 31, 20132016 and 20122015 are as follows:follows (in thousands):

 December 31, 
 2013  2012 
 
  
 December 31,
Net operating loss carryforwards $39,872  $29,394 
2016 2015
Net operating loss carry forwards$85,759
 $44,632
Research & other credits  660   527 626
 502
Settlement liability1,230
 2,466
Stock compensation7,300
 3,193
Accrued liabilities4,884
 5,794
Restructuring liability2,424
 —
Other62
 126
Deferred tax assets102,285
 56,713
Fair value of loans(1,045) (1,406)
Net servicing rights(4,895) (5,752)
Fixed assets  (23)  21 (1,226) (721)
Accrued liabilities and other  350   289 
  40,859   30,231 
        
Fair value of loans  (1,051)  (618)
Intangible assets(3,226) (4,246)
Foreign Earnings(270) —
Deferred tax liabilities(10,662) (12,125)
Net deferred tax assets91,623
 44,588
Valuation allowance  (39,808)  (29,613)(92,389) (44,933)
Net deferred tax asset $-  $- 
Net deferred tax liabilities$(766) $(345)

Prosper has determined that its net deferred tax asset did not satisfy the recognition criteria set forth in ASC Topic 740 and, accordingly, established a full valuation allowance against the net deferred tax asset. The valuation allowance as of December 31, 2013,2016, increased by $47.5 million to ($39,808)$92.4 million from ($29,613)$44.9 million in the prior fiscal year, an increase of 34%. The net deferred tax asset of $39,808 at December 31, 2013 consists of a net current deferred tax asset of $188 and a net noncurrent deferred tax asset of $39,620.  The net deferred tax asset of $29,613 at December 31, 2012 consists of a net current deferred tax asset of $116 and a net noncurrent deferred tax asset of $29,497.year. Under ASC 740,Accounting for Income Taxes (“ASC Topic 740”), a valuation allowance must be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The amount of valuation allowance would be based upon management’s best estimate of PMI’sProsper’s ability to realize the net deferred tax assets. A valuation allowance can subsequently be reversedreduced when management believes that the assets are realizable on a more-likely-than-not basis.

PMI has determined that its net deferred tax asset did not satisfy the recognition criteria set forth in ASC 740 and, accordingly, established a valuation allowance for 100 percent of the net deferred tax asset. Realization of the deferred tax assets is dependent upon future earnings, if any, the amount and timing of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance of $39,808 and $29,613 for the years ended December 31, 2013 and 2012, respectively.
The Tax Reform Act of 1986 and similar California legislation imposeInternal Revenue Code imposes substantial restrictions on the utilization of net operating losses and tax credits in the event of an “ownership change” of a corporation. Accordingly, PMI’sProsper’s ability to utilize net operating losses and credit carryforwards may be limited in the future as the result of such an “ownership change.”

PMI has not performed a Section 382 analysis (which subjects the amount of pre-change NOLs and certain other pre-change tax attributes that can be utilized to an annual limitation).  Use of the net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the ownership change provisions of U.S. tax law and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.

PMIProsper files Federal and various state income tax returns. PMIProsper has net operating loss carryforwards for both federal and state income tax purposes of approximately $101,798$233.6 million and $92,109$257.1 million respectively as of December 31, 2013,2016, available to reduce future income subject to income taxes. The federal net operating loss carryforwards will begin to expire in 2025. The state net operating loss carryforwards will begin to expire in 2015.  PMI also2017. Prosper has federal and California research and development tax credits of approximately $445$428 thousand and $466,$450 thousand, respectively. The federal research credits will begin to expire in the year 2025,2034 and the California research credits have no expiration date.  The $674 capital loss incurredProsper also has California enterprise zone credits of $1.1 million that will begin to expire in 2007 for Federal and California has expired in 2012.

As of December 31, 2013, PMI’s federal and state tax returns for the years ended December 31, 2010 and December 31, 2009, respectively, through the current period are open to examination.  In addition, all of the net operating losses and credits that may be used in future years are still subject to adjustment.

2024.
The following table summarizes the Company'sProsper’s activity related to its unrecognized tax benefits:benefits (in thousands):
  December 31,  December 31, 
  2013  2012 
Balance at January 1, 2013 $186  $- 
Increase related to current year tax position  33   - 
Increase related to tax position of prior years  8   186 
Balance at December 31, 2013 $227  $186 
 December 31,
2016		 December 31,
2015
Balance at January 1,$913
 $4,927
Decrease related to current year tax position

 (4,014)
Balance at December 31,$913
 $913

A total of $188None of the unrecognized tax benefits would affect PMI’s effective tax rate.  PMI currently has a full valuation allowance against its U.S. net deferred tax assets which would impact the timing of theProsper’s effective tax rate benefit should any ofif these uncertain tax positions be favorably settled inamounts are recognized due to the future.full valuation allowance. 

PMI'sProsper’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of December 31, 2013, PMI2016, Prosper has not accruedincurred any interest or penalties.

All tax returns will remain open for examination by the federal and most state taxing authorities for 3 years and 4 years, respectively, from the date of utilization of any net operating loss carryforwards or research and development credits.
12.   Commitments
17.Colchis Agreement
Prosper and ContingenciesColchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis.
On November 17, 2016, Prosper and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis has agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment by PMI and an agreement by PMI to issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI’s capitalization on a fully diluted basis as of the date of the issuance of the warrant (the “New Series”) for $.01 per share (the “Equity Payment”). This transaction has been accounted for as a termination of a contract and is included in other expense for $30.7 million.

18.Commitments and Contingencies
In the normal course of its operations, Prosper becomes involved in various legal actions. Prosper maintains provisions it considers to be adequate for such actions. Prosper does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper's financial condition, results of operations or cash flows.
Future Minimum Lease Payments

PMI leases its corporate office and co-location facility underProsper has entered into various non-cancelable operating leases that expire infor certain offices with contractual lease periods expiring between 2022 and 2027. Prosper recognized total rental expenses under operating leases of $6.9 million, $4.1 million and $2.0 million during the years ended December 201431, 2016, 2015 and August 2014, respectively.


Future minimum rental payments under these leases as of December 31, 20132016 are as follows:follows (in thousands):

Year ending December 31: 2013 
2014 $502 
2015  - 
Total future operating lease obligations $502 
2017$7,660
20188,129
20198,538
20208,781
20218,835
Thereafter17,767
Total future operating lease obligations$59,710

Rental expense under premises-operating lease arrangements was $633 and $532The payments in the above table include amounts that have been accrued for as part of the years endedrestructuring liability in Note 15 Restructuring. Restructuring accrual balances related to operating facility leases were $6.1 million at December 31, 2013 and 2012, respectively.2016.

Operating Commitments
PMI amended and restatedProsper has entered into an agreement with WebBank, an FDIC-insured Utah-chartered industrial bank, under which all loansBorrower Loans originated through the platformmarketplace are made by WebBank under its bank charter. The arrangement allowsPursuant to the agreement, the marketing fee that Prosper receives in connection with the origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as a percentage of the principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans to be offered to borrowers at uniform nationwide terms. PMIoriginated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the greater of a monthly minimum fee orfor the year ended December 31, 2017 is $1.7 million. The minimum fee is $1.7 million and $0.9 million in each of the years 2018 and 2019, respectively. Additionally, under the agreement with WebBank, Prosper is required to maintain a fee calculated based on a certain percentageminimum net liquidity of monthly loan origination volume.$15 million at all times during the term of the agreement. Net liquidity is defined as the sum of Cash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2016 the Company was in compliance with the covenant.

Loan Purchase Commitments
PMIProsper has entered into an agreement with WebBank to purchase $18.6 million of Borrower Loans that WebBank originated during the last two business days of the year ended December 31, 2016 and the first business day of the quarter ending March 31, 2017. Prosper will purchase these Borrower Loans within the first three business days of the quarter ending March 31, 2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper and investors that participate in the Whole Loan Channel, Prosper may, in certain circumstances, become obligated to repurchase a third party broker-dealer in whichBorrower Loan from an investor. Generally, these circumstances include the third party agreedoccurrence of verifiable identity theft, the failure to operateproperly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and maintainrepurchase obligation is estimated based on historical experience and the Note Trader Platforminitial fair value is insignificant. Prosper recognizes a liability for the secondary tradingrepurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of Notes.  PMIfederal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is requiredmade.  The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans sold through the Whole Loan channels, which at December 31, 2016 is $3.5 billion. Prosper had accrued $0.6 million and $0.5 million as of December 31, 2016 and 2015 respectively in regard to pay the third party broker-dealer an agreed upon monthly fee which equals the difference between the minimum monthly fee and the transaction fees collected by the third party provider during that month.this obligation.      

Securities Law Compliance
From inception of Prosper through October 16, 2008, PMIProsper sold approximately $178,000$178.0 million of Borrower Loans to lender membersinvestors through the old platform structure, whereby PMIProsper assigned promissory notes directly to lender members. PMIinvestors. Prosper did not register the offer and sale of the promissory notes corresponding to these loansBorrower Loans under the Securities Act or under the registration or qualification provisions of any state securities laws. PMIProsper believes that the question of whether or not the


operation of the platform during this period constituted an offer or sale of “securities” involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the platform during this period were viewed as a securities offering, PMIProsper would have failed to comply with the registration and qualification requirements of federal and state laws and lender members who hold these promissory notes may be entitled to rescission of unpaid principal, plus statutory interest. Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act is one year from the violation, although the statute of limitations period under various state laws may be for a longer period of time.laws.

PMI’s decision to restructure the platform and cease sales of promissory notes offered through the platform effective October 16, 2008 limited this contingent liability to the period covering its activities prior to October 16, 2008.
On April 21, 2009, PMI and the North American Securities Administrators Association (“NASAA”) reached agreement on the terms of a model consent order between PMI and the states in which PMI offered loan notes for sale prior to November 2008. The consent order involves payment by PMI of up to an aggregate of $1,000 in penalties, which have been allocated among the states based on PMI’s promissory note sale transaction volume in each state prior to November 2008. A state that enters into a consent order receives its portion of the $1,000 in exchange for its agreement to terminate, or refrain from initiating, any investigation of PMI’s note sale activities prior to November 2008.  Penalties are paid promptly after a state enters into a consent order. NASAA has recommended that each state enter into a consent order.  However, no state is obliged to do so, and there is no deadline by which a state must make its decision. PMI is not required to pay any portion of the penalty to those states that do not elect to enter into a consent order. If a state does not enter into a consent order, it is free to pursue its own remedies against PMI, subject to any applicable statute of limitations. As of December 31, 2013, PMI has entered into consent orders with 34 states and has paid an aggregate of $466 in penalties to those states.
As of December 31, 2013 and 2012, PMI had accrued approximately $248 and $248, respectively, in connection with the contingent liability associated with the states that have not entered into consent orders, in accordance with ASC Topic 450,  Contingencies. The methodology applied to estimate the accrual was to divide the $1,000 maximum fee pro-rata by state, using PMI’s note sales from inception through November 2008. A weighting was then applied by state to each state that has not entered into a consent order, assigning a likelihood that the penalty will be claimed. In estimating the probability of a claim being made by a state, PMI considered factors such as the standard terms of the consent orders; whether the state ever gave any indication of concern regarding the sale of promissory notes through the platform; the probability of a state electing not to enter into a consent order in order to pursue its own litigation against PMI; whether the penalty is sufficient to compensate a state for the cost of processing the settlement consent order; and finally the impact that current economic conditions have had on state governments. PMI will continue to evaluate this accrual and related assumptions as new information becomes known.
On November 26, 2008, plaintiffs filed a class action lawsuit against PMIProsper and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California. The suit was brought on behalf of all promissory note purchasers on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleged that PMIProsper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit sought class certification, damages and the right of rescission against PMI and the other named defendants, as well as treble damages against PMI and the award of attorneys’ fees, experts’ fees and costs, and pre-judgment and post-judgment interest.

On July 19, 2013 solely to avoid the costs, risks and uncertainties inherent in litigation, and without admitting any liability or wrongdoing, the parties to the class action litigation pending before the Superior Court, enteredagreed to enter into a Stipulation and Agreement of Compromise, Settlement, and Release (the “Settlement”) setting forth an agreementsettlement to settleresolve all claims related thereto.thereto (the “Settlement”). In connection with the Settlement, PMIProsper agreed to pay the plaintiffs, and took the charge on the income statement, an aggregate amount of $10,000, payable according to the following schedule: (i) $2,000 within 10 days$10 million into a settlement fund, split into four annual installments of entry of an$2 million in 2014, $2 million in 2015, $3 million in 2016 and $3 million in 2017. The Settlement received final approval in a final order by the Court granting preliminary approval of the settlement (“Preliminary Approval”); (ii) $2,000 on the one-year anniversary of Preliminary Approval; (iii) $3,000 on the two-year anniversary of Preliminary Approval; and (iv) $3,000 on the three-year anniversary of Preliminary Approval. The settlement is subject to final approvaljudgment entered by the Superior Court. SubjectCourt on April 16, 2014. Pursuant to satisfactionthe final order and judgment, the claims in the class action were dismissed, and at the effective time of the conditions set forth in the Settlement (June 16, 2014), the defendants will behave been released by the plaintiffs from all claims that were or could have been asserted concerning or arising out of the offering of promissory notes on the platform from January 1, 2006 through October 14, 2008.

As a result of the Settlement, PMI recorded the Settlementissues alleged in the condensed consolidated statement of operations and aclass action lawsuit. The reserve for the class action settlement liability of $10,000is $3.0 million in the consolidated balance sheetConsolidated Balance Sheets as of December 31, 2013.2016.

PMI’s insurance carrier with respect to the class action lawsuit, Greenwich Insurance Company (“Greenwich”), denied coverage.  On August 21, 2009, PMI filed suit against Greenwich in the Superior Court of California, County of San Francisco, California.  The lawsuit sought a declaration that PMI was entitled to coverage under its policy with Greenwich for losses arising out of the class action lawsuit as well as damages and the award of attorneys’ fees and pre- and post-judgment interest.

On January 26, 2011, the court issued a final statement of decision finding that Greenwich has a duty to defend the class action lawsuit, and requiring that Greenwich pay PMI's past and future defense costs in the class action suit up to $2,000.  Greenwich subsequently made payments to PMI in the amount of $2,000 to reimburse PMI for the defense costs it had incurred in the class action suit.  On October 22, 2012 Greenwich made an additional payment of $143 to PMI for pre-judgment interest. As a result, Greenwich has now satisfied its obligations with respect to PMI’s defense costs for the class action litigation.

On July 1, 2011, PMI and Greenwich entered into a Stipulated Order of Judgment pursuant to which PMI agreed to dismiss its remaining claims against Greenwich.  On August 12, 2011, Greenwich filed a notice of appeal of the court's decision regarding Greenwich’s duty to defend up to $2,000.

13.    Related Parties

19.Related Parties
Since PMI’sProsper’s inception, it has engaged in various transactions with its directors, executive officers and holders of more than 5%10% of its voting securities, and immediate family members and other affiliates of its directors, executive officers and 5%10% stockholders. Since January 1, 2009, PMI has engaged in financial transactions with an aggregate value of greater than $6,174 with its directors, executive officers and holders of more than 5% of its voting securities and other affiliates of its directors and executive officers. PMIProsper believes that all of the transactions described below were made on terms no less favorable to PMIProsper than could have been obtained from unaffiliated third parties.

PMI'sProsper’s executive officers, directors who are not executive officers and certain affiliates participate on PMI's lending platformProsper’s marketplace by placing bids and purchasing Notes. The aggregate amount of the Notes and Borrower Loans purchased and the income earned by parties deemed to be affiliates and related parties of PMI GroupProsper as of December 31, 20132016 and 20122015 are summarized below:below (in thousands):

Related Party 
Aggregate Amount of
Notes and Borrower
Loans
Purchased
 
Income Earned on
Notes and Borrower
Loans
  
Aggregate Amount of
Notes Purchased
 
Interest Earned on
Notes
2013 2012 2013 2012  2016 2015 2016 2015
Executive officers and management$1,387 $139 $90 $7  $1,065
 $1,361
 $225
 $206
Directors 622  3,996  255  334  508
 244
 34
 9
$2,009 $4,135 $345 $341 
Total $1,573
 $1,605
 $259
 $215

The Notes and Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other lenders. Of the total aggregate amount of Borrower Loans purchased since inception approximately $385 or 6% and $236 or 6% of principal has been charged off through December 31, 2013 and 2012, respectively. PMI has earned approximately $21 and $18 in servicing fee revenue related to these Notes and Borrower Loans for the years ended December 31, 2013 and 2012, respectively.
Related Party Notes balance as of December 31,
  2016 2015
Executive officers and management $1,620
 $1,912
Directors 537
 325
  $2,157
 $2,237

20.Postretirement Benefit Plans
14.    Postretirement Benefit Plans

PMIProsper has a 401(k) plan that covers all employees meeting certain eligibility requirements. The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service.  PMI’sProsper’s contributions to the plan are discretionary. PMIDuring the years ended December 31, 2016, 2015 and 2014, Prosper has not made any contributions to the plan to date.

15.    Subsequent Events

On March 10, 2014, the boards of PMIcontributed $2.6 million, $1.9 million and Prosper Funding, respectively, appointed Aaron Vermut, who previously served as President of PMI and Prosper Funding, to the position of Chief Executive Officer of PMI and Prosper Funding. In connection with Aaron Vermut’s appointment as Chief Executive Officer of PMI and Prosper Funding, Stephen P. Vermut, who previously served as Chief Executive Officer of PMI and Prosper Funding, has been appointed by the boards of PMI and Prosper Funding,$0.7 million, respectively to the role401(k) plan, respectively.
21.Significant Concentrations  
Prosper is dependent on third party funding sources such as banks and investment funds to provide the funds to allow WebBank to originate Borrower Loans that the third party funding sources will later purchase. Of all Borrower Loans


originated in the year ended December 31, 2016, 20%, 16% and 9% were purchased by three different parties. This compares to 37%, 19% and 11% for the year ended December 31, 2015.  Further, a significant portion of Executive Chairmanour business is dependent on funding through the Whole Loan Channel, for which 90% and 95% of PMIBorrower Loans were originated through the Whole Loan Channel in the years ended December 31, 2016 and 2015, respectively.  
Prosper Funding.receives all of its transaction fee revenue from WebBank.  Prosper earns a transaction fee from WebBank for our services in facilitating originations of Borrower Loans issued by WebBank.  The rate of the transaction fee for each individual Borrower Loan is based on the term and credit grade of the Borrower Loan.  No individual borrower or investor accounted for 10% or more of consolidated net revenue for any of the periods presented.    
22.Segments
Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. As such, we have a single reporting and operating segment.
23.Subsequent Events
On February 27, 2017, PFL entered into a Loan Purchase Agreement (the “Purchase Agreement”) with PF LoanCo Funding LLC (the “Beneficiary”) and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee (the “Trustee”) of PF LoanCo Trust (the “Purchaser”). The Purchase Agreement sets forth the terms and conditions pursuant to which PFL may sell eligible consumer loans in an aggregate amount of up to $5.0 billion (including certain loans purchased by an affiliate of the Beneficiary prior to the date of the Purchase Agreement (the “Pre-Purchased Loans”)) to the Purchaser for the benefit of the Beneficiary over a two-year period. Under the Purchase Agreement, PFL will be obligated to (i) offer for purchase minimum monthly volumes of eligible loans to the Purchaser, and (ii) deliver a minimum percentage of the monthly volume of such loans that the Purchaser elects to purchase for the benefit of the Beneficiary, if any (together, the “Volume Requirements”).
In connection with the foregoing appointments,Purchase Agreement, on February 27, 2017, PMI entered into a Warrant Agreement with PF WarrantCo Holdings, LP, an affiliate of the boardsBeneficiary (the “Warrant Holder”), and, for certain limited purposes, New Residential Investment Corp. (the “Warrant Agreement”). Pursuant to the Warrant Agreement, PMI issued to Warrant Holder three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
Warrant Holder’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Purchase Agreement based upon the volume of loans Purchaser elects to purchase (if any) in each month, subject to certain cure rights (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of the Pre-Purchased Loans). Additionally, certain portions of the Series F Warrant may automatically vest for a given month in the event that PFL fails to meet its Volume Requirements under the Purchase Agreement for such month. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI and Prosper Funding, respectively, also appointed Ronald Suberupon the occurrence of certain events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the roletenth anniversary of Presidenttheir date of issuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and certain other issuances by PMI.
Additionally, on February 27, 2017, PMI issued to Pinecone Investments LLC, a warrant (the “Series E Warrant”) to purchase 15,277,006 shares of PMI’s Series E-1 Preferred Stock at an exercise price of $0.01 per share. The Series E Warrant is immediately exercisable, in whole or in part, by paying in cash the full purchase price payable in respect of the number of shares purchased. The Series E Warrant was issued pursuant to the Warrant Agreement, dated December 16, 2016, between PMI and Prosper Funding.  Mr. Suber servedColchis Capital Management, L.P., previously described in PMI’s Current Report on Form 8-K as PMI’s Head of Global Institutional Sales and Prosper Funding’s Vice President prior to his appointment as President.filed with the Commission on December 22, 2016.


F-26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and MemberStockholders of
of Prosper Funding LLC
San Francisco, CA

We have audited the accompanying consolidated balance sheetsheets of Prosper Funding LLC and its subsidiary ("Prosper Funding"(the "Company") as of December 31, 2013,2016 and 2015, and the related consolidated statements of operations, changes in members’member’s equity, and cash flows for the yearyears then ended. Prosper Funding’s management is responsible for theseThese consolidated financial statements.statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
audits.
We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Prosper Funding LLCThe Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Prosper Funding’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prosper Funding LLC and its subsidiary as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Burr Pilger Mayer, Inc.
San Francisco, California
March 31, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholder
of Prosper Funding LLC

We have audited the accompanying balance sheet of Prosper Funding LLC as of December 31, 2012 and the related statements of operations, members' equity and cash flows for the period from February 20, 2012 (inception) to December 31, 2012. These financial statements are the responsibility of Prosper Funding’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Prosper Funding is not required to have, nor were we engaged to perform, an audit of Prosper Funding’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Prosper Funding’sthe Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audit providesaudits provide a reasonable basis for our opinion.

In our opinion, thesuch consolidated financial statements referred to above present fairly, in all material respects, the financial position of Prosper Funding LLC Inc. atand subsidiary as of December 31, 20122016, and 2015, and the results of itstheir operations and itstheir cash flows for the period from February 20, 2012 (inception) to December 31, 2012,years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, Prosper Marketplace, Inc.
DELOITTE & TOUCHE LLP
San Francisco, CA
March 17, 2017

/s/ OUM & Co. LLP
San Francisco, California
March 18, 2013



F-28
Prosper Funding LLC
Consolidated Balance Sheets
(amounts in thousands)

  December 31,  December 31, 
  2013  2012 
Assets 
  
 
Cash and cash equivalents $5,789  $5 
Restricted cash  12,299   - 
Loans held for investment  3,917   - 
Borrower loans receivable at fair value  226,238   - 
Property and equipment, net  1,980   - 
Other assets  14   - 
Total Assets $250,237  $5 
 
        
Liabilities and Member's Equity        
Accounts payable and accrued liabilities $3,712  $- 
Notes at fair value  226,794   - 
Repurchase and indemnification obligation  32   - 
Related party payable  205   - 
Total Liabilities  230,743   - 
 
        
Member's Equity        
Member's equity  16,076   210 
Retained earnings (accumulated deficit)  3,418   (205)
Total Member's Equity  19,494   5 
Total Liabilities and Member's Equity $250,237  $5 

 December 31,
2016		 December 31,
2015
Assets 
  
Cash and Cash Equivalents$6,929
 $15,026
Restricted Cash147,983
 139,937
Short Term Investments1,280
 1,277
Loans Held for Sale at Fair Value624
 32
Borrower Loans Receivable at Fair Value315,627
 297,273
Property and Equipment, Net10,095
 8,419
Servicing Assets12,461
 13,605
Other Assets186
 122
Total Assets$495,185
 $475,691
Liabilities and Member's Equity 
  
Accounts Payable and Accrued Liabilities$2,223
 $2,122
Payable to Related Party1,899
 2,989
Payable to Investors141,625
 135,661
Notes at Fair Value316,236
 297,405
Other Liabilities1,877
 1,209
Total Liabilities463,860
 439,386
Member's Equity 
  
Member's Equity30,704
 —
Retained Earnings621
 36,305
Total Member's Equity31,325
 36,305
Total Liabilities and Member's Equity$495,185
 $475,691
The accompanying notes are an integral part of these consolidated financial statements.

F-29

Prosper Funding LLC
Consolidated Statements of Operations
(amounts in thousands)

  For the Twelve Months Ended December 31, 
  2013  2012 
Revenues 
  
 
Administration fee revenue $7,632  $- 
Interest income on borrower loans  32,862   - 
Interest expense on notes  (30,564)  - 
Total Revenues  9,930   - 
 
        
Cost of Revenues        
Cost of services  (1,270)  - 
Provision for repurchase and indemnification obligation  (83)  - 
Net Revenues  8,577   - 
 
        
Operating Expenses        
Administration fee expense  5,053   - 
Depreciation and amortization  538   - 
Professional services  26   114 
Other operating expenses  242   91 
Total Operating Expenses  5,859   205 
Income (Loss) Before Other Income and Expenses  2,718   (205)
 
        
Other Income and Expenses        
Change in fair value on borrower loans, loans held for investment and notes, net  877   - 
Other income  28   - 
Total Other Income and Expenses, net  905   - 
 
        
Income (Loss) Before Income Taxes $3,623  $(205)
Provision for income taxes  -   - 
Total Net Income (Loss) $3,623  $(205)

 Year ended December 31,
 2016 2015
Revenues   
Operating Revenues   
Administration Fee Revenue – Related Party$36,630
 $57,919
Servicing Fees, Net28,604
 16,218
Gain on Sale of Borrower Loans3,637
 14,151
Other Revenues478
 1,500
Total Operating Revenues69,349
 89,788
Interest Income on Borrower Loans44,649
 41,380
Interest Expense on Notes(41,187) (38,174)
Net Interest Income3,462
 3,206
Change in Fair Value on Borrower Loans, Loans Held for Sale and Notes, Net(372) 59
Total Net Revenues72,439
 93,053
Expenses 
  
Administration Fee – Related Party62,203
 62,786
Servicing5,395
 3,705
General and Administrative1,321
 1,227
Other Expenses, Net30,704
 —
Total  Expenses99,623
 67,718
Total Net Income (Loss)$(27,184) $25,335
The accompanying notes are an integral part of these consolidated financial statements.

F-30

Prosper Funding LLC
Consolidated Statements of Member’s Equity
(amounts in thousands)

 
 
Member’s
Equity
  
Retained
Earnings
(Accumulated
Deficit)
  Total 
Balance as of December 31, 2011 $-  $-  $- 
Capital infusion from parent  210   -   210 
Net loss  -   (205)  (205)
Balance as of December 31, 2012 $210  $(205) $5 
Transfer of assets from PMI  5,865   -   5,865 
Capital infusion from parent  10,001   -   10,001 
Net Income  -   3,623   3,623 
Balance as of December 31, 2013 $16,076  $3,418  $19,494 

 
Member’s
Equity
 
Retained
Earnings
(Accumulated
Deficit)
 Total
Balance as of January 1, 2015$29,619
 $16,672
 $46,291
Capital Infusion from Parent(29,370) (6,130) (35,500)
Transfer of Servicing Rights to Parent(249) —
 (249)
Adjustment to Servicing Rights on Transition to Fair Value—
 428
 428
Net Income—
 25,335
 25,335
Balance as of December 31, 2015$—
 $36,305
 $36,305
Distributions to Parent—
 (8,500) (8,500)
Contributions by Parent30,704
 —
 30,704
Net Income (Loss)—
 (27,184) (27,184)
Balance as of December 31, 2016$30,704
 $621
 $31,325
The accompanying notes are an integral part of these consolidated financial statements.

F-31

Prosper Funding LLC
Consolidated Statements of Cash Flows
(amounts in thousands)

  
For the Twelve Months
Ended December 31,
 
  2013  2012 
Cash flows from operating activities: 
  
 
Net income (loss) $3,623  $(205)
Adjustments to reconcile net income (loss) to net cash used in operating activities:        
Change in fair value of notes  (5,734)  - 
Change in fair value of borrower loans  4,856   - 
Depreciation and amortization  538   - 
Loan loss reserve  (9)  - 
Change in fair value of loans held for investment  1   - 
Changes in operating assets and liabilities:        
Restricted cash  (8,155)  - 
Other assets  (13)  - 
Accounts payable and accrued liabilities  2,933   - 
Net related party payable  205   - 
Net cash used in operating activities  (1,755)  (205)
 
        
Cash flows from investing activities:        
Origination of borrower loans held at fair value  (331,353)  - 
Repayment of borrower loans held at fair value  99,313   - 
Proceeds from sale of borrower loans held at fair value  171,290   - 
Purchases of property and equipment  (1,798)  - 
Repayment of loans held for investment at fair value  143   - 
Origination of loans held for investment at fair value  (14,296)  - 
Proceeds from sale of loans held for investment at fair value  10,410   - 
Net cash used in investing activities  (66,291)  - 
 
        
Cash flows from financing activities:        
Proceeds from issuance of notes held at fair value  159,921   - 
Payment of notes held at fair value  (97,967)  - 
Member’s equity capital infusion from parent  10,001   210 
Net cash included in transfer of assets from PMI  1,875   - 
Net cash provided by financing activities  73,830   210 
 
        
Net increase in cash and cash equivalents  5,784   5 
Cash and cash equivalents at beginning of the period  5   - 
Cash and cash equivalents at end of the period $5,789  $5 
 
        
Supplemental disclosure of cash flow information:        
 
      
Restricted cash  4,144     
Loans held for investment  175     
Borrower loans at fair value  170,343     
Property and equipment, net  721    
Accrued liabilities  (779)    
Notes at fair value  (170,573)    
Loan repurchase and indemnification obligation(41)
Non-cash transfer  3,990     
Cash transferred 1,875     
Total transfer of net non-cash assets from PMI $5,865     

 For the Twelve Months Ended
December 31,
 2016 2015
Cash flows from operating activities: 
  
Net Income (Loss)$(27,184) $25,335
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: 
  
Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes372
 (59)
Other Non-Cash Changes in Borrower Loans, Loans Held for Sale and Notes176
 (57)
Gain on Sale of Borrower Loans(9,634) (14,561)
Change in Fair Value of Servicing Rights10,620
 4,176
Depreciation and Amortization4,083
 3,161
Loss on Contract Termination30,704
 —
Other, Net(128) —
Changes in Operating Assets and Liabilities: 
  
Purchase of Loans Held for Sale at Fair Value(1,979,952) (3,517,467)
Proceeds from Sales and Principal Payments of Loans Held for Sale at Fair Value1,979,352
 3,525,759
Restricted Cash Except for those Related to Investing Activities(5,268) (68,776)
Other Assets(64) (118)
Accounts Payable and Accrued Liabilities101
 1,510
Payable to Investors5,964
 71,852
Net Related Party Receivable/Payable(1,260) 2,880
Other Liabilities954
 539
Net Cash Provided by Operating Activities8,836
 34,174
Cash Flows From Investing Activities: 
  
Purchase of Borrower Loans Held at Fair Value(217,582) (197,436)
Principal Payment of Borrower Loans Held at Fair Value173,710
 151,893
Purchase of Short Term Investments(1,280) (1,277)
Maturities of Short Term Investments1,277
 1,274
Purchases of Property and Equipment(5,589) (9,211)
Changes in Restricted Cash Related to Investing Activities(2,778) 1,942
Net Cash Used in Investing Activities(52,242) (52,815)
Cash Flows from Financing Activities: 
  
Proceeds from Issuance of Notes Held at Fair Value217,767
 197,228
Payments of Notes Held at Fair Value(173,958) (151,838)
Cash Distributions to Parent(8,500) (35,500)
Loan Advances to Parent—
 (10,000)
Loan Repayments from Parent—
 10,000
Net Cash Provided by Financing Activities35,309
 9,890
Net Increase (Decrease) in Cash and Cash Equivalents(8,097) (8,751)
Cash and Cash Equivalents at Beginning of the Year15,026
 23,777
Cash and Cash Equivalents at End of the Year$6,929
 $15,026
Supplemental Disclosure of Cash Flow Information: 
  
Cash Paid for Interest$40,597
 $38,168
Non-Cash Operating Activity - Servicing Rights Fair Value Adjustment—
 428
Non-Cash Investing Activity- Accrual for Property and Equipment, Net1,606
 1,436
Non-Cash Financing Activity, Distribution to Parent$—
 $249
Non-Cash Financing Activity, Contribution by Parent$30,704
 $—
The accompanying notes are an integral part of these consolidated financial statements.


F-32

Prosper Funding LLC
Notes to Consolidated Financial Statements

1.      Organization and Business
1.Organization and Business
Prosper Funding LLC (“Prosper Funding”PFL”) was formed in the state of Delaware in February 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc. (“PMI”).
  Except as the context otherwise requires, as used in these Notes to Consolidated Financial Statements of Prosper Funding LLC, “Prosper Funding,” “we,” “us,” and “our” refers to PFL and its wholly owned subsidiary, Prosper Asset Holdings LLC (“PAH”), a Delaware limited liability company, on a consolidated basis.
PFL was formed by PMI to hold Borrower Loans and issue Notes through the platform.marketplace. Although Prosper Funding is consolidated with PMI for accounting and tax purposes, Prosper Funding has been organized and is operated in a manner that is intended to minimize the likelihood that it would be substantively consolidated with PMI in a bankruptcy proceeding. Prosper Funding’s intention is to minimize the likelihood that its assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy, as well as to minimize the likelihood that Prosper Funding will become subject to bankruptcy proceedings directly. Prosper Funding seeks to achieve this by placing certain restrictions on its activities and implementing certain formal procedures designed to expressly reinforce its status as a distinct corporate entity from PMI. In these notes to financial statements, the unsecured, consumer loans originated through the platform, which are referred to elsewhere in this Annual Report as “PMI Borrower Loans” and “Prosper Funding Borrower Loans”, are referred to collectively as “Borrower Loans”, and the borrower payment dependent notes issued through the platform, which are referred to elsewhere in this Annual Report as “PMI Notes” and “Prosper Funding Notes”, are referred to collectively as “Notes”.
On January 22, 2013, PMI entered into an Asset Transfer Agreement with Prosper Funding pursuant to which PMI transferred substantially all of its remaining assets to Prosper Funding, including (i) all outstanding Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee, (ii) all Borrower Loans held by PMI, (iii) all lender/borrower/group leader registration agreements related to the Notes or the Borrower Loans, and (iv) all documents and information related to the foregoing, effective February 1, 2013.

Prosper Funding commenced operations as of February 1, 2013 when PMI transferred ownership of the platform, including all of the rights related to the operation of the platform, to Prosper Funding. Since February 1, 2013, all Notes issued and sold through the platformmarketplace are issued, sold and serviced by Prosper Funding.PFL. Pursuant to a Loan Account Program Agreement between PMI and WebBank, PMI manages the operation of the platform,marketplace, as agent of WebBank, in connection with the submission of loanBorrower Loan applications by potential borrowers, the makingorigination of related loansBorrower Loans by WebBank and the funding of such loansBorrower Loans by WebBank. Pursuant to an Administration Agreement between Prosper FundingPFL and PMI, PMI manages all other aspects of the platformmarketplace on behalf of PFL. As a result Prosper Funding.Funding earns significant amounts of revenues and incurs significant expenses with a related party, its direct parent company, PMI.

A borrower who wishes to obtain a loan through the marketplace must post a loan listing, or listing, on the marketplace. PFL allocates listings to one of two investor funding channels: (i) the “Note Channel,” which allows investors to commit to purchase Notes from PFL, the payments of which are dependent PFL’s receipt of payments made on the corresponding Borrower Loan; and (ii) the “Whole Loan Channel,” which allows investors to commit to purchase 100% of a Borrower Loan directly from PFL.
All loans requested and obtained through the platformmarketplace are unsecured obligations of individual borrower membersborrowers with a fixed interest rate and loan terms set at three or five years as of December 31, 2013.2016. All loans made through the platformmarketplace are funded by WebBank, an FDIC-insured, Utah chartered industrial bank. After funding a loan, WebBank sells the loan to Prosper Funding,PFL, without recourse to WebBank, in exchange for the principal amount of the loan. WebBank does not have any obligation to purchasers of the Notes.

Prosper Funding’s marketplace is designed to allow investors to invest in Borrower Loans in an open transparent marketplace, with the aim of allowing both investors and borrowers to benefit financially as well as socially. Prosper Funding formedbelieves marketplace lending represents a new model of consumer lending, where individuals and institutions can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional consumer lender.
As of December 31, 2016, Prosper Asset Holdings LLC (“PAH”)Funding’s marketplace was open to investors in November 201330 states and the District of Columbia. Additionally, as a limited liability company withof December 31, 2016 Prosper Funding’s marketplace was open to borrowers in 45 states and the sole equity member being Prosper Funding. PAH was formed to purchase Borrower Loans from Prosper Funding and sellDistrict of Columbia. Currently, the Borrower Loans to third parties.marketplace does not operate internationally.

2.      Significant Accounting Policies

2.Significant Accounting Policies
Basis of Presentation

Prosper Funding’s consolidated financial statements include the accounts of Prosper FundingPFL and its wholly-owned subsidiary PAH. All intercompany balances and transactions between Prosper FundingPFL and PAH have been eliminated in consolidation. Prosper Funding's


Funding’s financial statements have been prepared in accordanceconformity with U.Saccounting principles generally accepted accounting principles (U.S. GAAP)in the United States of America (“U.S. GAAP”).

Use of Estimates

The preparation of Prosper Funding’s consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates, judgments and assumptions include but are not limited to the following: valuation of borrower loans receivableLoans Held for Sale, Borrower Loans and associated member payment dependent notes,Notes, valuation of servicing rights, repurchase and indemnification obligation, and contingent liabilities. Estimates are basedProsper Funding bases its estimates on historical experience from all Borrower Loans, and on various other assumptions that are believedit believes to be reasonable under the circumstances. Actual results could differ from those estimates.

Certain Risks and Concentrations

In the normal course of its business, Prosper Funding encounters two significant types of risk: credit and regulatory.risk. Financial instruments that potentially subject Prosper Funding to significant concentrations of credit risk consist primarily of cash, cash equivalents, borrower loans held and restricted cash. Prosper Funding places cash, cash equivalents and restricted cash with high-quality financial institutions and is exposed to credit risk in the event of default by these institutions to the extent the amount recorded on the balance sheet exceeds federally insured amounts. Prosper Funding also performs periodic evaluations of the relative credit standing of these financial institutions and has not sustainedrecognized any credit losses in earnings from instruments held at these financial institutions.

As a lending marketplace, Prosper Funding believes its customers are highly susceptible to uncertainties and negative trends, real or perceived, in the markets driven by, among other factors, general economic conditions in the United States and abroad. These external economic conditions and resulting trends or uncertainties could adversely impact its customers’ ability or desire to participate on its marketplace as borrowers or investors, and consequently could negatively affect its business and results of operations.
To the extent that Borrower Loan (including Borrower Loans that have been sold) payments are not made, servicing income will be reduced. A group of Notes corresponding to a particular Borrower Loan is wholly dependent on the repayment of such Borrower Loan. As a result, Prosper Funding does not bear the credit risk on such Borrower Loan.
Consolidation of Variable Interest Entities
Prosper FundingThe determination of whether to consolidate a variable interest entity (“VIE”) in which we have a variable interest requires a significant amount of analysis and judgment whether we are the primary beneficiary of a VIE via a controlling financial interest in the VIE. A controlling financial interest in a VIE exists if we have both the power to direct the VIE’s activities that most significantly affect the VIE’s economic performance and a potentially significant economic interest in the VIE. The determination of whether an entity is subjecta VIE considers factors, such as (i) whether the entity’s equity investment at risk is insufficient to various regulatory requirements. The failureallow the entity to appropriately identify and address these regulatory requirements couldfinance its activities without additional subordinated financial support or (ii) when a holder’s equity investment at risk lacks any of the following characteristics of a controlling financial interest: the direct or indirect ability through voting rights or similar rights to make decisions about a legal entity’s activities that have a significant effect on the entity’s success, the obligation to absorb the expected losses of the entity or the right to receive the expected residual returns of the legal entity. 
As a result of the nature of the retained servicing rights on the sale of Borrower Loans, we are a variable interest holder in certain discretionary actions by regulatorsspecial purposes entities that couldpurchase these Borrower Loans.   For all of these entities we either do not have the power to direct the activities that most significantly affect the VIE’s economic performance or we do not have a material effect on Prosper Funding'spotentially significant economic interest in the VIE.   In no case are we the primary beneficiary, therefore, we do not consolidate these entities. .  
Management regularly reviews and reconsiders its previous conclusions regarding the status of an entity as a VIE and whether we are required to consolidate such VIE in the consolidated financial position and results of operations.statements.


Cash and Cash Equivalents

Prosper Funding invests its excess cash primarily inCash includes various unrestricted deposits with highly rated financial institutions. Cash equivalents consist of highly liquid debt instruments of the U.S. government and its agencies. All highly liquid investmentsmarketable securities with statedoriginal maturities of three months or less from dateat the time of purchase are classified as cash equivalents.and consist primarily of money market funds, commercial paper, US treasury securities and US agency securities. Cash equivalents are recorded at cost, which approximates fair value. Such deposits periodically exceed amounts insured by the FDIC. Cash and cash equivalents include various unrestricted deposits with highly rated financial institutions in checking, money market and short-term certificate of deposit accounts.

Restricted Cash

Restricted cash consists primarily of cash deposits and short term certificates of deposit held as collateral as required for loan funding and servicing activities, and cash that investors or Prosper Funding has on the platform that has not yet been invested in Borrower Loans or disbursed to the investor.
Short Term Investments
Short term investments consists of  certificates of deposit with a term greater than three months but less than a year that are held as collateral as required for loan funding and servicing activities.
Fair Value Measurement
Prosper Funding measures the fair value of assets and liabilities in accordance with its fair value hierarchy which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. We apply this framework whenever other standards require (or permit) assets or liabilities to be measured at fair value.
We define fair value in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The price used to measure the fair value is not adjusted for transaction costs. Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.
Under ASC Topic 820, assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:
Level 1 — The valuation is based on quoted prices in active markets for identical instruments.
Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation methodologies for which all significant assumptions are observable in the market.
Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar methodologies, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.
Fair values of assets or liabilities are determined based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation methodologies are utilized, depending on the nature of the financial instrument, including the use of market prices for identical or similar instruments, or discounted cash flow models. When possible, active and observable market data for identical or similar financial instruments are utilized. Alternatively, fair value is determined using assumptions that management believes a market participant would use in pricing the asset or liability.


Financial instruments consist principally of cash and cash equivalents, restricted cash, Borrower Loans, accounts payable and accrued liabilities, and Notes. Servicing assets and liabilities are also subject to fair value measurement within the financial statements of PFL. The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature.
As observable market prices are not available for the Borrower Loans, Loans Held for Sale and Notes, Prosper Funding believes the Borrower Loans, Loans Held for Sale and Notes should be considered Level 3 financial instruments under ASC Topic 820. In a hypothetical transaction as of the measurement date, Prosper Funding believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which Prosper Funding might offer those loans may result in differences between the originated amount of the loans and their fair value as of the transaction date. For Borrower Loans and Loans Held for Sale, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, default rates and discount rates based on the perceived credit risk within each credit grade.
The obligation to pay principal and interest on any Note is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of our servicing fee which is generally 1.0% of the outstanding balance. The fair value election for Notes and Borrower Loans allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to lenders that are dependent upon borrower payments. As such, the fair value of a group of Notes is approximately equal to the fair value of the corresponding Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders.  As a result, the valuation of the Notes uses the same methodology and assumptions as the Borrower Loans, except that the Notes incorporate the 1.0% servicing fee and any differences in timing of payments. Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations. The effective interest rate associated with a group of Notes is less than the interest rate earned on the corresponding Borrower Loan due to the 1.0% servicing fee. See Note 4 for a roll-forward and further discussion of the significant assumptions used to value Borrower Loans and Notes.
Borrower Loans and Notes

Through the Note Channel, Prosper Funding purchases Borrower Loans from WebBank then issues Notes and holds the Borrower Loans until maturity. The obligation to repay a series of Notes issued through the Note Channel is dependent upon the repayment of the associated Borrower Loan. Borrower Loans originated and Notes issued through the Note Channel are carried on Prosper Funding’s consolidated balance sheets as assets and liabilities, respectively. Prosper Funding has adopted the provisions of ASC Topic 825,Financial Instrument.Instruments (“ASC Topic 825”). ASC Topic 825 permits companies to choose to measure certain financial instruments and certain other items at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which the fair value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows both the Borrower Loans and Notes to be valued using the same methodology. The fair value election, with respect to an item, may not be revoked once an election is made. In applying the provisions of ASC Topic 825, Prosper Funding records assets and liabilities measured using the fair value option in a way that separates these reported fair values from the carrying values of similar assets and liabilities measured with a different measurement attribute.  Prosper Funding does not record a specific allowance account related to the Borrower Loans and Notes in which it has elected the fair value option, but rather estimateestimates the fair value of thesuch Borrower Loans and Notes using discounted cash flow methodologies adjusted for Prosper Funding’s historicalthe expected payment, loss, recovery and recoverydefault rates.   An accountThe Borrower Loans are not derecognized when a corresponding Note is considered to be a loss, or charged-off, when it reaches more than 120 days past due.issued as Prosper Funding has reportedmaintains the aggregateability to sell the Borrower Loans without the approval of the holders in the corresponding Notes.
Loan Servicing Assets and Liabilities
Prosper Funding records servicing assets and liabilities at their estimated fair values for servicing rights retained when Prosper Funding sells Borrower Loans to unrelated third-party buyers. The change in fair value of servicing assets and liabilities is recognized in “Servicing Fees” revenue. The gain or loss on a loan sale is recorded in “Gain on Sale of Borrower Loans” while the fair value of the Borrower Loans and Notes as separate line itemsservicing rights, which is based on the degree to which the contractual loan servicing fee is above or below an estimated market loan servicing rate is recorded in theservicing assets or liabilities. Servicing assets and liabilities sectionsare recorded in “Servicing Assets” and “Other Liabilities,” respectively, on the consolidated balance sheets.
On January 1, 2015, Prosper elected to adopt the fair value method to measure the servicing assets and liabilities for all classes of servicing assets and liabilities subsequent to initial recognition.  ASC Subtopic 860-50, Servicing Assets and Liabilities, allows the adoption of the accompanying balance sheetsfair value method at the beginning of any fiscal year.  The adoption of the fair value method for a particular class is irrevocable.  Prior to January 1, 2015, Prosper measured the servicing assets and liabilities using the methods described in ASC Topic 820, Fair Value Measurements and Disclosures—See Fair Value Measurement.

Member Loans Sold Directly to Third Party Purchasers
For Borrower Loans sold to unrelated third party purchasers on a servicing retained basis, a gain or loss is recorded on the sale date. In order to calculate the gain or loss, Prosper Funding first determines whether the terms of the servicing arrangement with the purchaser resultsamortized cost method. This change resulted in a $428 thousand decrease to accumulated deficit, a $399 thousand increase in net servicing asset (i.e., when contractual/expected servicing revenues adequately compensate Prosper Funding) orassets and a $29 thousand decrease in net servicing liability (i.e., when contractual/expected servicing revenues do not adequately compensate Prosper Funding). When contractual/expected servicing revenues do not adequately compensate Prosper Funding, a portion of the gross proceeds of the Borrower Loans sold on a servicing retained basis are allocated to the recording of a net servicing liability. Conversely, when contractual/expected servicing revenues provide more than adequate compensation to Prosper Funding, the excess servicing compensation is allocated to the gross proceeds of the Borrower Loans sold and results in the recording of a net servicing asset.
F-34
liabilities.
Prosper Funding estimatesuses a discounted cash flow model to estimate the fair value of the loan servicing assetassets or liability consideringliabilities which considers the contractual projected servicing fee revenue adequate compensation forthat Prosper Funding’sFunding earns on the Borrower Loans, estimated market servicing obligation,fees to service such loans, prepayment rates, default rates and the current principal balances of the Borrower Loans and projected servicing revenues given projected defaults and prepayments (if significant) over the remaining lives of the Borrower Loans.
  
Loans heldHeld for investment
Sale
Loans heldHeld for investmentSale are primarily comprised of loansBorrower Loans held for short durations and are recorded at costfair value. The fair value is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of other Borrower Loans. We measure Loans Held for Sale at fair value on an instrument-by-instrument basis with unrealized gains and losses on items for which approximatesthe fair value.value option has been elected reported in earnings. Management believes that the fair value option is more meaningful for the readers of the financial statements and it allows for the Loans Held for Sale to be measured at fair value similar to Borrower Loans and Notes. The fair value election, with respect to an item, may not be revoked once an election is made.
Internal Use Software and Website Development

Software and Website Development represents the software and website that PMI has transferred to Prosper Funding.   Prosper Funding accounts for internal usedoes not develop any of its own software costs, includingor website.   Software and website development costs, in accordance with ASC Topic 350-40, Internal Use Software and ASC Topic 350-50, Website Development Costs. In accordance with ASC Topic 350-40 and 350-50, the costs to develop software for the website and other internal uses are capitalized when management has authorized and committed project funding, preliminary development efforts are successfully completed, and it is probable that the project will be completed and the software will be used as intended. Capitalized software development costs primarily include software licenses acquired, fees paid to outside consultants, and salaries and payroll related costs for employees directly involved in the development efforts.

Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed. Costs incurred for upgrades and enhancements that are considered to be probable to result in additional functionality are capitalized. Capitalized costs are included in property and equipment and amortized to expense using the straight-line method over their expected lives.lives which is generally one to five years. Prosper Funding evaluates its software assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of software and website development assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such software and website development assets are considered to be impaired, the impairment to be recognized is the excess of the carrying amount over the fair value of the software asset.and website development asset group.
Payable to Investors
Payable to Investors primarily represents our obligation to investors related to cash held in an account for the benefit of investors and payments-in-process received from borrowers.

RepurchaseLoan Trailing Fee
On July 1, 2016, Prosper Funding signed a series of agreements with WebBank which, among other things, includes an additional program fee ( the "Loan Trailing Fee") paid to WebBank in connection with the performance of each loan sold to Prosper Funding. These agreements are effective as of August 1, 2016. The Loan Trailing Fee is dependent on the amount and Indemnification Obligation

timing of principal and interest payments made by borrowers of the underlying loans, irrespective of whether the loans are sold by Prosper Funding, and gives WebBank an ongoing financial interest in the performance of the loans it originates. This fee is paid by Prosper Funding to WebBank over the term of the respective loans and is a function of the principal and interest payments made by borrowers of such loans. In the event that principal and interest payments are not made with respect to any loan, Prosper Funding is obligatednot required to indemnify lenders and repurchase certain Notes and member loansmake the related Loan Trailing Fee payment. The obligation to pay the Loan Trailing Fee for any loan sold directly to third party purchasers in the event of violation of applicable federal, state, or local lending laws, or verifiable identify theft. The loan indemnification and repurchase obligation is estimated based on historical experience. Prosper Funding accrues a provision for the repurchase and indemnification obligation when the Notes or member loans are issued. Indemnified or repurchased Notes and member loans associated with federal, state, or local lending laws, or verifiable identity thefts are written offis recorded at fair value at the time of repurchase or at the time an indemnification payment is made.
origination of such loan within Other Liabilities and recorded as a reduction of Transaction Fees, net. Any changes in the fair value of this liability are recorded in Change in Fair Value of Borrower Loans, Loans Held for Sale and Notes, Net on the statements of operations. The fair value of the Loan Trailing Fee represents the present value of the expected monthly Loan Trailing Fee payments, which takes into consideration certain assumptions related to expected prepayment rates and defaults rates.
Revenue Recognition

Revenue is recognizedprimarily results from fees, net interest earned and gains on the sale of borrower loans. Fees consist of related party administrative fees and servicing fees paid by investors. We also have other smaller sources of revenue reported as other revenue, which includes fees charged in accordance with ASC Topic 605, Revenue Recognition.  Under ASC Topic 605, PMI recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the price of the services is fixed and determinable, and collectability is reasonably assured.relation to securitizations by outside investors.


Administration Agreement License Fees

Prosper Funding primarily generates revenues through license fees it earns through an Administration Agreement with PMI. The Administration Agreement contains a license granted by Prosper Funding to PMI that entitles PMI to use the platform for and in relation to: (i) PMI’s performance of its duties and obligations under the Administration Agreement relating to corporate administration, loan platform services, loan and note servicing and marketing, and (ii) PMI’s performance of its duties and obligations to WebBank in relation to loan origination and funding.

Loan servicing fees

Loan servicing revenue includes monthly loan servicing fees and non-sufficient funds (“NSF”) fees. Loan servicing The license fees are accrued daily based on the currentnumber of listings that are posted to the platform.
Service Fees
Investors who purchase Borrower Loans through the Whole Loan Channel typically pay Prosper Funding a servicing fee which is currently set at 1.075% per annum of the outstanding loan principal balance of the Borrower Loans but are not recognized until payment is received dueLoan prior to applying the uncertaintycurrent payment. The servicing fee compensates Prosper Funding for the costs incurred in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investors’ account portfolios. Prosper Funding records servicing fees paid by Borrower Loan investors as a component of collectionoperating revenue when received.
Gain on Sale of borrower loan payments. NSF fees are charged to borrowersBorrower Loans
Prosper Funding recognizes gains or losses on the first failed paymentsale of each billing period.  NSF feesBorrower Loans when it is retained for the servicing of Borrower Loans by WebBank. Additionally, Prosper Funding recognizes gains or losses on the sale of Borrower Loans when it sells Borrower Loans to third parties. Gains or losses on sales of Borrower Loans that are charged torecognized at the customertime of sale and collectedare determined by the difference between the net sales proceeds, fair value of any servicing rights retained and recognized immediately.

the carrying value of the Borrower Loans sold.
Interest incomeIncome on Borrower Loans Receivable and Interest Expense on Notes

Prosper Funding recognizes interest income on Borrower Loans originated through the Note Channel and interest expense on the corresponding Notes using the accrual method based on the stated interest rate to the extent that is believedProsper Funding believes it to be collectable.  Below
Administration Fee Expense - Related Party
Pursuant to an Administration Agreement between Prosper Funding and PMI, PMI manages the marketplace on behalf of Prosper Funding. Accordingly, each month, Prosper Funding is a table which summarizes the gross interest incomerequired to pay PMI an administration fee that is based on PMI’s (a) finance and legal personnel costs, (b) number of Borrower Loans originated through the marketplace, (c) servicing fees collected by or on behalf of Prosper Funding, and (d) nonsufficient funds fees collected by or on behalf of Prosper Funding. In addition, under a second Administration Agreement between PMI and PAH, a wholly owned subsidiary of Prosper Funding, PAH is required to pay PMI an annual fee, for PMI being the administrator of PAH’s operations.
Other Expense
Other expense, on Notesnet includes contract termination costs that are expected to be non-recurring and not part of restructuring activities.
Comprehensive Income
There is no comprehensive income (loss) other than the net income (loss) disclosed in the consolidated statements of operations.
Recent Accounting Pronouncements
In May 2014, as part of its ongoing efforts to assist in the convergence of US GAAP and International Financial Reporting Standards (“IFRS”), the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-9, “Revenue from Contracts with Customers.” The new guidance sets forth a new five-step revenue recognition model which


replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects in exchange for the twelve months endedgoods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The standard will be effective for Prosper Funding in the first quarter of fiscal 2018. In August 2015, the FASB issued ASU No. 2015-14, which amended the standard to provide a one-year deferral of the effective date, as well as providing the option to early adopt the standard on the original effective date. Accordingly, Prosper Funding may adopt the standard in either Prosper Funding’s fiscal year ending December 31, 2013 and 2012.


 
December 31, 
 2013 2012 
Interest income on borrower loans$32,862 $- 
Interest expense on notes (30,564) - 
Net interest income$2,298 $- 

Fair Value Measurement

the date of adoption. Prosper Funding follows ASC Topic 820, Fair Value Measurementsexpects to adopt this ASU on a modified retrospective basis in the first quarter of fiscal 2018.  Our evaluation of this ASU is ongoing and Disclosures,not complete. The FASB has issued and may issue in the future, interpretative guidance, which providesmay cause our evaluation to change. Our preliminary results indicate that administration fees are included in the scope of the new guidance, regarding a fair value hierarchy, which prioritizes information used to measure fair valuewhile servicing fees and gain or loss on the effectsale of fair value measurements on earnings and provides for enhanced disclosures determined by the levelloans remain within the hierarchyscope of information usedASC topic 860, Transfers and Servicing. While we anticipate some changes to revenue recognition for certain customer contracts, Prosper Funding does not currently believe that this ASU will have a material effect on our Consolidated Financial Statements.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the valuation. ASC Topic 820 applies whenever other standards require (or permit) assetsForm of a Share Is More Akin to Debt or liabilities to be measured at fair value but does not expandEquity to eliminate the use of fair valuedifferent methods in any new circumstances.

ASC Topic 820 defines fair valuepractice and thereby reduce existing diversity in terms of the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The price used to measure the fair value is not adjustedaccounting for transaction costs while the cost basis of certainhybrid financial instruments may include initial transaction costs. Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occursissued in the principal market for the asset or,form of a share. For hybrid financial instruments issued in the absenceform of a principal market, the most advantageous market for the asset. The principal market is the market in which the reporting entity would sell or transfer the asset with the greatest volume and level of activity for the asset. In determining the principal market forshare, an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to the market as of the measurement date. If no market for the asset exists or if the reporting entity does not have access to the principal market, the reporting entity should use a hypothetical market.

Under ASC Topic 820, assets and liabilities carried at fair value on the balance sheets are classified among three levels based on the observability of the inputs used to determine fair value:

Level 1 — The valuation is based on quoted prices in active markets for identical instruments.

Level 2 — The valuation is based on observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 — The valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the instrument. Level 3 valuations are typically performed using pricing models, discounted cash flow methodologies, or similar techniques, which incorporate management’s own estimates of assumptions that market participants would use in pricing the instrument or valuations that require significant management judgment or estimation.

Fair value of financial instruments are determined based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of quoted prices and observable inputs and to minimize the use of unobservable inputs when measuring fair value. Various valuation techniques are utilized, depending on the nature of the contract by considering the economic characteristics and risks of the entire hybrid financial instrument, includinginstrument. The existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. This standard will be effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. Prosper Funding adopted this guidance on January 1, 2016, and the adoption of this standard did not have a material impact on Prosper Funding’s financial statements.
In February 2015, the FASB issued ASU 2015-2, "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-2 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-2 is effective for periods beginning after December 15, 2015 with early adoption permitted. Prosper Funding has decided to early adopt this guidance effective January 1, 2015, and the adoption of this standard had no impact on Prosper Funding’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-5 “Customers’ Accounting for Fees Paid in Cloud Computing Arrangement”, which will be effective for the annual reporting period beginning after December 15, 2015. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. Prosper Funding is currently assessing the potential impact on its consolidated financial statements from adopting this new guidance.
In January 2016, the FASB issued ASU 2016-1, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of market pricesFinancial Assets and Financial Liabilities", which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance will be effective for identical or similar instruments, or discountedus in the first quarter of our fiscal year 2019, and early adoption is not permitted. Prosper Funding is currently evaluating the impact that this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash flow models.  When possible, activereceipts and observable market datacash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. This guidance will be effective for identical or similar financial instruments are utilized. Alternatively, fair valueProsper in the first quarter of our fiscal year 2018, and early adoption is determined using assumptions that management believes a market participant would usepermitted. Prosper Funding is currently evaluating the impacts the adoption of this accounting standard will have on Prosper Funding's cash flows.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18)", which requires companies to include amounts generally described as restricted cash and restricted cash equivalents in pricing the asset or liability.

Financial instruments consist principally of cash and cash equivalents restricted cash, Borrower Loans receivable, accounts payablewhen reconciling beginning-of-period and accrued liabilities, and Notes. The estimated fair values of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their carrying values because of their short term nature.

The following tables present the assets and liabilities measured at fair valueend-of-period total amounts shown on a recurring basis at December 31, 2013 and 2012:

December 31, 2013 
Level 1
Inputs
  
Level 2
Inputs
  
Level 3
Inputs
  Fair Value 
Assets 
  
  
  
 
Borrower loans receivable $-  $-  $226,238  $226,238 
Certificates of deposit and restricted cash  11,028   1,271   -   12,299 
Loans held for investment  -   -   3,917   3,917 
Liabilities  -   -   -   - 
Notes $-  $-  $226,794  $226,794 

December 31, 2012
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Fair Value
Assets
Short term investments$-$-$-$-
Certificates of deposit----
Borrower loans receivable----
Loans held for investment----
Liabilities
Notes$-$-$-$-

As observable market prices are not available for the Borrower Loans and Notes, or for similar assets and liabilities, Prosper Funding believes the Borrower Loans and Notes should be considered Level 3 financial instruments under ASC Topic 820.  In a hypothetical transaction as of the measurement date, Prosper Funding believes that differences in the principal marketplace in which the Borrower Loans are originated and the principal marketplace in which Prosper Funding might offer those loans may result in differences between the originated amount of the Borrower Loans and their fair value as of the transaction date.  For Borrower Loans, the fair value is estimated using discounted cash flow methodologies based upon valuation assumptions including prepayment speeds, roll rates, recovery rates and discount rates based on the perceived credit risk within each credit grade.

The obligation to pay principal and interest on any Note is equal to the loan payments, if any, that are received on the corresponding Borrower Loan, net of its 1.0% servicing fee.  The fair value election for Borrower Loans and Notes allows both the assets and the related liabilities to receive similar accounting treatment for expected losses which is consistent with the subsequent cash flows to lender members that are dependent upon borrower payments.  As such, the aggregate fair value of a group of Notes corresponding to a particular Borrower Loan is approximately equal to the fair value of that Borrower Loan, adjusted for the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders.  Any unrealized gains or losses on the Borrower Loans and Notes for which the fair value option has been elected is recorded as a separate line item in the statement of operations.  Thecash flows. This guidance will be effective interest rate associated with a groupfor us in the first quarter of Notes2018 and early adoption is less thanpermitted. Prosper Funding is currently evaluating the interest rate earnedeffect that this guidance will have on the corresponding Borrower Loan due to the 1.0% servicing fee.  See Note 6 for a roll-forwardour consolidated financial statements and further discussion of the significant assumptions used to value Borrower Loans and Notes.related disclosures.
The changes in Level 3 assets measured at fair value on a recurring basis are as follows:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) 
  
Borrower
Loans
  Notes  
Loans
Held for
Investment
  Total 
Balance at January 1, 2013 $-  $-  $-  $- 
Assets transferred on February 1, 2013  170,344   (170,574)  175   (55)
Originations  331,353   (159,921)  14,296   185,728 
Principal repayments and credit losses  (99,313)  97,967   (143)  (1,489)
Borrower loans sold to third parties  (171,290)      (10,410)  (181,700)
Change in fair value on borrower loans and notes  (4,856)  5,734   -   878 
Change in fair value of loans held for investment  -   -   (1)  (1)
Balance at December 31, 2013 $226,238  $(226,794) $3,917  $3,361 

Quantitative information about Prosper Funding’s Level 3 fair value measurements of its borrower loans and notes as of December 31, 2013 is provided below.  The table is not intended to be all-inclusive, but rather provides information on the significant Level 3 inputs as they relate to Prosper Funding’s fair value measurements.

 
Assets and
Liabilities
Fair
Value as
of
December
31
 Valuation TechniqueUnobservable Inputs
 
        
Borrower loans receivable at fair value$226,238 Discounted CashflowDefault rates and discount rates
 
             
Notes at fair value$(226,794)Discounted CashflowDefault rates and discount rates

3.      Cash and Cash Equivalents

Cash and cash equivalents consist of the following:

 December 31, 
Cash and cash equivalents2013  2012 
Cash in bank$5,789  $5 
Total cash and cash equivalents$5,789  $5 


4.      Property and Equipment

3.Property and Equipment
Property and equipment consist of the following:following (in thousands):

December 31, December 31,
2013 2012 2016 2015
Property and equipment:
 
  
  
Internal-use software$3,454 $- 
Internal-use software and web site development costs$16,749
 $10,990
Property and equipment 3,454  - 16,749
 10,990
Less accumulated depreciation and amortization (1,474)   (6,654) (2,571)
Total property and equipment, net$1,980 $- $10,095
 $8,419
Depreciation and amortization expense for 20132016 and 20122015 was $538$4,083 thousand and $0,$3,161 thousand, respectively.  Prosper Funding capitalized internal-useInternal-use software costsand web site development additions of $5.8 million and $10.5 million were purchased from PMI in the amount of $1,798 and $0 for the years ended December 31, 20132016 and 2012,2015 respectively.

5.      Loans Held for Investment

During the year ended December 31, 2013, a total of $14,296 of Borrower Loans originated through the platform were held by Prosper Funding as Loans held for investment. During the year ended December 31, 2013, $10,410 of these Borrower Loans were sold to an unrelated third party. Loans held for investment on the consolidated balance sheets as of December 31, 2013 and 2012 was $3,917 and $0, respectively. When a Borrower Loan has been funded by Prosper Funding in whole, or in part, the portion of the borrower’s monthly loan payment that corresponds to the percentage of the Borrower Loan that was funded by Prosper Funding is retained. In these cases, interest income is recorded on such Borrower Loans.
4.Borrower Loans, Loans Held For Sale and Notes Held at Fair Value
The fair value of the Borrower Loans held for investmentoriginated and Notes issued through the Note Channel is estimated using discounted cash flow methodologies based upon a set of valuation assumptions similar to those of Borrower Loans, which are set forth in Note 2, as they have similar characteristics and Prosper Funding expects these loans to behave in a comparable manner.  The valuation assumptions used to value these loans include prepayment rates, default rates and recovery rates derived from historical loan performance data and discount rates based on the credit grade applied to each loan.

The fair value adjustment on the Borrower Loans held for investment was $(1) and $0, which is included in earnings for the year ended December 31, 2013 and 2012, respectively.  During the year ended December 31, 2013 Prosper Funding has received $143 in payments on these loans. During the year ended December 31, 2013, there was $14 in Borrower Loans held for investment that were charged-off.

6.      Borrower Loans and Notes Held at Fair Value
Prosper Funding estimates the fair value of the Borrower Loans and Notes using discounted cash flow methodologies based upon a set of valuation assumptions. The primary assumptions used to value such Borrower Loans and Notes include default rates derived from historical performance, market conditions and discount rates applied to each credit grade based on the perceived credit risk. The obligation to pay principal and interest on any series of Notes is equal to the payments, if any, received on the corresponding Borrower Loan, net of the servicing fee. As such, the fair value of the Notes is approximately equal to the fair value of the Borrower Loans originated through the Note Channel, adjusted for the servicing fee and the timing of borrower payments subsequently disbursed to the Note holders. The effective interest rate associated with a series of Notes will be less than the interest rate earned on the corresponding Borrower Loan due to the servicing fee.
At December 31, 2016 and 2015, Borrower Loans, Notes and Loans Held for Sale (in thousands) were:
 Borrower Loans Notes Loans Held for Sale
 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Aggregate principal balance
   outstanding
$319,143
 $296,945
 $(323,358) $(294,331) $641
 $42
Fair value adjustments(3,516) 328
 7,122
 (3,074) (17) (10)
Fair value$315,627
 $297,273
 $(316,236) $(297,405) $624
 $32
At December 31, 2016, outstanding Borrower Loans had original maturities between 36 and 60 months, had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2021.  At December 31, 2015, Borrower Loans and Loans Held for Sale had original terms between 36 months and 60 months, had monthly payments with fixed interest rates ranging from 5.32% to 33.04% and had various maturity dates through December 2020.
Within the change in fair value of Borrower Loans, Prosper Funding recorded a loss of approximately $2.4 million that is attributable to changes in the credit risks related to Borrower Loans during the year ending December 31, 2016.
As of December 31, 2016 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $3.2 million and a fair value of $1.0 million. As December 31, 2015 the Borrower Loans that were 90 days or more delinquent, had an aggregate principal amount of $2.3 million and a fair value of $0.9 million. As of December 31, 2016 and 2015, Borrower Loans in non-accrual status had a fair value of $0.5 million and $0.1 million, respectively.
5.Loan Servicing Assets and Liabilities


Prosper Funding initially records servicing assets and liabilities at their estimated fair values when Prosper Funding sells whole loans to unrelated third-party buyers. The initial fair value of such servicing assets or liabilities is amortized in proportion to the estimated servicing income or loss and is amortized over the period of servicing income or loss. The total gains recognized on the sale of the whole loans were $3.6 million and $14.2 million for the years ended December 31, 2016 and 2015, respectively. For the year ended December 31, 2016, servicing assets and liabilities were measured at fair value subsequent to the initial recognition.
At December 31, 2016, loans that were sold but for which we retained servicing rights had a total outstanding principal balance of $3.4 billion, original terms of either 36 or 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 35.52% and maturity dates through December 2020.  At December 31, 2015, loans that were sold but for which we retained servicing rights had a total outstanding principal balance of $3.6 billion, original terms between 36 and 60 months and had monthly payments with fixed interest rates ranging from 5.32% to 31.90% and Maturity dates through December 2019.
$38.2 million and $20.4 million of contractually specified servicing fees, late charges and ancillary fees are included on our Statement of Operations in Servicing Fees, Net for the years ended December 31, 2016 and 2015, respectively.  
Fair value
Valuation method  – Discounted cash flow valuation methodology generally consist of developing an estimate of future cash flows that are expected to occur over the life of a financial instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
Significant unobservable inputs presented in the table presented below within Note 6 are those that Prosper Funding considers significant to the estimated fair values of the Level 3 servicing assets and liabilities. The following is a description of the significant unobservable inputs provided in the table.  
Market servicing rate – Prosper Funding estimates adequate market servicing rates that would fairly compensate a substitute servicer should one be required, which includes the profit that would be demanded in the marketplace. This rate is stated as a fixed percentage of outstanding principal balance on a per annum basis. Prosper Funding estimated these market servicing rates based on observable market rates for other loan types in the industry and bids from subservicing providers, adjusted for the unique loan attributes that are present in the specific loans that Prosper Funding sells and services and information from a backup service provider.
Discount rate – The discount rate is a rate of return used to discount future expected cash flows to arrive at a present value, which represents the fair value of the loan servicing rights. We used a range of discount rates for the servicing assets and liabilities based on comparable observed valuations of similar assets and publicly available disclosures related to servicing valuations, with comparability adjustments made to account for differences with Prosper Funding’s servicing assets.
Default Rate – The default rate presented in Note 6 is an annualized, average estimate considering all loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional default rate curves for each credit grade or loan category. Each point on a particular loan category’s curve represents the percentage of principal expected to default per period based on the term and age of the underlying loans. The assumption regarding defaults directly reduces servicing revenues because the amount of servicing revenues received is based on the amount collected each period.
Prepayment Rate – The prepayment rate presented in Note 6 is an annualized, average estimate considering all Borrower Loan categories (i.e. Prosper ratings and duration), and represents an aggregate of conditional prepayment rate curves for each credit grade or Borrower Loan category. Each point on a particular Borrower Loan category’s curve represents the percentage of principal expected to prepay per period based on the term and age of the underlying Borrower Loans.  Prepayments reduce servicing revenues as they shorten the period over which we expect to collect fees on the Borrower Loans, which is used to project future servicing revenues.
6.Fair Value of Assets and Liabilities


For a description of the fair value hierarchy and Prosper Funding’s fair value methodologies, see Note 2 - Summary of Significant Accounting Policies. Prosper Funding did not transfer any assets or liabilities in or out of level 3 during the year ended December 31, 2016.
Financial Instruments Recorded at Fair Value
The fair value of the Borrower Loans, Loans Held for Sale and Notes are estimated using discounted cash flow methodologies based upon a set of valuation assumptions. The primary cash flow assumptions used to value such Borrower Loans, Loans Held for Sale and Notes include default rates derived from historical performance and discount rates applied to each Prosper Rating tranchecredit grade based on the perceived credit riskrisk.
Investments held at fair value consists of available for sale investments.  The available for sale investments consist of corporate and government bonds.  When available, Prosper Funding uses quoted prices in active markets to measure the fair value of securities available for sale. When utilizing market data and bid-ask spreads, Prosper Funding uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, Prosper Funding uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. Prosper Funding generally obtains prices from at least two independent pricing sources for assets recorded at fair value. Prosper Funding's primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information, such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar securities. Prosper Rating. IfFunding compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. Prosper Funding does not receive payments onadjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.
The following tables present the fair value hierarchy for assets and liabilities measured at fair value (in thousands):
December 31, 2016
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 Fair Value
Assets 
  
  
  
Borrower Loans$—
 $—
 $315,627
 $315,627
Servicing Assets—
 —
 12,461
 $12,461
Loans Held for Sale—
 —
 624
 624
Total Assets—
 —
 328,712
 328,712
Liabilities 
  
  
  
Notes$—
 $—
 $316,236
 $316,236
Servicing Liabilities—
 —
 198
 198
Loan Trailing Fee Liability—
 —
 665
 665
Total Liabilities$—
 $—
 $317,099
 $317,099
December 31, 2015
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 Fair Value
Assets 
  
  
  
Borrower Loans$—
 $—
 $297,273
 $297,273
Servicing Assets—
 —
 13,605
 13,605
Loans Held for Sale—
 —
 32
 32
Total Assets—
 —
 310,910
 310,910
Liabilities 
  
  
  
Notes$—
 $—
 $297,405
 $297,405
Servicing Liabilities—
 —
 484
 484
Total Liabilities$—
 $—
 $297,889
 $297,889
As Prosper Funding’s Borrower Loans, Loans Held for Sale, Notes, Servicing Assets, Servicing Liabilities and Loan Trailing Fee Liability do not trade in an active market with readily observable prices, Prosper Funding is not obligateduses significant


unobservable inputs to and does not make payments on the corresponding Notes. The aggregate fair value of a group of Notes corresponding to a particular Borrower Loan is approximately equal tomeasure the fair value of that Borrower Loan, adjusted forthese assets and liabilities. Financial instruments are categorized in the 1.0% servicing fee and the timing of borrower payments subsequently disbursed to such Note holders.  The effective interest rate associated with a group of Notes is less than the interest rate earnedlevel 3 valuation hierarchy based on the corresponding PMI significance of unobservable factors in the overall fair value measurement. These fair value estimates may also include observable, actively quoted components derived from external sources. As a result, the realized and unrealized gains and losses for assets and liabilities within the level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Significant Unobservable Inputs
The following tables present quantitative information about the significant unobservable inputs used for Prosper Funding’s level 3 fair value measurements at December 31, 2016:
Borrower LoanLoans, Loans Held for Sale and Notes:
Range
Unobservable InputDecember 31, 2016December 31, 2015
Discount rate4.0% - 15.9%4.3% - 14.5%
Default rate1.7% - 14.9%1.4% - 14.4%
Servicing Assets and Liabilities:
  Range
Unobservable Input December 31, 2016 December 31, 2015
Discount rate 15% - 25%
 15% - 25%
Default rate 1.5% - 15.2%
 1.2% - 14.7%
Prepayment rate 13.6% - 26.6%
 14.3% - 25.6%
Market servicing rate (1)
 0.625% 0.625%
(1) Excludes collection fees that would be passed on to a hypothetical third-party servicer. As of December 31, 2016 and 2015, the market rate for collection fees and non-sufficient funds fees was assumed to be 12 basis points and 8 basis points for a weighted-average total market servicing rate of 74.5 basis points and 70.5 basis points respectively.
At December 31, 2016 and 2015, the discounted cash flow methodology used to estimate the Note fair values used the same projected cash flows as the related Borrower Loans. As demonstrated in the following table, the fair value adjustments for Borrower Loans were largely offset by the fair value adjustments of the Notes due to the 1.0% servicing fee.borrower payment dependent design of the Notes and because the principal balances of the Borrower Loans approximated the principal balances of the Notes.
The following tables present additional information about level 3 Borrower Loans, Loans Held for Sale and Notes measured at fair value on a recurring basis (in thousands): 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  Borrower Loans Notes 
Loans
Held for
Sale
 Total
Balance at January 1, 2016 $297,273
 $(297,405) $32
 $(100)
Purchase of Borrower Loans/Issuance of Notes 217,582
 (217,767) 1,979,952
 1,979,767
Principal repayments (171,195) 173,958
 (447) 2,316
Borrower loans sold to third parties (2,515) —
 (1,978,905) (1,981,420)
Other changes 416
 (591) (1) (176)
Change in fair value (25,934) 25,569
 (7) (372)
Balance at December 31, 2016 $315,627
 $(316,236) $624
 $15


F-39
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  Borrower Loans Notes 
Loans
Held for
Sale
 Total
Balance at January 1, 2015 $273,243
 $(273,783) $8,463
 $7,923
Purchase of Borrower Loans/Issuance of Notes 197,436
 (197,228) 3,517,467
 3,517,675
Principal repayments (151,038) 151,025
 (552) (565)
Borrower loans sold to third parties (855) 813
 (3,525,207) (3,525,249)
Other changes 81
 (6) (18) 57
Change in fair value (21,594) 21,774
 (121) 59
Balance at December 31, 2015 $297,273
 $(297,405) $32
 $(100)
The following table presents additional information about level 3 servicing assets and liabilities measured at fair value on a recurring basis (in thousands):
Table of Contents
 
Servicing
Assets
 
Servicing
Liabilities
Amortized Cost at January 1, 2015$3,116
 $624
Adjustment to adopt fair value measurement399
 (29)
Fair Value at January 1, 2015$3,515
 $595
Additions14,909
 283
Less: Transfers to PMI(249) —
Less: Changes in fair value(4,570) (394)
Fair Value at January 1, 2016$13,605
 $484
Additions9,833
 9
Less: Changes in fair value(10,977) (295)
Fair Value at December 31, 2016$12,461
 $198
The following table presents additional information about level 3 Loan Trailing Fee Liability measured at fair value on a recurring basis (in thousands):
Balance at January 1, 2016$—
Issuances647
Cash payment of Loan Trailing Fee(21)
Change in fair value39
Balance at December 31, 2016$665
Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity
Key economic assumptions and the sensitivity of the current fair value to immediate adverse changes in those assumptions at December 31, 20132016 for Borrower Loans, Loans Held for Sale and Notes originated through the Note Channel are presented in the following table:table (in thousands, except percentages):

  Borrower Loans  Notes 
Discount rate assumption:  9.77%*  9.77%*
Resulting fair value from:        
100 basis point increase $222,989  $220,362 
200 basis point increase  220,363   217,756 
Resulting fair value from:        
100 basis point decrease $228,465  $225,784 
200 basis point decrease  231,282   228,560 
 
        
Default rate assumption:  7.2%*  7.2%*
Resulting fair value from:        
10% higher default rates $223,233  $220,620 
20% higher default rates  220,039   217,439 
Resulting fair value from:        
10% lower default rates $228,151  $225,477 
20% lower default rates  230,554   227,866 

 
Borrower
Loans
 Notes 
Discount rate assumption:7.30%*7.30%*
Resulting fair value from: 
  
 
100 basis point increase$312,424
 $313,022
 
200 basis point increase309,302
 309,888
 
Resulting fair value from: 
  
 
100 basis point decrease$318,913
 $319,535
 
200 basis point decrease322,288
 322,921
 
     
Default rate assumption:11.94%*11.94%*
Resulting fair value from: 
  
 
100 basis point increase$312,171
 $312,759
 
200 basis point increase308,833
 309,401
 
Resulting fair value from: 
  
 
100 basis point decrease$319,112
 $319,743
 
200 basis point decrease322,640
 323,294
 
* Represents weighted average assumptions considering all Prosper Ratings.
credit grades.
The changes in fair value would directlyfollowing table presents the estimated impact the change in fair value on Borrower Loans, loans held for investment and Notes in the consolidated statements of operations.

Due to the recent origination of the Borrower Loans and Notes, the change in fair value attributable to instrument-specific credit risk is immaterial.  Of the Borrower Loans originated through the platform from July 13, 2009 to December 31, 2013, 332 such loans which were 90 days or more delinquent for an aggregate principal amount of $1,941 and aProsper Funding’s estimated fair value of $175servicing assets and liabilities, calculated using different market servicing rates, prepayment rates and different default rates as of December 31, 2013.

7.      Repurchase and Indemnification Obligation

Changes in Prosper Funding’s repurchase and indemnification obligations are summarized below:

  Years Ended December 31, 
  2013  2012 
Beginning of year balance: $-  $- 
Provision for repurchases and indemnifications  41   - 
Amounts repurchased and immediately charged off or charged off and indemnified (net of recoveries)  (9)  - 
End of year balance: $32  $- 
For the years ended December 31, 2013 and 2012, the provision for repurchase and indemnification obligation was $83 and $0, respectively.2016 (in thousands, except percentages).
F-40
 
Servicing
Assets
 
Servicing
Liabilities
Weighted average market servicing rate assumptions0.625% 0.625%
Resulting fair value from: 
  
Servicing rate increase to 0.65%11,615
 217
Servicing rate decrease to 0.60%13,307
 177
    
Weighted average prepayment assumptions20.02% 20.02%
Resulting fair value from: 
  
Applying a 1.1 multiplier to prepayment rate12,262
 194
Applying a 0.9 multiplier to prepayment rate12,662
 201
    
Weighted average default assumptions11.59% 11.59%
Resulting fair value from: 
  
Applying a 1.1 multiplier to default rate12,271
 198
Applying a 0.9 multiplier to default rate12,654
 198
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
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8.      Income Taxes

7.Income Taxes
Prosper Funding incurred no income tax provision for the year ended December 31, 20132016 and 2012.2015. Prosper Funding is a US disregarded entity and the income and loss is included in the return of its parent, PMI. Since PMI is in a loss position, not


currently subject to income taxes, and has fully reserved its deferred tax asset, the net effective tax rate for Prosper Funding is 0%.

8.Commitments and Contingencies
9.      Subsequent Events
On March 10, 2014,In the boardsnormal course of PMI andits operations, Prosper Funding respectively, appointed Aaron Vermut, who previously served as President of PMI andbecomes involved in various legal actions. Prosper Funding maintains provisions it considers to be adequate for such actions. Prosper Funding does not believe it is probable that the ultimate liability, if any, arising out of any such matters will have a material effect on Prosper Funding's financial condition, results of operations or cash flows.
Operating Commitments
Prosper has entered into an agreement with WebBank, under which all Borrower Loans originated through the marketplace are made by WebBank under its bank charter. Pursuant to the position of Chief Executive Officer of PMI andagreement, the marketing fee that Prosper Funding. Inreceives in connection with Aaron Vermut's appointmentthe origination of each loan is partially reduced by an amount (the “Designated Amount”) calculated as Chief Executive Officera percentage of PMIthe principal amount of such loan based on the aggregate principal amount of loans originated for the applicable month.  To the extent the aggregate Designated Amount for all loans originated during any month is less than $143,500, Prosper is required to pay WebBank an amount equal to such deficiency.  Accordingly, the minimum fee for the year ended December 31, 2017 is $1.7 million. The minimum fee is $1.7 million and $1.0 million in each of the years 2018 and 2019, respectively. Additionally, under the agreement with WebBank, Prosper Funding, Stephen P. Vermut, who previously servedis required to maintain a minimum net liquidity of $15 million at all times during the term of the agreement. Net liquidity is defined as Chief Executive Officerthe sum of PMICash, Cash Equivalents and Available for Sale Investments. Violation of this covenant can result in termination of the contract with WebBank. At December 31, 2016 the Company was in compliance with the covenant.
Loan Purchase Commitments
Prosper Funding has entered into an agreement with WebBank to purchase $18.6 million of Borrower Loans that WebBank originated during the during the last two business days of the year ended December 31, 2016 and the first business day of the quarter ending March 31, 2017. Prosper will purchase these Borrower Loans within the first three business days of the quarter ended March 31, 2017.
Repurchase and Indemnification Contingency
Under the terms of the loan purchase agreements between Prosper Funding and investors that participate in the Whole Loan Channel, Prosper Funding may, in certain circumstances, become obligated to repurchase a Borrower Loan from an investor. Generally, these circumstances include the occurrence of verifiable identity theft, the failure to properly follow loan listing or bidding protocols, or a violation of the applicable federal, state, or local lending laws. The fair value of the indemnification and repurchase obligation is estimated based on historical experience and the initial fair value is insignificant. Prosper Funding recognizes a liability for the repurchase and indemnification obligation when the Borrower Loans are issued. Indemnified or repurchased Borrower Loans associated with violations of federal, state, or local lending laws or verifiable identity theft are written off at the time of repurchase or at the time an indemnification payment is made.  The maximum potential amount of future payments associated under this obligation is the outstanding balances of the Borrower Loans sold through the Whole Loan Channel, which at December 31, 2016 is $3.4 billion.  Prosper Funding had accrued $0.6 million and $0.5 million as of December 31, 2016 and 2015 respectively in regard to this obligation.      
9.Related Parties
Since inception, Prosper Funding has engaged in various transactions with its directors and executive officers, sole member, and immediate family members and other affiliates of its directors, executive officers and sole member. Prosper Funding believes that all of the transactions described below were made on terms no less favorable to Prosper Funding than could have been appointedobtained from unaffiliated third parties.
Prosper Funding’s executive officers, directors who are not executive officers and certain affiliates participate on Prosper Funding’s lending platform by placing bids and purchasing Notes. The aggregate amount of the boardsNotes purchased and the income earned by parties deemed to be affiliates and related parties of Prosper Funding as of December 31, 2016 and 2015 are summarized below (in thousands):


  Aggregate Amount of Interest Earned on
Related Party Notes Purchased Notes
  2016 2015 2016 2015
Executive officers and management $1,065
 $1,361
 $225
 $206
Directors —
 —
 —
 —
Total $1,065
 $1,361
 $225
 $206
Related Party Notes balance as of December 31,
  2016 2015
Executive officers and management $1,620
 $1,912
Directors —
 —
Total $1,620
 $1,912
10.Significant Concentrations
Prosper Funding is dependent on third party funding sources such as banks and investment funds to provide the funds to allow WebBank to originate loans that the third party funding sources will later purchase. Of all Borrower Loans originated in the year ended December 31, 2016, 20%, 16% and 9% were purchased by three different parties. This compares to 37%, 19% and 11% for the year ended December 31, 2015. Further, a significant portion of our business is dependent on funding through the Whole Loan Channel.  90% and 95% of Borrower Loans were originated through the Whole Loan Channel in the years ending December 31, 2016 and 2015, respectively.  

11.Colchis Agreement
PMI, PFL and Colchis Capital Management, L.P. (“Colchis”) entered into a Supplementary Agreement, dated June 1, 2013, and Addendum to the Supplementary Agreement, dated November 18, 2013 (together, the “Colchis Agreement”), pursuant to which Prosper agreed to give Colchis certain incentives to encourage Colchis to invest in Borrower Loans and Notes through the platform. On April 21, 2015, Colchis filed a demand for arbitration to resolve interpretative questions relating to the Colchis Agreement, including, for example, whether certain rights given to Colchis extended beyond the term of the Colchis Agreement. On October 17, 2016, the arbitrator issued a final award in favor of Colchis.
On November 17, 2016, PMI, PFL and Colchis entered into a Settlement and Release Agreement, pursuant to which Colchis has agreed to terminate the Colchis Agreement and waive all rights conferred under such agreement in exchange for a $9 million cash payment by PMI and Prosperan agreement by PMI to issue a warrant to purchase shares of a new series of preferred stock representing 7% of PMI’s capitalization on a fully diluted basis as of the date of the issuance of the warrant (the “New Series”) for $.01 per share (the “Equity Payment”). This has been accounted for by PFL as a termination of a contract and is included in other expense.

12.Subsequent Events
On February 27, 2017, PFL entered into a Loan Purchase Agreement (the “Purchase Agreement”) with PF LoanCo Funding respectively,LLC (the “Beneficiary”) and Wilmington Savings Fund Society, FSB, not in its individual capacity but solely in its capacity as trustee (the “Trustee”) of PF LoanCo Trust (the “Purchaser”). The Purchase Agreement sets forth the terms and conditions pursuant to which PFL may sell eligible consumer loans in an aggregate amount of up to $5.0 billion (including certain loans purchased by an affiliate of the Beneficiary prior to the roledate of Executive Chairmanthe Purchase Agreement (the “Pre-Purchased Loans”)) to the Purchaser for the benefit of PMIthe Beneficiary over a two-year period. Under the Purchase Agreement, PFL will be obligated to (i) offer for purchase minimum monthly volumes of eligible loans to the Purchaser, and Prosper Funding.(ii) deliver a minimum percentage of the monthly volume of such loans that the Purchaser elects to purchase for the benefit of the Beneficiary, if any (together, the “Volume Requirements”).


In connection with the foregoing appointments,Purchase Agreement, on February 27, 2017, PMI entered into a Warrant Agreement with PF WarrantCo Holdings, LP, an affiliate of the boardsBeneficiary (the “Warrant Holder”), and, for certain limited purposes, New Residential Investment Corp. (the “Warrant Agreement”). Pursuant to the Warrant Agreement, PMI issued to Warrant Holder three warrants (together, the “Series F Warrant”) to purchase up to in aggregate 177,720,706 shares of PMI’s Series F Preferred Stock at an exercise price of $0.01 per share (the “Warrant Shares”).
Warrant Holder’s right to exercise the Series F Warrant is subject to monthly vesting during the term of the Purchase Agreement based upon the volume of loans Purchaser elects to purchase (if any) in each month, subject to certain cure rights (except that a certain portion of the Series F Warrant will be immediately exercisable as a result of the Pre-Purchased Loans). Additionally, certain portions of the Series F Warrant may automatically vest for a given month in the event that PFL fails to meet its Volume Requirements under the Purchase Agreement for such month. Under the terms of the Warrant Agreement, the Warrant Shares may also vest in full upon a change of control of PMI and Prosper Funding, respectively, also appointed Ronald Suberupon the occurrence of certain events set forth in the Warrant Agreement.
The Series F Warrant will be exercisable with respect to vested Warrant Shares, in whole or in part, at any time prior to the roletenth anniversary of Presidenttheir date of PMIissuance. The number of shares underlying the Series F Warrant may be adjusted following certain events such as stock splits, dividends, reclassifications, and Prosper Funding. Mr. Suber served as PMI's Head of Global Institutional Sales and Prosper Funding's Vice President prior to his appointment as President.certain other issuances by PMI.
F-41
Table of Contents
SIGNATURES


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 31st17th day of March, 2014.2017.

 PROSPER MARKETPLACE, INC.
   
 By:/s/ Aaron VermutDavid Kimball
  Aaron VermutDavid Kimball
  
Chief Executive Officer (Principal Executive Officer)
Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joshua P. HachadourianUsama Ashraf and Sachin Adarkar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name Title Date
     
/s/ Aaron VermutDavid Kimball Chief Executive Officer (Principal Executive Officer); Director March 31, 201417, 2017
David Kimball
/s/ Usama AshrafChief Financial Officer (Principal Financial and Accounting Officer)March 17, 2017
Usama Ashraf
/s/ Aaron Vermut DirectorMarch 17, 2017
Aaron Vermut    
     
/s/ Joshua P. HachadourianVice President, Finance (Principal Financial Officer and Principal Accounting Officer)March 31, 2014
Joshua P. Hachadourian
/s/ Stephan VermutExecutive Chairman and DirectorMarch 31, 2014
Stephan Vermut
/s/ Christopher M. Bishko Director March 31, 201417, 2017
Christopher M. Bishko    
     
/s/ Rajeev V. Date Director March 31, 201417, 2017
Rajeev V. Date    
     
/s/ Patrick W. Grady Director March 31, 201417, 2017
Patrick W. Grady
/s/ David R. Golob DirectorMarch 17, 2017
David R. Golob
/s/ Nigel W. Morris  DirectorMarch 17, 2017
Nigel W. Morris    

S-1

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 31st17th day of March, 2014.2017.

 PROSPER FUNDING LLC
   
 By:/s/ Aaron VermutDavid Kimball
  Aaron VermutDavid Kimball
  Chief Executive Officer (Principal Executive Officer); Director

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joshua P. HachadourianUsama Ashraf and Sachin Adarkar, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name Title Date
     
/s/ Aaron VermutDavid Kimball Chief Executive Officer (Principal Executive Officer); DirectorDirector; Treasurer (Principal Financing and Accounting Officer) March 31, 201417, 2017
Aaron Vermut
/s/ Joshua P. Hachadourian
Treasurer (Principal Financial Officer and Principal Accounting Officer)
March 31, 2014
Joshua P. Hachadourian
/s/ Stephan VermutExecutive Chairman and DirectorMarch 31, 2014
Stephan VermutDavid Kimball    
     
/s/ Ronald Suber President; Director March 31, 201417, 2017
Ronald Suber    
     
/s/ Bernard J. Angelo Director March 31, 201417, 2017
Bernard J. Angelo    
     
/s/ David V. DeAngelis Director March 31, 201417, 2017
David V. DeAngelis    


S-2

EXHIBIT INDEX

Exhibit
Number
 Description
   
2.1 Asset Transfer Agreement, dated January 22, 2013, between Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 2.1 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K, filed on January 28, 2013)
2.2Agreement and Plan of Merger dated as of January 23, 2015 by and among Prosper Marketplace, Inc., American HealthCare Lending, LLC (“AHL”), Prosper Healthcare Lending, LLC and Shaun Sorensen, solely in his capacity as agent for AHL’s members and option holders (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on January 27, 2015)
2.3Agreement and Plan of Merger, dated as of September 23, 2015, by and among Prosper Marketplace, Inc., BillGuard, Inc., Beach Merger Sub, Inc. and Shareholder Representative Services LLC, solely in its capacity as the Stockholders’ Representative (incorporated by reference to Exhibit 2.1 of PMI’s Current Report on Form 8-K, filed on October 15, 2015)
   
3.1 Fifth Amended and Restated Limited Liability Company Agreement of Prosper Funding LLC, dated October 21, 2013 (incorporated by reference to Exhibit 3.1 of Post-Effective Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-179941), filed on October 23, 2013 by Prosper FundingPFL and PMI)
   
3.2
 Amended and Restated Certificate of Incorporation of Prosper Marketplace, Inc. (2)
   
3.3 Prosper Funding LLC Certificate of Formation (incorporated by reference to Exhibit 3.2 of Pre-Effective Amendment No. 1 to Prosper FundingPFL and PMI’s Registration Statement on Form S-1 (File No. 333-179941), filed on April 23, 2012)
   
3.4 Bylaws of PMI, dated March 22, 2005 (incorporated by reference to Exhibit 3.2 of PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed October 30, 2007)
   
4.1 Form of Prosper FundingPFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.5)4.5, incorporated by reference to Exhibit 4.2 of PMI and PFL’s Current Report on Form 8-K filed on January 28, 2013)
   
4.2 Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.4)4.4, incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed on June 26, 2009)
   
4.3 Supplemental Indenture, dated January 22, 2013, between Prosper Marketplace, Inc., Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K, filed on January 28, 2013)
   
4.4 Indenture, dated June 15, 2009, between Prosper Marketplace, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of Pre-Effective Amendment No. 5 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed on June 26, 2009)
   
4.5 Amended and Restated Indenture, dated January 22, 2013, between Prosper Funding LLC and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K filed on January 28, 2013)
   
10.1
 Form of Prosper FundingPFL Borrower Registration Agreement (2)
   
10.2
 Form of Prosper Funding LenderPFL Investor Registration Agreement (2)
   
10.3 Form of PMI Borrower Registration Agreement (incorporated by reference to Exhibit 10.1 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599), filed on November 19, 2012)
   
10.4 Form of PMI Lender Registration Agreement (Note Commitment, Purchase and Sale Agreement) (incorporated by reference to Exhibit 10.2 of Pre-Effective Amendment No. 1 to PMI’s Registration Statement on Form S-1 (File No. 333-182599) filed on November 19, 2012)
   
10.5 Amended and Restated Processing Agreement, dated  November 21, 2012, between CSC Logic, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.5 of Pre-Effective Amendment No. 5 to Prosper Funding and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed November 27, 2012) (1)
10.6Back-up Processing Agreement, dated November 21, 2012, between CSC Logic, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.6 of Pre-Effective Amendment No. 5 to Prosper Funding and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed November 27, 2012) (1)

10.7Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K, filed on January 28, 2013)
   
10.6Amendment No. #1 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 10-Q filed on May 14, 2014)



Exhibit
Number
Description
10.7Amendment No. #2 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and PFL’s Annual Report on Form 10-K filed on April 6, 2015)
10.8Amendment No. #3 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (2)
10.9 Services and Indemnity Agreement, dated March 1, 2012, between Global Securitization Services, LLC, Kevin Burns, Bernard Angelo, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.8 of Pre-Effective Amendment No. 3 to Prosper FundingPFL and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed on November 21, 2012)
   
10.910.10 Second Amended and Restated Loan Sale Agreement, dated January 25, 2013, between WebBank, Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.5 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K, filed on January 28, 2013) (1)
   
10.1010.11 Second Amended and Restated Loan Account Program Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K, filed on January 28, 2013) (1)
   
10.1110.12 Stand By Loan Purchase Agreement, dated January 25, 2013, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of PMI and Prosper Funding’sPFL’s Current Report on Form 8-K, filed on January 28, 2013) (1)
   
10.1210.13 Amended and Restated Loan Sale Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.4 of PMI’s Quarterly Report on Form 10-Q, filed on November 12, 2010)(1)
   
10.1310.14 Amended and Restated Loan Account Program Agreement, dated September 14, 2010, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI’s Quarterly Report on Form 10-Q, filed on November 12, 2010)(1)
   
10.14
Amended and Restated Hosting Services Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.3 of PMI and Prosper Funding’s Current Report on Form 8-K, filed on January 28, 2013)
10.15
Amended and Restated Services Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.2 of PMI and Prosper Funding’s Current Report on Form 8-K, filed on January 28, 2013)
10.16
Amended and Restated License Agreement, between FOLIOfn Investments, Inc., Prosper Marketplace, Inc. and Prosper Funding LLC (incorporated by reference to Exhibit 10.4 of PMI and Prosper Funding’s Current Report on Form 8-K, filed on January 28, 2013)
10.17
Hosting Services Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.5 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)
10.18
Prosper-Folio Services Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.6 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)
10.19
Prosper-Folio Software License Agreement, dated March 3, 2009, between FOLIOfn Investments, Inc. and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.7 of Pre-Effective Amendment No. 3 to PMI’s Registration Statement on Form S-1 (File No. 333-147019), filed April 14, 2009)
10.20
 Indemnification Agreement, dated January 15, 2013, between Prosper Marketplace, Inc. and Patrick GardyGrady  (incorporated by reference to Exhibit 10.20 of PMI and PFL’s Annual Report on Form 10-K, filed on March 31, 2014) (3)
 
��
10.21
10.16
Form of Indemnification Agreement dated July 18, 2013, between Prosper Marketplace, Inc.for PMI’s directors (other than Patrick Grady), officers and Rajeev V. Datekey employees (3)
 
10.22
Schedule of Prosper Marketplace, Inc. Officer and Director Indemnification Agreements (included as Exhibit A in Exhibit 10.21)

10.2310.17 Form of PMI interim Borrower Registration Agreement (incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 1 to PMI’sPMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013)
   
10.2410.18 Form of PMI interim Lender Registration Agreement (incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to PMI’sPMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013)
 
10.25
10.19
Backup Servicing Agreement, dated January 9, 2014, between Prosper Funding LLC and First Associates Loan Servicing, LLC  (1)(incorporated by reference to Exhibit 10.25 of PMI and PFL’s Annual Report on Form 10-K, filed on March 31, 2014)
 
10.2610.20 Amended and Restated Services and Indemnity Agreement, dated May 30, 2013, between Prosper Funding LLC, Prosper Marketplace, Inc., Global Securititization Services, LLC, Bernard J. Angelo and David V. DeAngelis (incorporated by reference to Exhibit 10.1 of thePMI and PFL’s Current Report on Form 8-K, filed on June 5, 2013 by Prosper Funding and PMI)
21.1
Subsidiaries of Prosper Marketplace, Inc.
21.2
Subsidiaries of Prosper Funding LLC2013) (3)
   
10.21Second Amendment to Second Amended and Restated Loan Sale Agreement, dated October 27, 2015, between PMI, PFL and WebBank (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Quarterly Report on Form 10-Q filed on November 9, 2015)
10.22Amended and Restated Prosper Marketplace, Inc. 2005 Stock Plan (incorporated by reference to Exhibit 4.2 of PMI’s Registration Statement on Form S-8 filed on May 29, 2014) (3)
10.23Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on May 12, 2015) (3)
10.24Amendment No. 1 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on April 13, 2016) (3)



Exhibit
Number
Description
10.25
Amendment No. 2 to Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of PMI’s Registration Statement on Form S-8 filed on August 15, 2016) (3)

10.26Form of Stock Option Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.29 of PMI and PFL’s Annual Report on Form 10-K, filed on March 18, 2016) (3)
10.27Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Award Agreement under the Prosper Marketplace, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.30 of PMI and PFL’s Annual Report on Form 10-K, filed on March 18, 2016) (3)
10.28Asset Sale Agreement, dated July 1, 2016, between WebBank and Prosper Funding LLC (incorporated by reference to Exhibit 10.1 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1)
10.29Marketing Agreement, dated July 1, 2016, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.2 of PMI and PFL’s Current Report on Form 8-K/A, filed on March 7, 2017) (1)
10.30Stand By Purchase Agreement, dated July 1, 2016, between WebBank and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.3 of PMI and PFL’s Current Report on Form 8-K, filed on July 8, 2017) (1)
21.1Subsidiaries of Prosper Marketplace, Inc. (2)
21.2Subsidiaries of Prosper Funding LLC  (incorporated by reference to Exhibit 21.2 of PMI and PFL’s Annual Report on Form 10-K, filed March 31, 2013)
23.1Consent of Independent Registered Accounting Firm (2)
31.1 Certification of Chief Executive Officer of PMI Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 (2)
   
31.2
 Certification of Principal Financial Officer of PMI pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 (2)
   
31.3
 Certification of Chief Executive Officer of Prosper FundingPFL Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.2002 (2)
   
31.4
Certification of Principal Financial Officer of Prosper Funding pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 Certification of Principal Executive Officer and Principal Financial Officer of PMI pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002 (2)
   
32.2
 Certification of Principal Executive Officer and Principal Financial Officer of Prosper FundingPFL pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.2002 (2)
(1)Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act.
(2)Filed herewith.
(3)Management contract or compensatory plan or arrangement.  
(1)  Certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 406 of the Securities Act.