| (Exact name of registrant as specified in its charter) | | (Exact name of registrant as specified in its charter)
Delaware | | 6199 | | 45-4526070 | (State or other jurisdiction of
incorporation or organization)
| | (Primary Standard Industrial
Classification Code Number)
| | (I.R.S. Employer
Identification Number)
|
| | | | | 45-4526070 | | 73-1733867 | | (I.R.S. Employer Identification Number) | | (I.R.S. Employer Identification Number) |
Delaware (State or other jurisdiction of incorporation or organization) 6199 (Primary Standard Industrial Classification Code Number) 221 Main Street, 22nd3rd Floor San Francisco, CA 9410494105 (415) 593-5400 (Address,(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
Sachin Adarkar,Julie Hwang, Esq.
Secretary 111 Sutter221 Main Street, 22nd3rd Floor
San Francisco, CA 9410494105 (415) 593-5400 (Name,(Name, address, including zip code, and telephone number, including
area code, of agent for service)
CopiesCopy to:
Keir D. Gumbs,Brian K. Rosenzweig, Esq.
Covington & Burling LLP 1201 Pennsylvania620 Eighth Avenue NW
Washington, DC 20004New York, NY 10018-1405
(202) 662-6000
(212) 841-1000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x☒ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.o☐ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o CALCULATION OF REGISTRATION FEE
| | Title of Securities being Registered | | Proposed Maximum Aggregate Offering Price (1)(2) | | Amount of Registration Fee | | Prosper Funding LLC Borrower Payment Dependent Notes | | $500,000,000 | | $57,300 | | |
(1)The Securities registered hereby consist of Prosper Funding LLC Borrower Payment Dependent Notes (the “Notes”). The Notes represent special, limited obligations of the registrant. Each Note corresponds to a single consumer loan originated through the platform that the registrant operates under license from its parent entity, Prosper Marketplace, Inc. The registrant will only be obliged to make payments on a Note if and to the extent it receives payments on the consumer loan corresponding to that Note. Each Note may have a separate term, principal amount and applicable interest rate.
(2)Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 underof the Securities Exchange Act of 1934. (Check one):Act.
| | | | | | | | | | | | | | | | | | Large Accelerated Filero | | Accelerated Filero | | Non-accelerated Non-
Accelerated Filerý | | Smaller Reporting Company | | Emerging Growth Company | | Prosper Funding LLC | o | | o | | x | | o | | o | | Prosper Marketplace, Inc. | o | | o | | x | | o | | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE | | | | | | | | | | | | | | | | | | Title of Each Class of Securities to be Registered | | Amount to be Registered | | | Proposed Maximum Aggregate Offering Price per Unit | | | Proposed Maximum Aggregate Offering Price | | | Amount of Registration Fee | | | Borrower Payment Dependent Notes | | $ | 1,000,000,000 | (1) | | | 100% | | | $ | 1,000,000,000 | (1) | | $ | 12,809 | (1) | | PMI Management Rights (2) | | | N/A | (2) | | | N/A | (2) | | | N/A | (2) | | | N/A | (2) |
(1) Pursuant to Rule 415(a)(6) under the Securities Act, the securities registered pursuant to this Registration Statement include unsold securities previously registered by the Registrants on the Registrants’ Registration Statements (File Nos. 333-204880 and 333-204880-01), originally filed on June 11, 2015 and declared effective on September 29, 2015 (the “Prior Registration Statements”). The Prior Registration Statements registered the offer and sale of Borrower Payment Dependent Notes, each issued with a PMI Management Right that was attached to and not be separable from the Borrower Payment Dependent Note having an aggregate initial offering price not to exceed $1,500,000,000 (collectively, the “Shelf Securities”). Of these Shelf Securities, the Company sold an aggregate of $602,878,256 of securities, and as a result, $897,121,744 of Shelf Securities remain unsold as the date of filing of this Registration Statement (the “Unsold Securities”). The Registrants have determined to include such Unsold Securities in this Registration Statement. The Registrants are also registering new shelf securities on this Registration Statement with an aggregate initial offering price of $102,878,256 (the “New Securities”). Pursuant to Rule 415(a)(6) under the Securities Act, the filing fee of $104,245 relating to the Unsold Securities under the Prior Registration Statements, which was paid under the Prior Registration Statements, will continue to be applied to the Unsold Securities registered pursuant to this Registration Statement. Accordingly, the amount of the registration fee in the "Calculation of Registration Fee" table has been calculated based on the proposed maximum offering price of the additional $102,878,256 of New Securities registered on this Registration Statement. As a result, a filing fee of $12,809 is being paid herewith. To the extent that, after the filing date hereof and prior to the effectiveness of this Registration Statement, the Registrants sell any Unsold Securities pursuant to the Prior Registration Statements, the Registrants will identify in a pre-effective amendment to this Registration Statement the updated amount of Unsold Securities
from the Prior Registration Statements to be included in this Registration Statement pursuant to Rule 415(a)(6) and the updated amount of New Securities to be registered on this Registration Statement. Pursuant to Rule 415(a)(6) under the Securities Act, the offering of the Unsold Securities under the Prior Registration Statements will be deemed terminated as of the date of effectiveness of this Registration Statement.
(2) Each Borrower Payment Dependent Note will be issued with a PMI Management Right that is attached to and will not be separable from the Borrower Payment Dependent Note. No separate consideration is being paid for or value assigned to the PMI Management Rights and accordingly, no additional registration fee is being paid herewith. The registrantRegistrants hereby amendsamend this Registration Statementregistration statement on such date or dates as may be necessary to delay its effective date until the registrantRegistrants shall file a further amendment thatwhich specifically states that this Registration Statementregistration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. | SUBJECT TO COMPLETION, DATED MARCH 7, 2012 |
The information in this prospectus is not complete and may be changed. Prosper Funding LLC and Prosper Marketplace, Inc. may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED September 27, 2018 PROSPER FUNDING LLC $1,000,000,000 Borrower Payment Dependent Notes PROSPER MARKETPLACE, INC. PMI Management Rights
PROSPER FUNDING LLC $500,000,0001,000,000,000 Borrower Payment Dependent Notes
PROSPER MARKETPLACE, INC. PMI Management Rights
This is a public offering to lender membersinvestors of Prosper Funding LLC of up to $500,000,000$1,000,000,000 in principal amount of Borrower Payment Dependent Notes, or “Notes”."Notes." Each Note will come attached with a PMI Management Right issued by Prosper Marketplace, Inc. Prosper Funding LLC will be the sole issuer of the Notes and Prosper Marketplace, Inc. will be the sole issuer of the PMI Management Rights. For the purposes of this prospectus, the Notes and the PMI Management Rights will be collectively referred to as "the Securities."
EachExcept as the context requires otherwise, as used in this prospectus, "we," "us," "our," and "Registrants" refer to Prosper Marketplace, Inc. ("PMI"), a Delaware corporation, and its wholly owned subsidiary, Prosper Funding LLC ("PFL"), a Delaware limited liability company; and "Prosper" refers to PMI and its wholly owned subsidiaries, PFL, BillGuard, Inc. ("BillGuard"), a Delaware corporation, and Prosper Healthcare Lending LLC ("PHL"), 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."
Payments for each series of Notes will be dependent for payment on payments we receivePFL receives on a specific borrower loanBorrower Loan described in a listing posted onto our peer-to-peer online credit platform, which we refer to as the “platform.”marketplace. All listings on the platformour marketplace are posted by individual consumer borrower membersborrowers of Prosper Funding LLCPFL requesting individual consumer loans, which we refer to as “borrower loans.” In addition, each listing will be described in a prospectus supplement.
Important terms of the Notes include the following, each of which is described in detail in this prospectus: ·
| The Notes are special, limited obligations of Prosper Funding LLC only and are not obligations of its parent company, Prosper Marketplace, Inc., or “PMI”, or the borrowers under the corresponding borrower loans.
| ·
| Our obligation to make payments on a Note will be limited to an amount equal to the Note holder’s pro rata share of amounts we receive with respect to the corresponding borrower loan, net of any servicing fees. Neither we nor PMI guarantees payment of the Notes or the corresponding borrower loans.
|
The Notes are special, limited obligations of PFL only and are not obligations of its parent company, PMI or of the borrowers under the corresponding Borrower Loans. PFL's obligation to make payments on a Note will be limited to an amount equal to the Note holder's pro rata share of amounts PFL receives with respect to the corresponding borrower loan, net of any servicing fees and other costs and fees, if applicable. Neither Prosper Funding LLC nor Prosper Marketplace, Inc. guarantees payment of the Notes or the corresponding Borrower Loans. The Notes will bear interest from the date of issuance, have a fixed rate, be payable monthly and have an initial maturity of three or five years from issuance. PFL may add additional Note terms from time to time. A Note holder's recourse will be extremely limited in the event that borrower information is inaccurate for any reason.
· | The Notes will bear interest from the date of issuance, have a fixed rate, be payable monthly and have an initial maturity of one, three or five years from issuance. We may add additional Note terms from time to time. |
Important terms of the PMI Management Rights include the following, each of which is described in detail in this prospectus:
The PMI Management Rights will not be separable from the Notes offered on the marketplace and will not be assigned a value separate from the Notes. The PMI Management Rights are "investment contracts" issued by PMI directly to Note holders. The phrase "investment contract" is a concept under federal securities law that refers to an arrangement where investors invest money in a common enterprise with the expectation of profits, primarily from the efforts of others. Here, the "investment contracts" that PMI is registering as PMI Management Rights arise from the services that PMI has provided and will provide, as described in the Administration Agreement, the Indenture, the Investor Registration Agreement, and in this prospectus, which services include, but are not limited to:
· | A Note holder’s recourse will be extremely limited in | | ◦ | the event that borrower information is inaccurate for any reason.existence and operation of the marketplace; |
| | | ◦ | verification of borrower information; |
| | | ◦ | evaluation and validation of the Prosper Score and Prosper Rating; |
| | | ◦ | remitting borrower payments; and |
| | | ◦ | collecting on delinquent accounts. |
Investors who purchase PMI Management Rights will have rights under the federal securities laws as a purchaser of a registered security. Investors will have limited contractual rights, collectively through the indenture trustee, to enforce PMI's contractual obligations under the Administration Agreement. Such contractual rights exist under state law and will not, in any way, affect the rights of investors under the federal securities laws. PMI's obligations to provide services under the Administration Agreement may be terminated by PMI or by PFL under certain circumstances described in this prospectus. For more information, see "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Administration Agreement-Indenture Trustee as Third-Party Beneficiary." Termination of the Administration Agreement would not affect the rights of holders of previously-issued PMI Management Rights under the federal securities laws.
WePFL will offer the Notes to our lender membersits investors at 100% of their principal amount. The Notes will be offered only through our website, and there will be no underwriters or underwriting discounts.
The Notes and PMI Management Rights will be issued in electronic form only and will not be listed on any securities exchange. The Notes will notand PMI Management Rights may only be transferable excepttransferred through an approved online trading platform. Currently, no trading platform exists for the Folio Investing Note Trader platform, ortransfer of the “Note Trader Platform,” operatedNotes and maintained by FOLIOfn Investments, Inc., a registered broker-dealer. TherePMI Management Rights and there can be no assurance however, that a markettrading platform for the transfer of Notes and PMI Management Rights will develop onin the Note Trader platform.future. Therefore, note purchasers must be prepared to hold their Notes and PMI Management Rights to maturity. For more information, see “Risk Factors-Risks Inherent in Investing in the Notes-The Notes will not be listed on any securities exchange and can be held only by PFL’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 Notes they purchase until maturity.” This offering is highly speculative and the Notes involve a high degree of risk. Investing in the Notes should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” on page 10."Risk Factors" for more information.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is _____, 2012_________, 2018.
TABLE OF CONTENTS
PART I | | | | | | ii | | | | | | iv | | | | | | 1 | | | | | | 3 | | | | | | 8 | | | | | | 10 | | | | | | 10 | | | | | | 16 | | | | | | 18 | | | | | | 25 | | | | | | | | 30 | | | | | | 30 | | | | | | 30 | | | | | | 31 | | | | | | 63 | | | | | | 73 | | | | | | 79 | | | | | | | | 84 | | | | | | 87 | | | | | | 90 | | | | | | 90 | | | | | | 90 | | | | | | 91 | | | | | | 95 | | | | | | 95 | | | | | | F-1 |
ABOUTABOUT THIS PROSPECTUS
This prospectus describes ourProsper Funding LLC's offering of Borrower Payment Dependent Notes, or “Notes.”"Notes." In addition, a PMI Management Right issued by Prosper Marketplace, Inc. is attached to each Note issued by Prosper Funding LLC. Such PMI Management Right will not be separable from the Note to which it is attached and will not be assigned any value separate from such Note. This prospectus is part of a registration statement filed with the Securities and Exchange Commission, which we referis referred to herein as the “SEC.”"SEC." This prospectus, and the registration statement of which it forms a part, speak only as of the date of this prospectus. WeProsper Funding LLC and Prosper Marketplace, Inc. will supplement this registration statementprospectus from time to time as described below. Unless the context otherwise requires, we use the terms “the Company,” “our company,” “we,” “us” and “our” in this prospectus to refer to Prosper Funding LLC, a Delaware limited liability company. We are a wholly-owned subsidiary of Prosper Marketplace, Inc., a Delaware corporation, or “PMI”.
The offering described in this prospectus is a continuous offering pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”"Securities Act"). We offer NotesThe Securities are offered continuously and sales of Notesthe Securities through the platformmarketplace occur on a daily basis. When we postPFL posts a loan request on our website,the marketplace, that posting constitutes an offer by usPFL to sell the series of Notes corresponding to that request. WeAs used in this prospectus, a "loan listing" or a "listing" shall refer to a posted loan request asrequest. PFL may allocate some of its loan requests to other investor funding channels, including, for example, loans that it sells privately to certain investors. If it does so, it will allocate loan requests among its various investor channels automatically, based upon a “loan listing”random allocation methodology determined by PFL or a “listing”. WePMI. Some loan listings may have been allocated to one of the other investor funding channels first. All such loan listings will be identified for investors. PFL and PMI prepare regular supplements to this prospectus, which we refer to as “listing reports”.are called "listing reports." In each listing report, wePFL and PMI provide information about the most recent loan listings posted on our websitethe marketplace and the series’series of Notes that correspond to those listings. WePFL and PMI will also regularly file prospectus supplements that we refer to as “sales reports”,are called "sales reports," describing the bidding historyfunding, interest rate and maturity date for each series of Notes sold through the platform.marketplace. These prospectus supplements will provide information about the Notes that will correspond to the information contained in the corresponding borrower listings. WeListing reports will also post these listing and sales reportsbe posted on ourPFL's website.
WePFL and PMI will prepare prospectus supplements to update this prospectus for other purposes, such as to disclose changes to the terms of ourthe offering of the Notes, provide quarterly updates of our financial and other information included in this prospectus and disclose other material developments. WeThese prospectus supplements will file these prospectus supplementsbe filed with the SEC pursuant to Rule 424(b) and post themwill be posted on ourPFL's website. When required by SEC rules, such as when there is a “fundamental change”"fundamental change" in ourthe offering or the information contained in this prospectus, or when an annual update of our financial information is required by the Securities Act or SEC rules, wePFL and PMI will file post-effective amendments to the registration statement of which this prospectus forms a part, which will include either a prospectus supplement or an entirely new prospectus to replace this prospectus. WePFL and PMI currently anticipate that post-effective amendments will be required, among other times, when we changethere are changes to the material terms of the Notes.
The NotesSecurities are not available for offer and sale to residents of every state. OurPFL's website will indicateindicates the states where residents may purchase Notes. We will postthe Securities. PFL posts on ourits website any special suitability standards or other conditions applicable to purchases of Notesthe Securities in certain states that are not otherwise set forth in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
WePFL and PMI have filed a registration statement on Form S-1 with the SEC in connection with this offering. In addition, wePFL and PMI are required to file annual, quarterly and current reports and other information with the SEC. You may read and copy the registration statement and any other documents we havePFL or PMI has filed at the SEC’sSEC's Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. OurPFL and PMI's SEC filings are also available to the public at the SEC’sSEC's Internet site at http://www.sec.gov.
This prospectus is part of the registration statement and does not contain all of the information included in the registration statement and the exhibits, schedules and amendments to the registration statement. Some items are omitted in accordance with the rules and regulations of the SEC. For further information with respect to usPFL, PMI and the Notes, weSecurities, please refer you to the registration statement and to the exhibits and schedules to the registration statement filed as part of the registration statement. Whenever a reference is made in this prospectus to any of ourPFL or PMI's contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement.
PFL and PMI "incorporate" into this prospectus information filed with the SEC in their Annual Report on Form 10-K for the fiscal year ended December 31, 2017 ("Annual Report") filed on March 26, 2018, except for the information that has been
which this prospectus is a part, their Quarterly Reports on Form 10‑Q for the fiscal quarters ended March 31, 2018, filed on May 14, 2018, and June 30, 2018, filed on August 13, 2018 (each, a "Quarterly Report"), and their Current Report on Form 8-K filed on February 28, 2018 ("Current Report"). This means that PFL and PMI disclose important information to you by referring you to their Annual Report, Quarterly Report, and their Current Reports, all of which are available at www.prosper.com. The information incorporated by reference is considered to be part of this prospectus. Information contained in this prospectus automatically updates and supersedes previously filed information.
PROSPECTUS SUMMARYYou may request a copy of PFL and PMI's Annual Report, Quarterly Reports, and Current Reports, which will be provided to you at no cost, by writing, telephoning or emailing PFL or PMI. Requests should be directed to Customer Support, 221 Main Street, 3rd Floor, San Francisco, CA 94105; telephone number (415) 593-5400; or emailed to support@prosper.com. In addition, PFL and PMI's Annual Reports, Quarterly Reports and Current Reports are available at www.prosper.com.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including ourthe financial statements and related notes, and the risk factors, beginning on page 10, before deciding whether to purchase ourthe Notes.
Prosper Funding LLCPFL operates a peer-to-peer online credit platform,marketplace, which we referthis prospectus refers to as the “platform”,"marketplace," that enables its borrower membersPFL's borrowers to borrow money and its lender membersinvestors to purchase Borrower Payment Dependent Notes, or Notes, issued by Prosper Funding LLC,PFL, the proceeds of which facilitate the funding of the loansBorrower Loans made to borrower members. Prosper Funding LLCborrowers. The peer-to-peer lending industry is a very innovative and unique industry, and the application of federal and state laws in areas such as securities and consumer finance to PFL's business is still evolving. PFL is a wholly-owned subsidiary of Prosper Marketplace, Inc. We use the terms “we”, “us” and “our” to refer to Prosper Funding LLC, and we use the term “PMI” to refer to Prosper Marketplace, Inc.PMI.
About the PlatformMarketplace
PMI developed the platformmarketplace and ownsowned the proprietary technology that makes operation of the platformmarketplace possible. We haveIn connection with this offering, PMI transferred ownership of the marketplace, including all of the rights related to the operation of the marketplace, to PFL.
PMI and WebBank entered into a ServicingMarketing Agreement, pursuant to which PMI, as agent of WebBank, manages the operation of the marketplace 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. In the future, PMI and/or PFL may enter into agreements with other banks that would act in addition to, or in lieu of, WebBank, in connection with making Borrower Loans through the marketplace. PFL and PMI entered into an Administration Agreement, pursuant to which PMI has licensedagreed to usmanage all other aspects of the right to operate the platform, and we have appointed PMI to provide certain administrative services relating to the platform (the “Servicing Agreement”).marketplace on behalf of PFL. Prior to the commencement of this offering, PMI operated the platform directly,marketplace, facilitated the origination of loans by WebBank through the platformmarketplace and issued and sold notes corresponding to those loans. We refer to borrower loans originated and notesNotes issued and sold through the platformmarketplace prior to the commencement of this offering are referred to as “PMI Borrower Loans” and “PMI Notes”, respectively."PMI Notes".
Loan Listings. A loan listing, or a listing, is a request by a PFL borrower member for a borrower loanBorrower Loan in a specified amount that is posted on the platformmarketplace by the borrower. A borrower member. We refer to a borrower member who posts a loan listing on the marketplace is referred to as an “applicant”"applicant" and an applicant who obtains a loan through the platformmarketplace as a “borrower”. Each"borrower." PMI adds to each listing sets forthadditional information, including the desired loan amount, interest rate and corresponding yield percentage, the minimum amount of total bids required for the loan to fund, the Prosper Rating and estimated loss rateProsper Score for the listing, the applicant’sapplicant's debt-to-income ratio, certain credit information from the applicant’sapplicant's credit report, the applicant’sapplicant's numerical credit score range, and the applicant’sapplicant's self-reported annual income range, occupation and employment status. Neither PFL nor PMI guarantees payment of the Notes or the corresponding Borrower Loans.
The Prosper Rating is a proprietary credit rating that we assign to each listing. The Prosper Rating is a letter that indicates the level of risk associated with a listing and corresponds to an estimated average annualized loss rate range for the listing. There are currently seven Prosper Ratings, represented by seven letter scores, but this, as well as the loss ranges associated with each, may change over time as the marketplace dictates. The estimated loss rate for each listing is based on two scores: a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous borrower loansBorrower Loans with similar characteristics.characteristics (a "Prosper Score"). We will use these two scores to determine an estimated average annualized loss rate
for each listing, which correlates to a Prosper Rating. This rating system allows us to maintainfor consistency when assigning a ratingratings to a listing.listings. See “About"About the Platform –Marketplace - Risk Management.”Management" for more information. For loan listings begun on or after December 21, 2016, the borrower's Prosper Rating and Prosper Score have been determined based on information obtained from his or her TransUnion credit report. For all listings begun prior to December 21, 2016, the Prosper Rating and Prosper Score were determined using information obtained from Experian.
Bidding on Listings. A bid on a listing is a lender member’san investor's commitment to purchase a Note in the principal amount of the lender member’sinvestor's bid that will be dependent for payment on the payments we receivePFL receives on the borrower loanBorrower Loan described in the listing. After a listing is posted, lender membersinvestors can place bids on that listing until the listing has received bids totaling the requested loan amount. Currently, aThe minimum amount an investor may bid is $25. All bids may be between $25 and the full amountup to 100% of the requested loan amount. A lender memberAn investor who wishes to bid on a listing must have funds in the amount of the bid in his lender memberinvestor account at the time the bid is made. See “About the Platform - Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information. Once a bid is placed, it is irrevocable, and the amount of the bid may not be withdrawn from the lender member’sinvestor's account, unless the bidding period expires without the listing having received enough bids to be funded. Once the listing has received bids totaling the requested loan amount, no further bids can be placed. The maximum length of the bidding period is 14 days. If the listing does not receive bids equal to or exceeding the minimum amount required for the listing to fund by the close of the fourteenth day after the listing is posted, the listing will terminate and the requested loan will not be funded.
Borrower Loans. If at the end of the bidding period the listing has received bids equal to or exceeding the minimum amount required to fund, a loan will generally be made to the applicant in an amount equal to the total amount of all winning bids. All borrower loansBorrower Loans are unsecured obligations of individual borrower membersborrowers with a fixed interest rate set by us and a loan term currently set at one, three or five years, although we may expand the range of available loan terms in the future to between three months and seven years. The minimum and maximum principal amounts for borrower loansBorrower Loans are currently $2,000 and $25,000,$40,000, respectively. We may expand the range of the minimum and/or maximum principal amounts for Borrower Loans in the future to $1,000 and/or $45,000, respectively. All borrower loansBorrower Loans are fundedoriginated by WebBank, a Federal Deposit Insurance Corporation (“FDIC”("FDIC") insured, Utah-chartered industrial bank. After fundingoriginating a loan,Borrower Loan, WebBank sells and assigns the loansuch Borrower Loans to us,PFL, without recourse to WebBank, in exchange for the principal amount of the borrower loan.Borrower Loan. WebBank has no obligation to Note holders.
For all borrower loans,Borrower Loans, we verify the applicant’sapplicant's identity against data from consumer reporting agencies and other identity and anti-fraud verification databases. Loan listings can be posted without ourus obtaining any documentation of the applicant’sapplicant's ability to afford the loan. In some instances, we verify the income or employment information provided by applicants in listings. This verification is normally done after the listing has been created but before the loan is funded, and therefore the results of the verification process are not reflected in the loan listings. See “AboutIf we are unable to verify material information with respect to an applicant or listing, we will cancel or refuse to post the Platform –listing or cancel any or all commitments against the listing. We may also delay funding of a 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 we identify material misstatements or inaccuracies in the listing or in other information provided by the applicant, we will cancel the listing or related loan. For more information, see "About the Marketplace-Borrower Identity and Financial Information Verification.”"
The Notes. We issuePFL generally issues and sellsells a series of Notes for each borrower loanBorrower Loan that is funded onthrough the platform.marketplace. The Notes are sold to the lender membersinvestors who successfully bid on the corresponding loanBorrower Loan listing in the principal amounts of their respective bids. Each series of Notes is dependent for payment on payments we receivePFL receives on the corresponding borrower loan. We useBorrower Loan. PFL uses the proceeds of each series of Notes to purchase that loanthe corresponding Borrower Loan from Web Bank.WebBank.
WePFL will pay each Note holder principal and interest on the Note in an amount equal to each such Note’s Note's pro rataportion of the principal and interest payments, if any, we receivethat PFL receives on the corresponding borrower loan,Borrower Loan, net of ourPFL's servicing fee, which is currently set at 1%, but which we per annum of the outstanding principal balance of the corresponding Borrower Loan prior to applying the current payment. PFL may increase in the future increase the servicing fee to an amounta percentage that is greater than 1% but less than or equal to 3%. We per annum. Any change to PFL's servicing fee will only apply to Notes offered and sold after the date of the change. PFL will pay Note holders any other amounts we receiveit receives on the corresponding borrower loans,Borrower Loans, including late fees and prepayments, subject to ourits servicing fee, except that weit will not pay to Note holders any non-sufficient funds fees for failed borrower payments that we receive.it receives. In addition, the funds available for payment on the Notes will be reduced by the amount of any attorneys' fees or collection fees PFL, a third-party servicer or a collection agency charges for services renderedimposes in connection with collection efforts related to the corresponding borrower loan..loan. Notwithstanding the foregoing, no payments will be made on any Note after its final maturity date. See “The Offering - Final"The Offering-Final maturity date/Extension of maturity date.”"
Under our lender memberthe Indenture, if a "Repurchase Event" occurs with respect to a Note, PFL will, at its sole option, either repurchase the Note from the holder or indemnify the holder of the Note for any losses resulting from nonpayment of the Note or from any claim, demand or defense arising as a result of such Repurchase Event. A "Repurchase Event" occurs with respect to a Note if (i) a Prosper Rating different from the Prosper Rating actually calculated by PFL was included in the listing for the corresponding Borrower Loan and the interest of the holder in the 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 Borrower Loan because either PFL inaccurately input data into, or inaccurately applied, the formula for determining the Prosper Rating and, as a result, the interest of the holder in the Note is materially and adversely affected, or (iii) the corresponding Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower and a material payment default under the corresponding Borrower Loan has occurred.
Under PFL's investor registration agreement, PFL represents and warrants that (i) if an investor uses an automated bidding tool or order execution service offered by PFL, such as Auto Invest or Recurring Investment (formerly known as Auto Quick Invest), to identify Notes for purchase, each Note purchased will conform to the investment criteria provided by the investor through such tool or service, and (b) each Note that an investor purchases from PFL will be in the event of a material default under a series of Notes due to verifiable identity theftprincipal amount of the named borrower’s identity, webid such investor placed and will repurchasecorrespond to the Borrower Loan on which such Notesinvestor bid. If PFL breaches either of these representations and warranties and, as a result, the Note sold to an investor is materially different from the relevant lender members. InNote that would have been sold had the event we breach not occurred or if the investor would not have purchased the Note at all absent such breach, PFL will, at its sole option, either indemnify the investor from any losses resulting from such breach, repurchase the Note or cure the breach, if the breach is susceptible to cure. If PFL breaches any of ourits other representations and warranties in the lenderinvestor registration agreement pertaining to the Notes, and such breach materially and adversely affects an investor's interest in a series of Notes, weNote, PFL will, at its sole option, either indemnify the lender members,investor, repurchase that series of Notesthe affected Note from such investor or cure the breach. See “AboutIf PFL repurchases any Notes, PMI will concurrently repurchase the Platform—Our Noterelated PMI Management Right for zero consideration. For more information about PFL's repurchase and indemnification obligations under the indenture and the investor registration agreements, see "About the Marketplace-Note Repurchase and Indemnification Obligations.” "
PMI Management Rights. The PMI Management Rights are "investment contracts" issued by PMI directly to Note holders. The phrase "investment contract" is a concept under federal securities law that refers to an arrangement where investors invest money in a common enterprise with the expectation of profits, primarily from the efforts of others. Here, the "investment contracts" that PMI is registering as PMI Management Rights arise from the services that PMI has provided and will provide, as described in the Administration Agreement, the Indenture, the Investor Registration Agreement, and in this prospectus, which services include, but are not limited to:
the existence and operation of the marketplace; verification of borrower information; evaluation and validation of the Prosper Score and Prosper Rating; remitting borrower payments; and collecting on delinquent accounts.
Investors who purchase PMI Management Rights will have rights under the federal securities laws as a purchaser of a registered security. Investors will have limited contractual rights, collectively through the indenture trustee, to enforce PMI's contractual obligations under the Administration Agreement. Such contractual rights exist under state law and will not, in any way, affect the rights of investors under the federal securities laws.
The PMI Management Rights arise from the services that PMI will provide to PFL under the Administration Agreement as described in this prospectus. Pursuant to the Administration Agreement, PMI will provide three kinds of services to PFL: (i) PMI will manage the operation of the marketplace itself (credit policy revisions, systems maintenance, etc.) (the "Loan Marketplace Administration Services"); (ii) PMI will provide back-office services to PFL (maintaining books and records, making periodic regulatory filings, performing limited cash management functions, etc.) (the "Corporate Administration Services"); and (iii) PMI will service the Borrower Loans and Notes originated through the marketplace (the "Loan and Note Servicing Services"). Holders of PMI Management Rights will have a limited contractual ability, collectively through the indenture trustee, to enforce PMI's obligations under the Administration Agreement. However, holders of PMI Management Rights also have rights under the federal securities laws that are not limited, contractually or otherwise. PMI's obligations to provide services under the Administration
Agreement may be terminated by PMI or by PFL under certain circumstances described in this prospectus. For more information, see "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-PMI Management Rights."
Termination of the Administration Agreement would not affect the rights of holders of previously issued PMI Management Rights under the federal securities laws. If PFL or PMI were to terminate PMI's obligations to provide services under the Administration Agreement, PMI would cease to issue new PMI Management Rights. PFL has entered into a back-up servicing agreement with a loan servicing company who is willing and able to transition loan and Note servicing responsibilities from PMI, but it is unlikely that the back-up servicer would be able to perform functions other than servicing the outstanding Borrower Loans and Notes. Therefore, PFL might have to suspend the facilitation of new Borrower Loans and the issuance of new Notes until it could find another party or parties that could perform the services PMI had been performing under the Administration Agreement. PFL believes it could find another party or parties to perform such services, but the search could take time. For more information, see "Risk Factors-Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes."
The PMI Management Rights will be attached to the Notes, will not be separable from the Notes and will not be assigned a value separate from the Notes. Servicing and Loan Marketplace Administration. Servicing. We arePFL is responsible for servicing the borrower loansBorrower Loans and Notes. WeFollowing its purchase of Borrower Loans and sale of Notes corresponding to the Borrower Loans, PFL begins servicing the Borrower Loans and Notes. If a Borrower Loan becomes one or more days past due, PFL may collect on it directly or refer borrower loans that become more than 30 days past-dueit to a third party servicer or collection agency for collection proceedings.collection. See “About"About the Platform –Marketplace- Loan Servicing and Collection.”Collection" for more information.
PFL has entered into an Administration Agreement with PMI, pursuant to which PFL has engaged PMI to assist it in servicing the Borrower Loans, managing the marketplace, and in performing other duties. Pursuant to the Administration Agreement, PMI will provide a variety of administrative and management services, including, but not limited to, supervision of:
the management, maintenance and operation of the marketplace; the issuance, sale and payment of the Notes; PFL's purchase of Borrower Loans; the operation of www.prosper.com; PFL's compliance with applicable federal and state laws (including consumer protection laws, state lender licensing requirements and securities registration requirements); the applicant verification and eligibility processes; the posting of listings on the marketplace; and the assignment of a Prosper Rating and an interest rate to each listing.
See "About the Marketplace," "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Administration Agreement" and "Information About Prosper Marketplace, Inc." for more information.
Recurring InvestmentQuick Invest. The platform includes a. Our automated loan search tool, Recurring Investment (formerly known as Auto Quick Invest), is an automated loan search tool that allows investors to easily invest in Notes that meet their specific investment criteria by automatically bidding any available funds in their account on Notes that match their selected parameters, in accordance with their instructions. An investor using Recurring Investment is asked to indicate his or her investment criteria by applying one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio, credit score and Prosper Rating. The investor is then asked to specify the amount he or she wishes to invest per note, and can also set aside a specific amount of his or her funds as a cash reserve that will not be invested by the Recurring Investment tool. After the investor has entered and saved the parameters of his or her search, Recurring Investment automatically (i) runs searches on their designated criteria as new listings are posted on the marketplace, and (ii) places bids on any Notes identified by each such search. For more information about the Recurring Investment tool and how it works, see "About the Marketplace-How to Bid to Purchase Notes-Recurring Investment."
Auto Invest. Our automated loan search tool, Auto Invest, that makes it easier for lender membersinvestors to identifybuild their desired portfolio of Notes by automatically investing any available funds in an investor’s account in Notes that meet theirmatch the investor’s specified investment criteria. A lender membercriteria and allocation targets. An investor using QuickAuto Invest is asked to indicateselect (i) thea loan allocation target, or a target mix of loans based on Prosper Rating or Ratings, she wishes to use as search criteria,and (ii) the total amount she wishes to invest and (iii) the amounthe or she wishes to invest per Note. Quick Invest then compiles a basketThe investor has the option of Notes forselecting his or her consideration that meet her search criteria. If the pooltarget from Prosper’s series of Notes that meet her criteria exceeds the total amount she wishes to invest, Quick Invest selects Notes from the pool based on how far the listings corresponding to the Notes have progressed through thepreset loan verification process, i.e., Notes from the pool that correspond to listings for which we have completed the verification process will be selected first. If the pool of Notes that meet the lender member’s criteria and for which we have completed verification still exceeds the amount she wishes to invest, Quick Invest selects Notes from that poolallocations based on the principlerecent historical loan inventory on the marketplace, any of first in, first out, i.e.,which may be customized by changing the Notes from the pool with the corresponding listings that were posted earliest will be selected first. If the lender member’s search criteria include multiple Prosper Ratings, Quick Invest divides the lender’s basket into equal portions, one portion representingindividual allocation targets for each Prosper Rating, selected.
Tohis 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 criteria, and pause and restart Auto Invest, at any time. Once the investor turns on Auto Invest, the tool may immediately begin placing orders for Notes in accordance with the investor’s current and target allocations and other investment criteria. The mix of 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 available Notespossible, the allocation specified in his or her investment criteria. The frequency with these Prosper Ratings are insufficient to fillwhich Auto Invest will place orders on the lender member’s order,investor’s behalf is based on the lender member is advisedcash balance of this shortfallhis or her account, the availability of listings matching his or her investment criteria, and given an opportunity either to reduce the size of her order or to modify her searchdemand from other investors. The investor’s account and investment criteria to make her search more expansive. Thewill be reviewed by 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,marketplace. Auto Invest prioritizes accounts with a higher percentage of cash and (ii) to have bids placed automaticallyplaces orders for those accounts first. Auto Invest does not prioritize accounts based on any Notes identified by each such search. See “Aboutoverall account size or investment criteria. For more information about the Platform—HowAuto Invest tool and how it works, see "About the Marketplace-How to Bid to Purchase Notes—QuickNotes-Auto Invest.”"
Corporate Information
Prosper Marketplace, Inc. PMI was incorporated in the State of Delaware inon March 2005, and22, 2005. Its principal executive offices are located at 221 Main Street, 3rd Floor, San Francisco, California 94105. Its telephone number at this location is (415) 593-5400.
Prosper Funding LLC. PMI formed Prosper Funding LLC in the State of Delaware inon February 17, 2012. OurPFL's principal executive offices are located at 111 Sutter221 Main Street, 22nd3rd Floor, San Francisco, California 94104. Our94105. Its telephone number at this location is (415) 593-5400. Our543-5400. Its website address iswww.prosper.com. The information contained on ourits website is not incorporated by reference into this prospectus.
We havePFL has been organized and will beis operated in a manner that is intended (i) to minimize the likelihood that weit will become subject to bankruptcy proceedings, and (ii) to minimize the likelihood that weit would be substantively consolidated with PMI, and thus having ourhave its assets subject to claims by PMI’sPMI's creditors, if PMI files for bankruptcy. This is achieved by placing certain restrictions on ourPFL's activities, including its transactions with PMI, and implementing certain formalities designed to expressly reinforce ourPFL's status as a distinct corporate entity from PMI. See “Information"Information About Prosper Funding LLC.”"
Borrower Payment Dependent Notes
| | | | | Issuer | | Prosper Funding LLC | | | | | | Securities offered | | Borrower Payment Dependent Notes, or “Notes,”"Notes," issued in series, with each series dependent for payment on payments we receivePFL receives on a specific borrower loan.corresponding Borrower Loan. | | | | | | Offering price | | 100% of the principal amount of each Note. | | | | | | Initial maturity date | | Maturities are for one, three or five years and match the maturity date of the corresponding borrower loan. WeBorrower Loan. PFL may in the future extend the range of available loan terms to between three months and seven years, at which time the Notes will have terms between three months andand/or seven years. | | | | | Final maturity date/Extension of maturity date | | The final maturity date of each Note is the date that is one year after the initial maturity date. Each Note will maturematures on the initial maturity date, unless any principal or interest payments in respect of the corresponding borrower loanBorrower Loan remain due and payable to usPFL upon the initial maturity date, in which case the maturity of the Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding borrower loan still due and owing to us afterEach Note will mature on the final maturity date, weeven if principal or interest payments in respect of the corresponding Borrower Loan remain due and payable. PFL will have no further obligation to make payments on the NotesNote after the final maturity date even if we receiveit receives payments on the corresponding borrower loanBorrower Loan after the final maturity date. However, because we may, in our sole discretion and subject to our servicing standard, amend, modify, sell to a third-party debt purchaser or charge-off the borrower loan at any time after the 31st day of its delinquency, and because we generally charge-off a loan after it becomes more than 120 days past due, a borrower loan may never reach its final maturitysuch date. | | | | | | Interest rate | | Each series of Notes will have a stated, fixed interest rate equal to itsthe loan yield percentage specified in the related loan listing as determined by us,PFL, which is the interest rate for the corresponding borrower loan,Borrower Loan, net of servicing fees. | | | | |
Setting interest rate for Notes | | Interest rates vary among the Notes, but each series of Notes that corresponds to a single borrower loan will have the same interest rate. We set the interest rates for borrower loansBorrower Loans based on their Prosper Ratings, as well as additional factors such as loanBorrower Loan terms, group affiliations, the economic environment and competitive conditions. The interest rate on each Note is equal to the interest rate on the corresponding borrower loan,Borrower Loan, net of servicingservice fees. See “About the Platform—SettingMarketplace-Setting Interest Rates.”Rates” for more information. | | | | | | | Payments on the Notes | | WePFL will pay principal and interest on any Note a lender memberan investor purchases in an amount equal to the lender member’s investor's pro rataportion of the principal and interest payments, if any, we receivePFL receives on the corresponding borrower loan,Borrower Loan, net of servicing fees and other charges.
See “—Servicing For more information, see "The Offering-Borrower Payment Dependent Notes-Servicing Fees and Other Charges.”" Each Note will provide for monthly payments over a term equal to the corresponding borrower loan.Borrower Loan. The payment dates for the Notes will fall on the sixth business day after the due date for each installment of principal and interest on the corresponding borrower loan.Borrower Loan although interest will be deemed to accrue thereon only through each corresponding loan payment date. See “Summary"Summary of Material Agreements—Indenture, as Form of Notes”Notes, PMI Management Rights and Administration Agreement-Indenture and Form of Notes" for more information.
| | | | | Borrower loans | Lender members | Investors will designate usPFL to apply the proceeds from the sale of each series of Notes to ourthe purchase of the corresponding borrower loanBorrower Loan from WebBank. Each borrower loanBorrower Loan is a fully amortizing consumer loan made by WebBank to an individual borrower member.borrower. Borrower loansLoans currently have a term of one, three or five years, but wePFL may in the future extend the range of available loan terms to between three months and seven years. Borrower membersBorrowers may request loansBorrower Loans within specified minimum and maximum principal amounts (currently between $2,000 and $25,000)$40,000), which are subject to change from time to time. WebBank subsequently sells and assigns the borrower loansBorrower Loans to usPFL without recourse in exchange for the principal amount of the borrower loan. Borrower loans are repayable inLoan. Borrower Loans provide for monthly installmentspayments over the term thereof and are unsecured and unsubordinated. Borrower loansLoans may be repaid at any time by the borrowers without prepayment penalty. We verifyPMI verifies each applicant’sapplicant's identity against data from consumer reporting agencies and other identity and anti-fraud verification databases. Loan listings can be posted without oureither of us obtaining any documentation of the applicant’sapplicant's ability to afford the loan. We sometimes verify the income or employment information provided by applicants. This verification is normally done after the listing has been created but before the loan has funded, and therefore the results of the verification are not reflected in the listings. See “About"About the Platform – BorrowerMarketplace-Borrower Identity and Financial Information Verification”Verification" for more information. | | | | |
Security Interest—Ranking | | | | | | Borrowers are able to use the 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, (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), or (iii) engaging in any illegal activity or gambling, and they warrant, represent and agree that they will not use the proceeds of any loan for such purposes. | | | | | | The Notes will not be contractually senior or contractually subordinated to other indebtedness, if any, that we incur.PFL incurs. All Notes will be special, limited obligations of Prosper Funding LLC. We werePFL. PFL was formed by PMI so that, in the event of PMI’sPMI's bankruptcy, the borrower loans we ownBorrower Loans that PFL owns should be shielded from claims by PMI’sPMI's creditors, thereby protecting the interests of Note holders in those borrower loans.Borrower Loans and the proceeds thereof. This is achieved by placing certain restrictions on ourPFL's activities, including restrictions in ourPFL's organizational documents on ourits ability to incur additional indebtedness, and by implementing certain formalities designed to expressly reinforce ourits status as a distinct corporate entity from PMI. Nevertheless, the Notes themselves do not restrict ourPFL's incurrence of other indebtedness or the grant or imposition of liens or security interests on ourPFL's assets, and holders of the Notes do not themselves have a direct security interest in the corresponding borrower loanBorrower Loan or the proceeds of that loan. Accordingly, in the event of a bankruptcy or similar proceeding of Prosper Funding LLC,PFL, the relative rights of a holder of a Note may be uncertain. To further limit the risk of ourPFL's insolvency, we havePFL has therefore granted the indenture trustee, for the benefit of the Note holders, a security interest in all of the borrower loans,, allBorrower Loans corresponding to the Notes, the payments and proceeds we receivethat PFL receives on the borrower loans and insuch Borrower Loans, the bank account in which the borrower loanBorrower Loan payments are deposited.deposited and the FBO funding account. The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture,Amended and Restated Borrower Payment Dependent Notes Indenture for the Notes (the "indenture"), which would include ourPFL's becoming subject to a bankruptcy or similar proceeding. Only the indenture trustee, not the holders of the Notes, has a security interest in the above collateral. If the indenture trustee were to exercise its legal rights to the collateral, the indenture provides that amounts collected on a borrower loanparticular Borrower Loan (minus allowable fees and expenses) are to be applied to amounts due and owing on the corresponding Note. There can be no assurance, however, that the indenture trustee, or ultimately the Note holders, would realize any amounts from the collateral. See “Risk Factors—"Risk Factors- Risks Related to Prosper Funding LLC, the PlatformPFL and PMI, Our Marketplace and Our Ability to Service the Notes”Notes" for more information. | | | | | Servicing fees and Other Charges
other charges | | We subtractPFL subtracts a servicing fee from every loan payment we receive.it receives. The amount of the servicing fee with respect todeducted from a particular payment is calculatedequal to (a) the product obtained 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’sborrower's last payment (or, if applicable, since the date on which the relevant loan was funded) and the denominator of which is 365, andmultiplied by (b) multiplying the product obtained by the outstanding principal balance of the loan prior to applying the current payment. The annual servicing fee rate is currently set at 1%, per annum of the outstanding principal balance of the corresponding loan prior to applying the current payment, but wePFL may increase that in the future to a rate greater than 1% but less than or equal to 3%. per annum. Any change to the servicing fee will only apply to Notes offered and sold after the date of the change. Listings set forth the applicable servicing fee. Because servicing fees reduce the effective yield to lenders,investors, the yield percentage displayed in each listing is net of servicing fees.
Any
| | | | | | PFL will retain any non-sufficient funds fees and check processing fees charged to a borrower’sborrower's account will be retained by us as additional servicing compensation.to cover its administrative expenses. If a borrower loanBorrower Loan enters collection, theeither of us, a third party servicer or a collection agency willmay charge a collection fee of between 17% and 30%up to 40% of any amounts that are obtained, in addition to any litigation costs and any legal or transaction fees associated with accepting payments incurred in the collection effort. The collection fee will vary depending on thewhether we use our in-house collections department, a third party servicer's in-house collections department or a collection agency. If a third party servicer or a collection agency used. The collection fees charged byis used, the various collection agencies can be accessed through hyperlinks from the bidding pagefee will also vary depending on the platform.third party servicer or collection agency used. These fees will correspondingly reduce the amounts of any payments lender membersthat Note holders receive on the corresponding Notes and are not reflected in the yield percentage displayed in listings.We
| | | | | | PFL will pay lender membersinvestors any late fees we receiveit receives on borrower loans.Borrower Loans. | | | | | | Use of proceeds | | WePFL will use the proceeds of each series of Notes to purchase the corresponding borrower loan.Borrower Loan. | | | | |
| | | | | Electronic form and transferability | | The Notes will be issued in electronic form only and will not be listed on any securities exchange. The Notes will notand PMI Management Rights may only be transferable excepttransferred through an approved online trading platform. Currently, no trading platform exists for the Folio Investing Note Trader platform operatedtransfer of the Notes and maintained by FOLIOfn Investments, Inc., a registered broker-dealer. TherePMI Management Rights and there can be no assurance that a markettrading platform for the transfer of Notes and PMI Management Rights will develop onin the Note Trader platform and, therefore, lender membersfuture. Therefore, note purchasers must be prepared to hold their Notes and PMI Management Rights to maturity. See “About“Risk Factors-Risks Inherent in Investing in the Platform—Note Trader Platform”Notes” for more information.
|
| | | | | U.S. federal income tax consequences | | Although the matter is not free from doubt, we intend toPFL will treat the Notes as ourits debt instruments that have original issue discount (“OID”("OID") for U.S. federal income tax purposes. Accordingly, if you hold a Note, you will be required to include OID currently as ordinary interest income for U.S. federal income tax purposes (which may be in advance of interest payments on the Note) if the Note has a maturity date of more than one year, regardless of your regular method of tax accounting. If the Note has a maturity of one year or less, (1) if you are a cash-method taxpayer, in general, you will not have to include OID currently in income on your Note unless you elect to do so, and (2) if you are an accrual-method taxpayer, in general, you will have to include OID currently in income on your Note. You should consult your own tax advisor regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership, and disposition of the Notes (including any possible differing treatments of the Notes). See “Material"Material U.S. Federal Income Tax Considerations”Considerations" for more information..information. | | | | | | Financial suitability | | To purchase Notes, lender members located inInvestors that are residents of Alaska, Idaho, Missouri, Nevada, New Hampshire, Oregon, Virginia or MissouriWashington must meet one or more of the following suitability requirements:
a)
| | | | | a. | (i) You must have an annual gross income of at least $70,000;$80,000; (ii) your net worth must be at least $70,000;$80,000 (exclusive of home, home furnishings and automobiles); and (iii) the total amount of NotesSecurities you purchase cannot exceed 10% of your net worth (exclusive of home, home furnishings and automobiles); or | | | | | b. | (i) Your net worth must be at least $280,000 (exclusive of home, home furnishings and automobiles); and (ii) the total amount of Securities you purchase cannot exceed 10% of your net worth (exclusive of home, home furnishings and automobiles). | | | | | Investors that are residents of California must meet one or more of the following suitability requirements: | | | | | a. | (i) You must have had an annual gross income of at least $85,000 during the last tax year; (ii) you must have a good faith belief that your annual gross income for the current tax year will be at least $85,000; and (iii) the total amount of Securities you purchase cannot exceed 10% of your net worth; or b)
| | | | | b. | (i) Your net worth must be at least $250,000; $200,000 (or $300,000 together with your spouse); and (ii) the total amount of NotesSecurities you purchase cannot exceed 10% orof your net worth; or | | | | | c. | (i) Your net investment in Securities cannot exceed $2,500; and (ii) the total amount of Securities you purchase cannot exceed 10% of your net worth. | | | | The Maine Office of Securities recommends and the Oregon Division of Finance and Corporate Securities requires that an investor's aggregate investment in this offering and similar offerings by PMI, PFL or its affiliates not exceed 10% of the investor's liquid net worth. For this purpose, "liquid net worth" is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities. | | | | For purposes of these suitability requirements, you and your spouse are considered to be a single person. In addition, the following definitions apply: | | | | "annual gross income"means the total amount of money you earn each year, before deducting any amounts for taxes, insurance, retirement contributions or any other payments or expenses; | | | | "net worth"means the total value of all your assets, minus the total value of all your liabilities. The value of an asset is equal to the price at which you could reasonably expect to sell it. In calculating your net worth, you should only include assets that are liquid, meaning assets that consist of cash or something that could be quickly and easily converted into cash, such as a publicly-traded stock. You shouldn't include any illiquid assets, such as homes, home furnishings or cars; | | | | "net investment"means the principal amount of NotesSecurities purchased, minus principal payments received on the Notes.Securities. Lender members
| | | | Investors should be aware that wePFL may apply more restrictive financial suitability standards or maximum investment limits to residents of certain states. If established, before making commitments to purchase Notes each lender memberinvestor will be required to represent and warrant that he or she meets these minimum financial suitability standards and maximum investment limits. See “Financial"Financial Suitability Requirements”Requirements" for more information. |
PMI Management Rights | | | | | | Issuer | | Prosper Marketplace, Inc. | | | | | Securities offered | | PMI Management Rights issued by PMI and attached to the Notes offered on the marketplace. The PMI Management Rights are "investment contracts" issued by PMI directly to Note holders. The phrase "investment contract" is a concept under federal securities law that refers to an arrangement where investors invest money in a common enterprise with the expectation of profits, primarily from the efforts of others. Here, the "investment contracts" that PMI is registering as PMI Management Rights arise from the services that PMI has provided and will provide, as described in the Administration Agreement, the Indenture, the Investor Registration Agreement, and in this prospectus, which services include, but are not limited to: | | | | | | | - | the existence and operation of the marketplace; | | | - | verification of borrower information; | | | - | evaluation and validation of the Prosper Score and Prosper Rating; | | | - | remitting borrower payments; and | | | - | collecting on delinquent accounts. | | | | | | Offering price | | No separate consideration will be paid for the PMI Management Rights and such securities will not be separable from the Notes. | | | | | | Use of proceeds | | PMI will not receive any proceeds from the issuance of the PMI Management Rights. | | | | | | Electronic form and transferability | | The PMI Management Rights will be issued in electronic form only. | | | | | | Enforceability | | Investors who purchase PMI Management Rights will have rights under the federal securities laws as a purchaser of a registered security. Investors will have limited contractual rights, collectively through the indenture trustee, to enforce PMI's contractual obligations under the Administration Agreement. Such contractual rights exist under state law and will not, in any way, affect the rights of investors under the federal securities laws. PMI's obligations to provide services under the Administration Agreement may be terminated by PMI or by PFL under certain circumstances described in this prospectus. For more information, see "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Administration Agreement-Indenture Trustee as Third-Party Beneficiary." | | | | | | U.S. federal income tax consequences | | PMI expects that the purchase, sale and holding of the PMI Management Rights will not have any U.S. federal income tax consequences | | | | | | Financial suitability | | See "The Offering-Borrower Payment Dependent Notes-Financial suitability." |
The following diagram illustrates the basic structure of the platformmarketplace for a single series of Notes. This graphic does not demonstrate many details of the platform,marketplace, including the effect of prepayments, late payments, late fees or collection fees. See “About"About the Platform”Marketplace" for more information.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. 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”"may," "believe," "expect," "project," "estimate," "intend," "anticipate," "plan," "continue" or similar expressions. In particular, information appearing under “About the Platform,” “Risk Factors” or “Management’s"Business," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations" in this prospectus, includesas well as the information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of Exhibit 99.1 to the Registration Statement of which this prospectus is a part, and in PFL and PMI’s Quarterly Reports for the fiscal quarters ended March 31, 2018, pages 46 to 58, and June 30, 2018, pages 50 to 65, which are incorporated by reference in this prospectus, include forward-looking statements. 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, we expressPFL or PMI expresses an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and isrespective managements, expressed in good faith and is believed to have a reasonable basis, butbasis. 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 performance of our Borrower Payment Dependent Notes, or “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 make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding loans; |
our ability to attract potential borrowers to our marketplace;the reliability of the information about borrowers that is supplied by borrowers including actions by some borrowers to defraud investors; · | the reliability of the information about borrowers that is supplied by borrowers; |
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 creditworthiness of borrowers and the effectiveness of the credit rating systems; · | our ability to service the 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; |
our compliance with applicable regulations and regulatory developments or court decisions affecting our business;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; · | credit risks posed by the creditworthiness of borrowers, the lack of a maximum debt-to-income ratio for borrowers, and the effectiveness of our credit rating systems; |
the impact of current economic conditions on the performance of the Notes and loss rates of 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; · | actions by some borrowers to defraud lender members and risks associated with identity theft; |
potential efforts by state regulators or litigants to characterize PFL or PMI, rather than WebBank, as the lender of the Borrower Loans originated through the marketplace;the application of federal and state bankruptcy and insolvency laws to borrowers, PFL and PMI; · | our limited operational history and lack of significant historical performance data about borrower performance; |
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 inability to resell the Notes at all; · | the impact of current economic conditions on the performancethe federal income tax treatment of an investment in the Notes and the PMI Management Rights; and loss rates of the Notes; |
· | payments by borrowers on the loans in light of the facts that the loans do not impose restrictions on additional borrower debt and do not include cross-default provisions; |
· | 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;
| · | potential efforts by state regulators or litigants to characterize us or PMI, rather than WebBank, as the lender of the borrower loans; |
· | the application of federal and state bankruptcy and insolvency laws to borrowers, us and PMI; |
· | the impact of borrower defaults and prepayments on the returns on the Notes; |
· | the lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform; |
· | the federal income tax treatment of an investment in the Notes; |
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 marketplace or adversely impact our ability to service Borrower Loans.
· | 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 loans; |
· | the resolution of pending litigation involving PMI, including any state or federal securities litigation; and |
· | our ability to compete successfully in the peer-to-peer and consumer lending industry. |
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact they will have on either of our results of operations and financial condition.conditions. You should carefully read the factors described in the “Risk Factors”"Risk Factors" section of this prospectus for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to update or revise 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.
OurThe Notes and PMI Management Rights involve a high degree of risk. You should carefully consider the risks described below before making a decision to invest in the Notes.Notes and PMI Management Rights. If any of the following risks actually occurs, you might lose all or part of your investment in the Notes. Notes and PMI Management Rights. In addition to the disclosures below, please read carefully the sections entitled "Item 1A. Risk Factors" beginning on page 16 of PFL and PMI's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 previously filed with the SEC and incorporated by reference into this prospectus, and the sections entitled "Item 1A. Risk Factors" included in any subsequent Annual or Quarterly Report that may be incorporated by reference into this prospectus. Before making an investment decision, you should carefully consider these risks. While we believe the risks and uncertainties described below include all material risks currently known by us, it is possible that these may not be the only ones we face. If any of the risks actually occur, our business, financial condition, operating results and prospects could be materially and adversely affected.
Risks Related to Borrower DefaultRISKS RELATED TO BORROWER DEFAULT
The Notes are risky and speculative investments for suitable investors only.
YouInvestors should be aware that the Notes offered through the platformour marketplace are risky and speculative investments. The Notes are special, limited obligations of oursPFL and depend entirely for payment on payments to usPFL's receipt of obligations of borrower memberspayments under the corresponding borrower loans.Borrower Loans. 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 Notes, you purchase, youthe investor should not invest in the Notes.
Payments on the Notes depend entirely on payments we receivePFL receives on corresponding borrower loans.Borrower Loans. If a borrower fails to make any payments on the corresponding borrower loanBorrower Loan related to youra Note, you will not receive any payments on your Note.such Note will be correspondingly reduced. WePFL will only make payments pro rataon a series of Notes after we receiveit receives a borrower’sborrower's payment on the corresponding borrower loan,Borrower Loan, net of our servicing fees. WePFL also will not pay lender members any non-sufficientretain from the funds fees we receive,received from the relevant borrower and the fundsotherwise available for payment on the Notes will be reduced byany non-sufficient funds fees and the amountamounts of any attorneys' fees or collection fees our in-house collections department, a third-party servicer or collection agency charges.imposes in connection with collection efforts. Under the terms of the Notes, if we doPFL does not receive any or all payments on the corresponding borrower loan, you will not receive anyBorrower Loan, payments on your Note.the 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 the Note on the corresponding succeeding Note payment date.
Information supplied by applicants may be inaccurate or intentionally false. Information regarding income and employment is not verified in many cases.
Applicants supply a variety of information regarding the purpose of the loan, income, occupation, and employment status that is included in borrower listings. We do not verify the majority of this information, which may be incomplete, inaccurate or intentionally false. Applicants may misrepresent their intentions for the use of borrower loanBorrower Loan proceeds. Neither we nor WebBank verifies any statements by applicants as to how loan proceeds are to be used andnor do notwe or WebBank confirm after loan funding how loan proceeds were used. All listings are posted on the platformto our marketplace without our verifying the information provided by the applicant, including the borrower’sborrower's stated income, employment status or occupation. Lender membersInvestors should not rely on an applicant’sapplicant's self-reported information such as income, employment status, or occupation in making investment decisions. In the cases in which we select applicants for income and employment verification, the verification is normally done after the listing has been created but prior to the time the borrower loanBorrower Loan is funded. FromFor the period from July 14,13, 2009 to SeptemberJune 30, 2011 PMI2018, we verified employment and/or income on approximately 42%65% of the PMI Borrower Loans originated through the platformour marketplace on a unit basis (6,316(638,443 out of 15,139)976,358) and approximately 65%76% of originations on a dollar basis ($55,766,0419.6 billion out of $85,985,988)$12.6 billion). PMIOf these loans, we canceled 11% of the loan listings for which we verified employment and/or income information because the listings contained inaccurate or insufficient employment or income information. We selected these listings based on the samea combination of factors, we use in selecting listings for additional verification, including amount of loan requested, Prosper Rating, debt-to-income ratio and stated income. If we identify inaccurate information in a listing that does not trigger cancellation of the listing, we do not update the listing to include the corrected information. Listings do not disclose the identity of applicants, and lender membersinvestors have no ability to obtain or verify applicant information either before or after they purchase a Note. If you rely onan applicant supplies false, misleading or unverifiedinaccurate information, supplied by applicants in deciding to purchase Notes, youan investor may lose part or all of the purchase price you paypaid for a Note. Under PFL's Administration Agreement with PMI, PMI is required to perform borrower identity
and financial information verification services for PFL. See “About"About the Platform—BorrowerMarketplace-Borrower Identity and Financial Information Verification”Verification" for more information.
The Notes are special, limited obligations of Prosper Funding LLC onlyapplicants whose income and are not directly secured byemployment information is verified in relation to future listings may differ from the historical information supplied above. No assurance is made that such information will be verified with respect to any collateralparticular applicant or guaranteed or insured by any third party.
The Notes will not represent an obligation of borrowers, PMI or any other party except Prosper Funding LLC, and are special, limited obligations of Prosper Funding LLC. The Notes are not directly secured by any collateral and are not guaranteed or insured by any governmental agency or instrumentality or any third party. Although we have grantedborrower. Neither the indenture trustee for the benefitnor holders of the Note holders, a security interest in all of theany Notes will have any contractual or other relationship with any borrower loans, all payments and proceeds received by us on the borrower loans and in the bank account in which the borrower loan payments are deposited, the Note holders do not themselves have a security interest in the borrower loans or the right to payment thereunder. If an event of default underthat would enable the indenture weretrustee or such holder to occur,make any claim against such borrower for fraud or breach of any representation or warranty in relation to any false, incomplete or misleading information supplied by such borrower in relation to the Note holders would be dependent on the indenture trustee’s ability to realize on the collateral and make payments on the Notes in the manner contemplated by the indenture.relevant Borrower Loan or Note.
The borrower loansBorrower Loans are not secured by any collateral or guaranteed or insured by any third party, and youinvestors must rely on us or a third-party collection agency to pursue collection against any borrower.
Borrower loansLoans are unsecured obligations of borrower members.borrowers. They are not secured by any collateral, and they are not guaranteed or insured by PFL, PMI or any third party or backed by any governmental authority in any way. We and our designated third-party collection agencies will, therefore, be limited in our ability to collect on borrower loans.Borrower Loans. Moreover, borrower loansBorrower Loans are obligations of borrowers to Prosper Funding LLCPFL as successor to WebBank, not obligations to the holders of Notes. Holders of the Notes will have no recourse to the borrowers and no ability to pursue borrowers to collect payments under borrower loans.Borrower Loans. Holders of the Notes may look only to Prosper Funding LLCPFL for payment of the Notes. Furthermore, if a borrower fails to make any payments on the borrower loan,Borrower Loan, the holders of the Notes corresponding to that borrower loanBorrower Loan will not receive any payments on their Notes. The holders of such 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 borrower loan. Some of the borrowers on the platform have “subprime” credit ratings, are considered higher than average credit risks, and may present a high risk of loan delinquency or default.
Some of the borrowers on the platform are people who have had difficulty obtaining loans from other sources, including banks and other financial institutions, on favorable terms, or on any terms at all, due to credit problems, limited credit histories, adverse financial circumstances, or high debt-to-income ratios. Therefore, acquiring Notes that are dependent on payments we receive on the corresponding borrower loans of such borrowers may present a high risk of loan delinquency or default. Borrower Loan.
Prior to the commencement of this offering, PMI operated the platform directly, facilitated the origination of loans by WebBank through the platform and issued and sold notes corresponding to those loans. We refer to borrower loans originated and notes issued and sold by PMI as “PMI Borrower Loans” and “PMI Notes”, respectively. From July 13, 2009 to September 30, 2011, PMI facilitated 15,001 PMI Borrower loans with an average original principal amount of $5,583 and an aggregate original principal amount of $83,754,411 on the platform. As of September 30, 2011, of these 15,001 PMI Borrower Loans, 77.2% were current or had not reached their first billing cycle, 15.3% were paid in full, 1.8% were 1- 30 days past due, 2.0% were more than 30 days past due, and 3.7% had defaulted (a PMI Borrower Loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy). In addition, of these 15,001 PMI Borrower Loans:
| · | 1,282, or 9%, have been more than 15 days past due on at least one occasion; |
| · | 952, or 6%, have been more than 30 days past due on at least one occasion; |
| · | 735, or 5%, have been more than 60 days past due on at least one occasion; |
There can be no assurance that historical loss rates for PMI Borrower Loans will be indicative of future loss rates or the likelihood of the delinquency or default on our borrower loans. See “About the Platform—Historical Performance of PMI Borrower Loans” and “Risk Factors—Risks Relating to Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.
There is noThe maximum debt-to-income ratio for applicants.applicants is 50%.
There is no maximum debt-to-income ratio (or “DTI”Debt-to-income ("DTI") for applicants who post listings on the platform. DTI is a measurement of a borrower’sborrower's ability to take on additional debt. BecauseWhile there is no maximuman upper limit of 50% on the DTI ratio for applicants, borrower loanseligible borrowers in our marketplace, borrowers with higher DTI ratios may haverepresent a highergreater risk of default than would otherwise beborrowers with lower DTI ratios. Note that the case if there weremeasure of DTI for eligibility decisions does not include the amount of the requested Borrower Loan, whereas the measure of DTI presented in a maximum DTI.listing includes the amount of the requested Borrower Loan.
The credit information of an applicant may be inaccurate or may not accurately reflect the applicant’sapplicant's creditworthiness, which may cause youan investor to lose all or part of the price you paid for a Note.
We obtain applicant credit information from consumer reporting agencies, and assign Prosper Ratings to listings based in part on the applicant’sapplicant's credit score. A credit score that forms a part of the Prosper Rating assigned to a listing may not reflect the applicant’sapplicant'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’sapplicant's credit report and displayed in listings may also be based on outdated, incomplete or inaccurate consumer reporting data. We do not verify the information obtained from the applicant’sapplicant'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 Notes, and no assurances can be provided that actual loss rates for the Notes will come within the expectedestimated loss rates indicated by the Prosper Rating.Rating, and investors have limited rights to cause Prosper to repurchase the Notes.
We will indemnify a Note holder or repurchase a Note if we include the wrongThe Prosper Score in a listing or calculate the Prosper Score for a listing incorrectly. We will not, however, have any indemnity or repurchase obligation as a result of any other inaccuracy with respectRating assigned to a listing’s Prosper Scoreloan listing may not accurately reflect the risks of investing in the Notes, and is not a recommendation by us to buy, sell or Prosper Rating.hold a Note. For example, the Prosper Rating for a listing could be inaccurate because the applicant’s credit report contained incorrect information. ASimilarly, although most of the information provided by applicants that is relevant to the Prosper Rating is not a recommendationverified 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 buy, sell or hold a Note.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 we include in a listing a Prosper Rating that is different from the Prosper Rating calculated by us or calculate the Prosper Rating for a listing incorrectly, and such error materially and adversely affects a holder’s interest in the related Note, PFL will indemnify the holder or repurchase the Note. PFL will not, however, have any indemnity or repurchase obligation under the Amended and Restated Indenture, the Notes, the investor 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. PFL’s contractual repurchase obligations do not affect a Note holder’s rights under federal or state securities laws. See “About"About the Platform—Our NoteMarketplace-Note Repurchase and Indemnification Obligations”Obligations" for more information.
Investors who use the Recurring Investment or Auto Invest tools may face additional risk of funding Borrower Loans that have been erroneously selected by the tool.
Since it was first implemented in July 2011 through June 30, 2018, the Recurring Investment tool (formerly known as Auto Quick Invest) has experienced programming errors that affected 8,630 Notes and PMI Notes out of the 10,611,785 Notes and PMI Notes purchased. The Auto Invest tool was first implemented on June 2, 2016. Since such time through June 30, 2018, the Auto Invest tool has experienced programming errors that affected 2 Notes out of the 3,507,392 Notes purchased.
In the event of any errors in Recurring Investment or Auto Invest that cause an investor to purchase a Note from PFL that such investor would not otherwise have purchased or that differs materially from the Note such investor would have purchased had there been no error, PFL will either repurchase the Note, indemnify the investor against losses suffered on that Note or cure such error. See "Risk Factors-Risks Related to PFL and PMI Our Marketplace and Our Ability to Service the Notes" for more information.
The Recurring Investment and Auto Invest tools may invest all available funds in an investor’s account, including any principal and interest payments the investor receives on existing Notes, in accordance with the investor’s investment criteria.
The Recurring Investment (formerly known as Auto Quick Invest) and Auto Invest tools may invest all available funds in an investor’s account, including any principal and interest payments the investor receives on his existing Notes, in accordance with the investor’s investment criteria. Because Notes are risky and speculative investments, investors using these tools may lose some, or all, of the funds in their account, including any principal and interest payments received on Notes. Investors who wish to set aside a portion of their account as cash that will not be invested by Recurring Investment or Auto Invest, as applicable, should set a cash reserve as part of their investment preferences within each tool. Some borrowers may use the platformour marketplace to defraud lender members,investors, which could adversely affect yourinvestors' ability to recoup yourtheir investment.
We use identity and fraud checks with external databases to authenticate each borrower’sborrower's identity. Although we use diligent efforts in this regard, thereThere is a risk, however, that our fraudthese checks could fail and fraud may occur. In addition, applicants may misrepresent their intentions regarding loan purpose or other information contained in listings, and we do not verify the majority of this information. While wePFL will indemnify an investor or repurchase Notes in limited circumstances (including, e.g., a material payment default on the borrower loanBorrower Loan resulting from verifiable identity theft), we areit is not obligated to indemnify an investor or repurchase a Note 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, user recommendations, group affiliations or similar indiciaindicators of borrower intent and ability to repay the borrower loan.Borrower Loan. For the period from July 13, 2009 to June 30, 2018, we verified employment and/or income on approximately 65% of the Borrower Loans originated through our marketplace on a unit basis (638,443 out of 976,358) and approximately 76% of originations on a dollar basis ($9.6 billion out of $12.6 billion). Of these Borrower Loans, we canceled 11% of the loan listings for which we verified employment and/or income information because the listings contained inaccurate or insufficient employment or income information. If we repurchasePFL repurchases a Note, the repurchase price will be equal to the Note’sNote's outstanding principal balance and will not include accrued interest. If PFL repurchases any Notes, PMI will concurrently repurchase the related PMI Management Rights for zero consideration. See “About"About the Platform—Our NoteMarketplace-Note Repurchase and Indemnification Obligations”Obligations" for more information.
The fact that we have the exclusive right and ability to investigate claims of identity theft in the origination of loansBorrower Loans creates a significant conflict of interest between us and the lender members.our investors.
We have the exclusive right to investigate claims of identity theft and determine, in our sole discretion, whether verifiable identity theft has occurred. Verifiable identity theft triggers an obligation by usPFL to either repurchase a Note.the related Notes or indemnify the applicable Note holders. As we are the sole entityentities with the ability to investigate and determine verifiable identity theft, which triggers our PFL's repurchase or indemnification obligation, a conflict of interest exists. Lender membersInvestors rely solely on us to investigate incidents that might require usPFL to indemnify the applicable Note holders or repurchase a loan.the related Notes. The denial of a claim under ourPFL's identity theft guarantee would save usPFL from ourits indemnification or repurchase obligation. See “About the Platform—Our Note Repurchase and Indemnification Obligations” for more information.
We do not have significant historical performance data about performance on the borrower loans. Loss rates on the borrower loansBorrower Loans may increase and prior to investing youinvestors should consider the risk of non-payment and default.
We are in the early stages of our development and have a limited operating history. We did not offer borrower loans through the platform prior to this offering. PMI began offering PMI Borrower Loans were first offered through the platformour marketplace in February of 2006, but the performance of PMI Borrower Loans may not be indicative of the future performance of our borrower loans. Due to our limited operational history, we do not have significant historical data regarding the performance of the borrower loans, and we do not yet know what the long-term loan loss experience will be.2006. The estimated loss rates we display on our website and useused to determine the Prosper Rating have been developed from PMI’sthe loss histories of PMIall Borrower Loans. Accordingly, borrower loansLoans originated on the platformthrough our marketplace. However, future Borrower Loans originated through our marketplace may default more often than similar PMI Borrower Loans have defaulted in the past, which increases the risk of investing in the Notes.
If payments on the Borrower Loan corresponding borrower loans relating to your 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 Notes,the Note, and yousuch investor may not recover any of yourthe original purchase price.price on the Note.
We may refer Borrower Loans that become past due to a third party collection agency for collection or we may collect on such Borrower Loans directly. If a borrower fails to make a required payment on a borrower loanBorrower Loan within 30 days of the due date, we will pursue reasonable collection efforts in respect of the borrower loan.Borrower Loan. Referral of a delinquent borrower loanBorrower Loan to a collection agency within five (5) business days after it becomes thirty days past due will be considered reasonable collection efforts.
If we refer a borrower loan to a collection agency, we will not have any other obligation to attempt to collect that borrower loan. We also may handle collection efforts in respect of a delinquent borrower loan directly. If payment amounts on a delinquent borrower loanBorrower Loan are received from a borrower more than 30 days after their due date, and the loan has been referred to our in-house collections department or an outside collection agency, we or that collection agency willmay retain a percentage of that payment as a fee before any principal or interest becomes payable to you.an investor. Collection fees range from 17%may be up to 30%40% of recovered amounts. amounts, in addition to any legal fees and transaction fees associated with accepting payments incurred in the collection effort.
For some non-performing borrower loans,Borrower Loans, we willmay not be able to recover some or allany of the unpaid loan balance and, as a result, a lender memberan investor who has purchased a corresponding Note willmay receive little, if any, of the unpaid principal and interest payable under the Note. YouIn all cases, investors must rely on theour collection efforts of us, PMI or the applicable collection agency to which such borrower loansBorrower Loans are referred. Youreferred, and are not permitted to collect or attempt to collectcollection of payments on the borrower loansBorrower Loans in any manner.
Late payment performance is an early indicator of charge off probability. Of all Borrower Loans originated between July 13, 2009 and June 30, 2018, 15.5% have been greater than 30 days past due at any time and 14.1% have been greater than 60 days past due at any time. Of all Borrower Loans originated between July 13, 2009 and June 30, 2018 a total of 120,438 or 12.4% of such loans have been charged off.
Loss rates on the borrower loansBorrower Loans may increase as a result of economic conditions beyond our control and beyond the control of the borrower member.borrower.
Borrower loanLoan loss rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers. In particular, loss rates on borrower loansBorrower 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 we receivePFL receives payments on the borrower loans relatingBorrower Loan corresponding to your Notesan investor's Note after the final maturity date, yousuch investor will not receive payments on your Notesthat Note after maturity.
Each Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding borrower loanBorrower Loan remain due and payable to usPFL upon the initial maturity date, in which case the maturity of the Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding borrower loanBorrower Loan still due and owing to us afterPFL on the final maturity date, wePFL will have no further obligation to make payments on the related Notes, even if we receiveit receives payments on the corresponding borrower loanBorrower Loan after final maturity.
The borrower loansBorrower 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 borrower loan,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 Note.
If a borrower incurs additional debt after the date of the borrowera loan listing is posted, the additional debt may impair the ability of that borrower to make payments on his or her borrower loanBorrower 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 Note. In addition,Moreover, the additional debt may adversely affect the borrower’sborrower'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 us.to 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’sborrower's ability to repay the borrower loanBorrower Loan on which youran investor's Note is dependent for payment. Borrowers may also choose to repay obligations under secured indebtedness or other unsecured indebtedness before repaying borrower loansBorrower Loans because there is no collateral securing the borrower loans. A lender memberBorrower Loans. An investor will not be notified if a borrower incurs additional debt after the date a loan listing is posted. A borrower may request that his or her bank “chargeback”"chargeback" a payment on a borrower loanBorrower Loan upon which a 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 memberan investor's account.
A borrower chargeback is a process by which a borrower who has made a payment on a borrower loanBorrower Loan has his or her bank cancel the payment or request a refund of that payment. We withhold payments to lender membersinvestors up to six business days after a related borrower payment is initiated. If the chargeback occurs between six and 60or more days after the initiation of payment, youan investor must rely on us to contest the chargeback if we deem it appropriate. If a borrower successfully processes a chargeback between six and 60or more days after initiation of payment, such payment will be deducted from your lender memberan investor's account, and if you havesuch investor has withdrawn funds in the interim, a negative cash balance may result. Amounts received on borrower loansBorrower Loans corresponding to youran investor's Notes payments and deposited into your lender membersuch investor's account are subject to set-off against any negative balance or shortfall in your lender memberthe account. See “About the Platform - 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 usPFL as having the same significance as loans from traditional lending sources, such as bank loans.sources.
The investment return on the Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding borrower loan.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 borrower loanBorrower Loan upon which payment of youran Investor's Note is dependent or chooses not to repay his or her borrower loanBorrower Loan entirely, yousuch investor may not be able to recover any portion of yourthe investment in a Note.
The platformOur marketplace may fail to comply with applicable law, which could limit our ability to collect on borrower loans .Borrower Loans.
The borrower loansBorrower Loans are subject to federal and state consumer protection laws. The platformOur marketplace may not always be, and the equivalent platform previously operated by PMI may not always have been, in compliance with these laws. Failure to comply with the laws and regulatory requirements applicable to the platformour marketplace may, among other things, limit our PMI’s or a collection agency’sagency's ability to collect all or part of the principal of or interest on borrower loans. See “Government Regulation—Regulation and Consumer Protection Laws” for more information.Borrower Loans.
We regularly review the requirements of these laws and taketakes measures aimed at ensuring that the borrower loansBorrower Loans originated on the platformthrough our marketplace meet the requirements of all applicable laws. However, determining compliance with all applicable laws is a complex matter and it is possible that our 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 borrower loan.Borrower Loan.
In general, the borrower loansBorrower Loans do not contain any cross-default or similar provisions. If a borrower defaults on any of his or her other debt obligations, our ability to collect on the borrower loanBorrower Loan on which your Notes arean investor's Note is dependent for payment may be substantially impaired.
The borrower loansBorrower 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 borrower loansBorrower Loans do not contain cross-default provisions, a borrower’s loanBorrower Loan will not be placed automatically in default upon that borrower’sborrower's default on any of the borrower’sborrower'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 borrower loan,Borrower Loan, the third party may seize the borrower’sborrower's assets or pursue other legal action against the borrower before the borrower defaults on the Borrower Loan, which may affect our ability to collect from the borrower loan. when or if the Borrower Loan becomes delinquent.
Borrowers may seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of youran 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 borrower loanBorrower Loan on hold and prevent further collection action absent bankruptcy court approval. If we receive notice that a borrower has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, we will put the borrower’s loanborrower's account into “bankruptcy"bankruptcy status.”" When this occurs, we terminate automatic monthly ACH debits on borrower loansthe Borrower Loan and we will not undertake collection activity without bankruptcy court approval. Whether any payment will ultimately be made or received on a borrower loanBorrower Loan after a bankruptcy status is declared depends on the borrower’sborrower's particular financial situation. In most cases, however, unsecured creditors such as usPFL receive nothing, or only a fraction of their outstanding debt.debt and, 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. See “About"About the Platform—LoanMarketplace-Loan Servicing and Collection”Collection" for more information.
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 loansBorrower Loans and reduce the amount of interest paid on the corresponding Notes.
Federal law provides borrowers on active military service with rights that may delay or impair our ability to collect on a borrower loanBorrower Loan corresponding to youran investor's Note. The Servicemembers Civil Relief Act or “SCRA,” requires("SCRA") and other similar state laws require that the interest rate on preexisting debts, such as borrower loans,Borrower Loans, be set at no more than 6% while the qualified service member or reservist is on active duty. A holder of a Note that is dependent on such a borrower loanBorrower Loan for payment will not receive the difference between 6% and the original stated interest rate for the borrower loanBorrower Loan during any such period. The SCRA law also permits courts to stay proceedings and execution of judgments against service members and reservists on active duty, which may delay recovery on any borrower loansBorrower Loans in default, and, accordingly, payments on the corresponding 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 delay recovery on any relevant Borrower Loans in default, and, accordingly, payments on the corresponding Notes.
If there are any amounts under such a borrower loanBorrower Loan still due and owing to usPFL after the final maturity of the corresponding Notes, wePFL will have no further obligation to make payments on the Notes, even if we receiveit receives payments on the borrower loanBorrower Loan after the final maturity of the Notes. We do not take military service into account in assigning a Prosper Rating to loan listings. In addition, as part of the borrower registration process, we do not request borrower membersborrowers to confirm if they are qualified service members or reservists within the meaning of the SCRA or the MLA.
As of June 30, 2018, 82 Borrower Loans with an unpaid principal balance of $614 thousand, are subject to the SCRA. See “Government Regulation—Regulation
The Federal Holder in Due Course Rule may substantially impair an investor’s ability to recoup the full purchase price of a Note or to receive the interest payments that such investor expects to receive on the Note.
The FTC Holder in Due Course Rule, which in certain circumstances permits borrowers to assert any claims and Consumer Protection Laws—Servicemembers Civil Relief Act” for more information.defenses that they would have had against a seller of goods or services obtained with the proceeds of a loan against an originator or subsequent purchaser of the loan, could allow certain borrowers to raise such defenses against PFL to the extent of the outstanding loan balance. If such defenses are successfully raised, PFL will be unable to collect on the loan and it is unlikely that any further payment will be made on the corresponding Notes.
The death of a borrower may substantially impair youran investor's ability to recoup the full purchase price of Notesa Note or to receive the interest payments that you expectsuch investor expects to receive on the Notes.Note.
If a borrower dies while his or her loanBorrower Loan is still outstanding, generally, we will seek to work with the executor of the borrower’sborrower's estate to obtain repayment of the loan. However, the borrower’sborrower's estate may not contain sufficient assets to repay the loan.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 loan,Borrower Loan, it is unlikely that any further payments will be made on the corresponding Notes, because the time required for the probate of the borrower’sborrower's estate will probably extend beyond the final maturity date of the Notes.
RISKS INHERENT IN INVESTING IN THE NOTES
WeThe Notes are special, limited obligations of PFL only and are not directly secured by any collateral or guaranteed or insured by PMI or any third party.
The Notes will not represent an obligation of borrowers, PMI or any other party except PFL, and are special, limited obligations of PFL. The Notes are not guaranteed or insured by PMI, any governmental agency or instrumentality or any third party. Although PFL has granted the indenture trustee, for the benefit of the Note holders, a security interest in the Borrower Loans corresponding to the Notes, the payments and proceeds that PFL receives on such Borrower Loans, the bank account in which such Borrower Loan payments are deposited, and the accounts in which investors' funding amounts are deposited, the Note holders do not themselves have a direct security interest in the Borrower Loans or the right to payment thereunder. If an event of default under the Amended and Restated Indenture were to occur, the Note holders would be dependent on the indenture trustee's ability to realize on the collateral and make payments on the Notes in the manner contemplated by the Amended and Restated Indenture. In addition, although PFL 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 Notes could be required to share the collateral (and any proceeds thereof) with PFL's other creditors, or, if a bankruptcy court were to order the substantive consolidation of PMI and PFL (as described below), PMI's creditors.
PFL is not obligated to indemnify Note holders or repurchase any Notes except in limited circumstances.
We are notPFL is only obligated to repurchase any Note exceptNotes or indemnify holders of Notes in limited circumstances. These circumstances including (1)include if (i) a material payment default occurring on a Noteunder the corresponding Borrower Loan occurs as a result of verifiable identity theft, (2)identify theft; (ii) we include a borrower loanProsper Rating in a listing that is different from the Prosper Rating we calculated, or we calculate the Prosper Rating incorrectly; or (iii) if any errors in Quick Invest, Recurring Investment, or Auto Invest cause an investor to purchase a Note from PFL that such investor would not otherwise have purchased or that differs materially failingfrom the Note, in which cases PFL also has the option to comply with applicable federal and state law at origination, or (3) any other breach of our representations and warranties under our lender registration agreement. Under this agreement, in the event of a breach of the type described in clause (1), we arecure such error. PFL is not required to repurchase the Note, and in the event of any breach described in clause (2) or (3) that materially and adversely affects a lender member’s interest in a Note, we are required to cure the breach, repurchase the NoteNotes or indemnify and holdholders of Notes, however, if the lender member harmless against losses resulting from the breach. We are not, however, obligated to repurchase a Note from a lender member if his or herholder'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 listing, whether in credit data, borrower representations user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the loan. Even ifFor the period from July 13, 2009 to June 30, 2018, we are obligatedverified employment and/or income on approximately 65% of the Borrower Loans originated through our marketplace on a unit basis (638,443 out of 976,358) and approximately 76% of originations on a dollar basis ($9.6 billion out of $12.6 billion). Of these loans, we canceled 11% of the loan listings for which we verified employment and/or income information because the listings contained inaccurate or insufficient employment or income
information. Nor is PFL under any obligation to repurchase a Note or indemnify any holder of Notes if a correctly-determined Prosper Rating fails to accurately predict the actual losses on a Borrower Loan.
PFL might 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.
PFL 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, PFL considers the history of such obligations incurred by it and PMI. Nonetheless, there can be no assurance that weif PFL is obligated to repurchase a Note or indemnify a Note holder, that it will be able to meet ourits repurchase obligation.or indemnification obligations. If we arePFL is unable to meet ourits indemnification and repurchase obligation, youobligations with respect to a Note, the investor in such Note may lose all of yoursuch investor's investment in the Note. Risks Inherent in Investing in the Notes
If you decidean investor decides to invest through the platformour marketplace and concentrate yourhis or her investment in a single Note, yousuch investor may increase yourhis or her risk of borrower defaults.
YourThe expected return on youran investor's investment in the Notes depends on the performance of the borrowers under the corresponding borrower loans.Borrower Loans. There are a wide range of Prosper Ratings and listings onin the platformmarketplace and we expectPFL expects some borrowers to default on their loans. If you decidean investor decides to invest through the platformour marketplace and concentrate yourhis or her investment in a single Note, yoursuch investor's entire return will depend on the performance of a single borrower loan.Borrower Loan. For example, if you planan investor plans to purchase $200 (not in thousands) of Notes, and choosechooses to invest the entire $200 (not in thousands) in a single Note instead of in eight $25 (not in thousands) Notes corresponding to the borrower loansBorrower Loans of eight different borrowers, yoursuch investor's entire $200 (not in thousands) investment will depend on the performance of a single borrower loan. ItBorrower Loan. Investors may befind it desirable to diversify yourtheir portfolio in order to reduce the risk that youthey could lose yourtheir entire investment due to a single default, or a small number of defaults. However, diversification does not eliminate the risk that youinvestors may lose some, or all, of yourtheir investment in the Notes.
The platformOur marketplace allows a borrower member to prepay a borrower loanBorrower Loan at any time without penalty. Borrower loanLoan prepayments will extinguish or limit youran investor's ability to receive additional interest payments on a Note.
Borrower loanLoan prepayment occurs when a borrower decides to pay some or all of the principal amount on a borrower loanBorrower Loan earlier than originally scheduled. Borrowers may decide to prepay all or a portion of the remaining principal amount due under a Borrower Loan at any time without penalty. In the event of a prepayment of the entire remaining unpaid principal amount of a borrower loanBorrower Loan on which your Notes arean investor's Note is dependent for payment, yousuch investor will receive yourhis or her share of such prepayment but further interest will not accrue on such Borrower Loan or on such 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 borrower loanBorrower Loan will not change, but interest will cease to accrue on the prepaid portion, and youan investor will not receive all of the interest payments that yousuch investor originally expected to receive on your 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 borrower loanBorrower Loan is prepaid. Prepayments are subject to ourPFL's servicing fee, even if the prepayment occurs immediately after issuance of youra Note.
Prevailing interest rates may change during the term of yourthe Notes. If this occurs, youinvestors may receive less value from yourthe purchase of the NoteNotes in comparison to other ways youthey may invest yourtheir money. Additionally, borrowers may prepay their borrower loansBorrower 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 Notes.
The borrower loansBorrower Loans on which the Notes are dependent for payment bear fixed, not floating, rates of interest. If prevailing interest rates increase, the interest rates on 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.
We may not set appropriate interest rates for borrower loans.Borrower Loans.
We set interest rates for all Borrower Loans based on Prosper Ratings, as well as additional factors such as Borrower Loan terms, the economic environment and competitive conditions. If we set interest rates for borrower loansBorrower Loans too low, lender members
investors may not be compensated appropriately for the level of risk that they are assuming in purchasing a 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 Notes that are commensurate with the risks they have assumed in acquiring such Notes.
The PMI Management Rights attached to the Notes will not comprise collateral for the Notes nor generate any funds that will be payable to the holders of 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 Borrower Loans or in any way related to PFL's payment obligations in relation to the Notes. The PMI Management Rights attached to the Notes will not comprise collateral for the Notes nor guarantees of any Borrower Loans or Notes, nor generate any funds or proceeds that will be payable to PFL, the indenture trustee or holders of Notes in relation to any Borrower Loans or Notes. Holders of Notes will have no recourse to PMI or its assets in relation to payments on Borrower Loans or Notes. If PFL repurchases any Notes, PMI will concurrently repurchase the related PMI Management Right for zero consideration. PFL's repurchase obligations under the Amended and Restated Indenture, the Notes, the investor agreement or any other agreement associated with the Note Channel, and PMI's concurrent repurchase of the related PMI Management Rights, do not affect investors' 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, investors 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 PFL: (i) Loan Marketplace Administration Services (managing the operation of our marketplace), (ii) Corporate Administration Services (providing back-office services to PFL, 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 Borrower Loans and Notes originated through our marketplace). 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 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 marketplace administration and corporate administration obligations under the Administration Agreement. Holders representing at least 25% of the combined total of the outstanding 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 PFL is unable to timely replace PMI as the servicer of the Notes, investors' ability to receive principal and interest payments on Notes may be substantially impaired, even if their portfolio of Notes is well diversified and the Borrower Loans are paying on schedule. In addition, although PFL has a back- up provider in place for PMI as Loan and Note Servicer under the Administration Agreement, PFL does not have a back-up provider for the Loan Marketplace 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 investors' ability to benefit from those services. PMI's obligations to provide services under the Administration Agreement may be terminated by PMI or by PFL 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 Investor Registration Agreement contains provisions that limit certain legal rights of investors in relation to PFL and PMI.
Investors enter into the Investor Registration Agreement with PFL and PMI, which agreement governs all sales of Notes to investors. The Investor Registration Agreement contains provisions that limit certain legal rights of investors in relation to PFL and PMI, including:
Upon a breach of the agreement by PFL or PMl, PFL and PMI have the option to determine which remedy to apply. The available remedies are generally to (1) cure the breach, (2) repurchase the Note or (3) indemnify and hold the investor harmless against all losses resulting from such breach. PFL may in its sole discretion, with or without cause and with or without notice, restrict an investor's access to our marketplace or the website. PFL may in its sole discretion terminate the agreement, with or without cause. Investors agree to indemnify PFL and PMI for all losses (i) resulting from an investor's material breach of the agreement, (ii) relating to the contents of the investor's web page, own website or business, (iii) resulting from an investor's (and their employees, agents or representatives) acts, omissions and representations relating to PFL, PMI and their affiliates, or (iv) asserted by third parties against PFL, PMI and their affiliates alleging that the trademarks, trade names, logos or branding that an investor uses, displays, links to or advertises infringes upon the intellectual property rights of any such third party. These indemnification obligations survive termination of the agreement. Investors are prohibited from assigning, transferring, sublicensing, or otherwise delegating any of their rights under the agreement without PFL's prior written consent. Investors may agree that any claim (excluding claims against Prosper Funding or PMI, or their respective officers and directors, under the federal securities laws) relating to the agreement will be resolved by binding arbitration administered by the American Arbitration Association or JAMS. An investor that agrees to arbitration is required to pay up to $1,000 in fees and costs of the arbitration, which amount may be reimbursed if the investor wins the arbitration. An investor that agrees to arbitration must pay its own attorney’s fees. In addition, any claim of an investor must be brought as a single person, and not as a member of a class or purported class.
The Notes will not be listed on any securities exchange will not be transferable except through the Note Trader platform, and can be held only by our lender members. Youregistered Prosper 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 Notes youthey purchase until they mature.maturity.
The Notes and PMI Management Rights will not be listed on any securities exchange. Allexchange and all Notes and PMI Management Rights must be held by registered Prosper investors. Further, in connection with Prosper’s termination of its relationship with FOLIOfn in October 2016, a trading platform for the transfer of Notes and PMI Management Rights no longer exists. While we may, in our lender members. Thesole discretion, permit the establishment of another platform on which a secondary market may be made with respect to the Notes, there can be no assurance a trading platform for the Notes and PMI Management Rights will notdevelop in the future. Therefore, note purchasers must be transferable exceptprepared to hold their Notes and PMI Management Rights to maturity.
In connection with the termination of Prosper’s relationship with FOLIOfn, investors have no current means to transfer the Notes and PMI Management Rights, and the resulting lack of liquidity could render a potential investment in the Notes less attractive. Prior to October 2016, Note investors could only trade their Notes through our Note Traderthe online trading platform operated by FOLIOfn, an unaffiliated registered broker-dealer. However, in connection with Prosper’s termination of its relationship with FOLIOfn in October 2016, a trading platform for the resale of Notes no longer exists, and there can be no assurance that a market for Notes will continue to develop on the Note Trader platform, or that the Note Traderanother trading platform will continuedevelop for the resale of Notes in operation. Therefore, lender members must be prepared to hold their Notes to maturity. See “About the Platform—Note Trader Platform” for more information. .
If the Note Trader platform fails to develop, or if the Note Trader platform develops but you cannot find a purchaserfuture. The resulting lack of liquidity for the Notes that you wish to sell, you will be forced to holdcould reduce investor demand for the Notes, for their remaining term.which would adversely affect our business.
We cannot guarantee that the Note Trader platform will continue to develop. A Note offered for sale on the Note Trader platform must be purchased in its entirety by a single lender member, and 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 Notes.
If you choose to post your 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 borrower loan.
The ability to sell your Note on the Note Trader platform does not guarantee that you will be able to find a lender member willing to buy the Note at a price acceptable to you, or at all. If the borrower becomes delinquent in payments under the corresponding borrower loan upon which your Note is dependent for payment, your ability to sell the Note on our Note Trader platform will be substantially impaired. You may have to offer the Note for sale at a substantial discount, and there is no guarantee that you will receive the expected value of the Note or any value at all. Additionally, lender members may be less willing to bid for and purchase your Note if prevailing interest rates have changed or other investing activities have proven more attractive while you have held the Note.
YouInvestors do not earn interest on funds held in your lender memberthe FBO funding account.
Your lender memberAn investor's account represents an interest in a pooled bankFBO funding account that does not earn interest. See “About"About the Platform—Structure of Lender Member Accounts and Treatment of Lender Member Balances”Marketplace - Investors" for more information.
The U.S. federal income tax consequences of an investment in the Notes are uncertain.
There are no statutory provisions, regulations, published rulings or judicial decisions that directly address the characterization of the Notes or instruments similar to the Notes for U.S. federal income tax purposes. However, although the matter is not free from doubt because payments on the Notes are dependent on payments on the corresponding borrower loan, we intend to treatBorrower Loan, PFL treats the Notes as our debt instruments that have original issue discount (“OID”("OID") for U.S. federal income tax purposes. Where required, we intendPFL intends to file information returns with the IRSU.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 Notes. YouInvestors should be aware, however, that the U.S. Internal Revenue Service (“IRS”)IRS is not bound by ourPFL's characterization of the Notes and the IRS or a court may take a different position with respect to the Notes’Notes' proper characterization. For example, the IRS could determine that, in substance, each lender memberinvestor owns a proportionate interest in the corresponding loanBorrower Loan for U.S. federal income tax purposes or, for example, the IRS could instead treat the 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 Note. For example, if the Notes are treated as ourPFL's equity, (1) we(i) PFL would be subject to U.S. federal income tax on income, including interest, accrued on the corresponding loansBorrower Loans but would not be entitled to deduct interest or OID on the Notes, and (2)(ii) payments on the 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 ourPFL'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 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 Notes (including any possible differing treatments of the Notes).
OurPFL's ability to pay principal and interest on a Note may be affected by ourits ability to match the timing of ourits income and deductions for U.S. federal income tax purposes.
YouInvestors should be aware that ourPFL's ability to pay principal and interest on a Note may be affected by ourits ability, for U.S. federal income tax purposes, to match the timing of income we receiveit receives from a corresponding loanBorrower Loan that we holdit holds and the timing of deductions that weit may be entitled to in respect of payments made on the Notes that we issue.it issues. For example, if the Notes are treated as contingent payment debt instruments for U.S. federal income tax purposes but the corresponding borrower loansBorrower Loans are not, there could be a potential mismatch in the timing of ourPFL's income and deductions for U.S. federal income tax purposes, whichand PFL's resulting tax liabilities could affect ourits ability to make payments on the Notes.
ParticipationOur participation in the funding of loansBorrower Loans could be viewed as creating a conflict of interest.
As is the practice with other peer-to peermarketplace lending companies, including our competitor, LendingClub, from time to time, we or PMI may fund portions of qualified loan requests on the platformin our marketplace and hold any Notes that we or PMI purchasepurchased as a result of such funding for our or PMI’s own account.individual accounts. Even though we and PMI will participate in loans on the platformfunding Borrower Loans listed in our marketplace under the same terms and conditions and through the use of the same information that is made available to other potential lenders on the platform,investors in our marketplace, such participation may be perceived as involving a conflict of interest. For example, our or PMI’s funding of a loanBorrower Loan may cause the loan to fund, and in some cases, fund faster, than it would fund in the absence of our or PMI’s participation, which could benefit us to the extent that it ensures that we generateone or the other of us generates the revenue associated with the loan.
Risks Related to Us,During the Platform and Our Ability to Service thethree months ended June 30, 2018, we purchased $0 in Notes for investment.
RISKS RELATED TO PFL AND 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 Servicing 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.
On November 26, 2008, plaintiffs, Christian Hellum, William Barnwell and David Booth, individually and on behalf of all other plaintiffs similarly situated, 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 purchasers of loan notes from PMI on the platform from January 1, 2006 through October 14, 2008. The lawsuit alleges that PMI offered and sold unqualified and unregistered securities in violation of the California and federal securities laws. The lawsuit seeks 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.
PMI intends to vigorously defend the class action lawsuit. PMI cannot, however, presently determine or estimate the final outcome of the lawsuit, and there can be no assurance that it will be finally resolved in PMI’s favor. If the class action lawsuit is not resolved in PMI’s favor, PMI might be obliged to pay damages, and might be subject to such equitable relief as a court may determine.
As a result of PMI’s prior operations, a lender member who holds a 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 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 Servicing Agreement we have entered into with PMI (the “Servicing Agreement”), PMI is generally responsible for managing the operation of the platform on our behalf. See “Summary of Indenture, Form of Notes and Servicing Agreement—Servicing Agreement”. If a significant number of PMI’s former lender members sought rescission, or if the class action securities lawsuit is successful, PMI’s ability to perform its obligations under the Servicing Agreement may be adversely affected and, in such event, our ability to continue to make payments on the Notes could be materially impaired.
PMI has incurred operating losses since inception and we anticipate that PMI will continue to incur net losses through at least 2012.
PMI has incurred operating losses since its inception and we anticipate that PMI will continue to incur net losses for a number of years as it grows its business. For the nine months ended September 30, 2011 and 2010 PMI had negative cash flows from operations of $6.7 million and $7.3 million, respectively. Additionally, from its inception through September 30, 2011, PMI had an accumulated deficit of $56.7 million.
PMI had financed its operations to date primarily with proceeds from the sale of equity securities. At September 30, 2011, PMI had approximately $13.6 million in unrestricted cash and cash equivalents. 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 financings and, ultimately, to achieve profitable operations and positive cash flow from operations could adversely affect its ability to perform its obligations under the Servicing Agreement and, in such event, our ability to continue to make payments on the Notes could be materially impaired. OUR MARKETPLACE AND OUR ABILITY TO SERVICE THE NOTES
We and PMI both have limited operating histories. As an online companyexperienced errors on our platform that have resulted in the early stagesincorrect reporting of development, we face increased risks, uncertainties, expenses and difficulties.
As the number of borrowers, lender members and borrower loans originated on the platform increases, PMI will needperformance returns to increase its facilities, personnel and infrastructure in order to accommodate the greater servicing obligations and demands on the platform. PMI must constantly add new hardware and update its software and our website, expand its customer support services, and add new employees to maintain the operations of the platform as well as to satisfy our servicing obligations on the borrower loans and the Notes. If PMI is unable to increase the capacity of the platform and maintain the necessary infrastructure, you may experience delays in receipt of payments on your Notes and periodic downtime of our website.
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 on the platform.
Our 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 our business. In addition, in the future we may experience new competition from more established Internet companies, such as eBay Inc., Google Inc., or Yahoo! Inc., 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 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 platforms 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.Note investors. If we are unable to compete with such companiesprevent the reoccurrence of similar errors, investors could be adversely impacted.
In April 2017, we became aware of an error in the annualized net return and meetseasoned annualized net return numbers displayed to note investors. On average, the need for innovation,error resulted in note investors being shown annualized net return information that was approximately 260 basis points higher than the useactual performance of notes in their accounts. The error did not affect any other part of note investors’ accounts, nor did it affect any other aspects of the platform, could stagnateincluding the receipt and distribution of loan payments, deposits, monthly statements or substantially decline.tax documentation, or the note and loan level information provided to investors.
If we failThe error was the result of errors in the code forming part of our calculation framework and reveals a risk associated with the complex programs, algorithms and inputs that support our platform. We depend on these programs, algorithms and inputs to promotestore, retrieve, process and maintainmanage data, as well as to provide marketplace features such as our brandcredit assessments and underwriting, the Prosper Rating, estimated loss rates, estimated returns, and individual note, note portfolio and platform wide performance data. Errors or other design defects within these programs, algorithms and inputs may result in a cost-effective manner, we may lose market sharenegative experience for borrowers and investors, delay introductions of new features or enhancements, or impact the information displayed on our revenue may decrease.
We believe that developingwebsite. They could also result in negative publicity and maintaining awareness of the Prosper brand in a cost-effective manner is critical to achieving widespread acceptance of the platform and attracting new borrower and lender members. Furthermore, we believe that the importance of brand recognition will increase as competition in the peer-to-peer lending industry increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the member experience on the platform. These brand promotion activities may not yield increased revenues. If we fail to successfully promote and maintain our brand, we may lose our existing membersunfavorable media coverage, harm to our competitorsreputation, litigation, regulatory inquiries or be unableproceedings, loss of or damage to attract new members,our relationships with borrowers or investors or loss of revenue or liability for damages, any of which would cause our revenue to decrease and may impair our ability to maintain the platform.
If we are unable to increase transaction volumes,could adversely affect our business and results of operations will be affected adversely.
To succeed, we must increase transaction volumes on the platform by attracting a large number of borrowers and lender members in a cost-effective manner, many of whom have not previously participated in peer-to-peer lending. If we are not able to attract qualified borrowers and sufficient lender members purchase commitments, we will not be able to increase our transaction volumes. Additionally, we rely on a variety of methods to drive traffic to our website. If we are unable to use any of our current or future marketing initiatives or the cost of these initiatives were to significantly increase, we may not be able to attract new borrowers and lender members in a cost-effective manner and, as a result, our revenue and results of operations would be affected adversely, which may impair our ability to maintain the platform.
We are subject to extensive federal, state and local regulation that could adversely impact our ability to service the borrower loans.
We are subject to extensive federal, state and local regulation, non-compliance with which could have a negative impact on our ability to service the Notes, provide a trading market for the Notes, or maintain the platform.
Additionally, PMI holds lending licenses or similar authorizations in 16 states, all of which have the authority to supervise and examine PMI’s activities. Because we rely on PMI, as Servicer under the Servicing Agreement, to manage the operation of the platform on our behalf, if PMI does not comply with applicable laws, it could lose one or more of these licenses or authorizations, which may have an adverse effect on our ability to continue to perform our servicing obligations or maintain the platform. See “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 we obligate the collection agencies we use to comply with applicable law in collecting borrower loans, it is possible that improper collection practices may occur that could adversely impact the collectability of particular borrower loans originated through the platform.financial results.
Our arrangementsArrangements for back-up servicing are limited. If PMI fails to maintain operations you willor the Administration Agreement is rejected or terminated (in bankruptcy or otherwise), investors may experience a delay and increased cost in respect of yourtheir expected principal and interest payments on your Notes, and wePFL may be unable to collect and process repayments from borrowers.
If PMI were to failbecome subject to a bankruptcy proceeding, PMI may have the right to assume or become insolvent, wereject the Administration Agreement between PFL 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 Borrower Loans and the Notes. If PMI were to continue as servicer during the pendency of its bankruptcy proceeding, depending on the facts and circumstances at the time, PFL would determine whether the creation of new Borrower Loans would continue to be facilitated and new Notes issued through our marketplace. 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, PFL would attempt to transfer the loan servicing obligations on the borrower loansBorrower Loans and Notes to a third party pursuant to ourits contractual agreements with lender members. We and PMI haveinvestors.
PFL has entered into a back-up servicing agreement with a loan servicing company whothat is willing and able to transition servicing responsibilities in the event PMI can no longer do so.from PMI. There can be no assurance, however, that this back-up servicer will be able to adequately perform the servicing of the outstanding borrower loans.Borrower Loans and Notes. If this back-up servicer assumes the servicing of the borrower loans,Borrower Loans and Notes, the back-up servicer may impose additional servicing fees, reducing the amounts available for payments on the 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 Borrower Loans and information with respect to amounts owed on the borrower loansBorrower Loans or, if the platformour marketplace becomes inoperable, may prevent the back-up servicer from servicing the borrower loansBorrower Loans and making principal and interest payments on the Notes. If the back-up servicer is not able to service the borrower loansBorrower Loans and Notes effectively, yourinvestors' ability to receive principal and interest payments on your Notes may be substantially impaired.impaired, even if their portfolio of Notes is well diversified and the corresponding Borrower Loans are paying on schedule.
PMI does not have patent protection for all of its proprietary technology. It mayIn addition, it is unlikely that the back-up servicer would be difficultable to perform functions other than servicing the outstanding Borrower Loans and costly for PMI to protect its intellectual property rights, and PMI mayNotes. For instance, the back-up servicer likely would not be able to ensure their protection.
PMI developedfacilitate the platformcreation of new Borrower Loans through our marketplace or manage PFL's marketing efforts. PFL believes that it could find one or more other parties who could perform these and ownsany other functions necessary to fully operate our marketplace in the proprietary technology that makesabsence of PMI. However, it could take some time to find another such party or parties who could perform the necessary functions and it could take such party or parties additional time to become comfortable with the operation of our marketplace.
Moreover, PMI owns and has not transferred to PFL ownership of the platform possible. PMI’scomputer 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 PFL (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 PFL or a back-up service provider to retrieve data and information in the possession of PMI and to operate our marketplace or elements thereof relevant to Borrower Loan and Note servicing.
Any such delay or impairment that did not affect existing Note holders, because PFL or its back-up servicer proves able to continue servicing outstanding Borrower Loans and Notes, could nonetheless delay PFL's ability to maintainfacilitate the platformorigination of new Borrower Loans and perform its obligations under the Servicing Agreement depends,issue new Notes through our marketplace, which could adversely affect PFL's finances and customer relationships
A decline in part, upon its proprietary technology. PMIeconomic conditions may not protect its proprietary technology effectively, which would allow competitors to duplicate our products and 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 compete with them. participate on our marketplace as borrowers or investors, and consequently could negatively affect our business and results of operations.
A third partyrelatively 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 attempt to reverse engineer or otherwise obtain and use PMI’s proprietary technology without its consent. In addition, the platform may infringe upon claims of third-party patents and we or PMI may face intellectual property challenges from such other parties. We 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, PMI’s technology may become obsolete, and there is no guarantee that PMI will be able to successfully develop, obtain or use new technologies to adapt the platform to compete with other peer-to-peer lending platforms. If PMI cannot protect the proprietary technology embodied in and used by the platform from intellectual property challenges, or if the platform becomes obsolete, PMI’s ability to maintain the platform and perform its servicing obligations under the Servicing Agreementadversely affected.
Our business could be adversely affected and, in such event, our ability to continue to make payments on the Notes could be materially impaired.by a weakening market for securities backed by consumer assets.
We relyPFL is involved in the securitization market through its business of selling loans to investors who, in turn, sell asset backed securities based on a third-party commercial bank to process transactions.accumulated loan portfolios. If we arethe 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 continue utilizing these services,attract sufficient investor purchase commitments from new and existing investors, then our business and ability to service the Notesresults of operations may be adversely affected.
Because we are not a bank, we cannot belong to or directly access the Automated Clearing House (ACH) payment network. As a result, we currently rely on an FDIC-insured depository institution to process our transactions. If we cannot continue to obtain such services from this institution or elsewhere, or if we cannot transition to another processor quickly, our ability to process payments will suffer and your ability to receive principal and interest payments on the Notes will be delayed or impaired.
Although we havePFL has been organized in a manner that is intended to minimize the likelihood that weit will become subject to a bankruptcy proceeding, if this were to occur, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped. The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note.
Although we havePFL has been organized and will beis operated in a manner that is intended to minimize the likelihood that weit will become subject to a bankruptcy or similar proceeding, if this were to occur, the recovery, if any, of a holder of a 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 Note.Note even if a Note holder's portfolio of Notes is well diversified and the Borrower Loans are paying on schedule. For example, we havePFL has structured ourits limited liability company agreement, and agreed to covenants in the Amended and Restated Indenture, that limit ourits activities in a manner that is intended to limit the possibility that weit would voluntarily file for or could be required to file for bankruptcy. Among other things, PFL must receive the affirmative vote of its independent board members to file for bankruptcy. There is no guarantee, however, that we have made the right choices structurallyits fee income from license fees and as a result, we could take actionsloan servicing fees will be sufficient to fund its contingent and other liabilities or that it will not enter into transactions that cause it to face solvency issues that ultimately could cause usit to file for bankruptcy. Further, although we havePFL has granted the indenture trustee, for the benefit of the Note holders, a security interest in all of the borrower loans, Borrower Loans,
all payments and proceeds we receiveit receives on the borrower loanscorresponding Borrower Loans and in the bank account in which the borrower loanBorrower Loan payments are deposited, the holders of the Notes would still be subject to the following risks associated with ourPFL's insolvency, bankruptcy or a similar proceeding.
If we becomePFL 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 usPFL because of the uncertainties occasioned by ourits 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 Notes corresponding to those borrower loans.Borrower Loans. In addition, the commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent usPFL 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 loansBorrower Loans in a bankruptcy or similar proceeding, the indenture trustee’strustee'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 we becomePFL becomes subject to a bankruptcy or similar proceeding, interest accruing upon and following such bankruptcy or similar proceeding may not be paid.
In a bankruptcy or similar proceeding for us,PFL, interest accruing on the Notes during the proceedingproceedings may not be part of the allowed claim of a holder of a Note. If the holder of a Note receives a recovery on the Note (and no such recovery can be assured), any such recovery may be based on, and limited to, the claim of the holder of the 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.
If we becomePFL becomes subject to a bankruptcy or similar proceeding a holder of a Note may not have any priority right to payment from the corresponding borrower loan,Borrower Loan, may not have any right to payment from funds in the master servicingdeposit account, and may not have any ability to access funds in the account we maintain for the benefit of lender members.an FBO funding account.
If wePFL failed to perfect the security interest properly, youinvestors may be required to share the proceeds of the borrower loanBorrower Loans upon which your Note istheir Notes are dependent for payment with ourPFL's other creditors.creditors, including holders of other Notes or Borrower Loans. To the extent that proceeds of the corresponding borrower loanBorrower Loans would be shared with ourPFL'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 Note.the corresponding Notes.
If a payment is made on a borrower loanBorrower Loan corresponding to a Note before ourPFL's bankruptcy or similar proceeding is commenced, and those funds are held in the master servicingdeposit account we maintainPFL maintains with Wells Fargo Bank, N.A., to collect borrower payments and have not been used by usPFL to make payments on the Note as of the date the bankruptcy or similar proceeding is commenced, there can be no assurance that wePFL will or will be able to use such funds to make payments on the Note. Other creditors of oursPFL (including holders of other Note or 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 Note. See “About"About the Platform—LoanMarketplace-Loan Servicing and Collections”Collection" for more information.
We maintain a pooled account at Wells Fargo Bank, N.A. to hold the funds of lender members. This account is titled “Prosper Funding LLC for the benefit of its lender members” and we refer to it as the “FBO account”. Although we believePFL believes that amounts funded by lender membersinvestors into the FBO accountfunding accounts should not be subject to claims of ourits creditors other than the lender membersinvestors for whose benefit the funds are held, the legal title to the FBO account,funding accounts, and the attendant right to administer the FBO accountfunding accounts would be property of ourPFL's bankruptcy estate. As a result, if wePFL were to file for bankruptcy protection, the legal right to administer the funds in the FBO accountfunding accounts would vest with the bankruptcy trustee or debtor in possession. In that case, while neither wePFL nor ourits 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 accountfunding accounts as a result. Moreover, United States Bankruptcy Courts have broad powers at law and in equity and, if we havePFL 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 usPFL and therefore that they became available to ourPFL's creditors generally. See “About"About the Platform—LoanMarketplace-Loan Servicing and Collections” and “About the Platform—Structure of Lender Member Accounts and Treatment of Lender Member Balances”Collection"" for more information.
In a bankruptcy or similar proceeding for us,PFL, the holder of a Note may be delayed or prevented from enforcing ourPFL's repurchase obligations.
In a bankruptcy or similar proceeding for us,PFL, any right of a holder of a Note to require usPFL to repurchase the Note or indemnify the holder of the Note under the circumstances set forth in the lender registrationinvestor agreement or Note might not be enforceable, and such holder’sholder's claim for such repurchase may be treated less favorably than a general unsecured obligation of ours.PFL. For a discussion of the restrictions we havePFL has imposed upon ourselvesitself and the formalities we haveit has adopted under ourits organizational documents to minimize the likelihood of ourits becoming subject to a bankruptcy or similar proceeding, see “Information"-Information about Prosper Funding LLC”.LLC" and "Information About Prosper Marketplace, Inc."
Although we havePFL has been organized in a manner that is intended to prevent usit from being substantively consolidated with PMI in the event of PMI’sPMI's bankruptcy, if wePFL were substantively consolidated in this manner, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stoppedstopped. The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note.
Although we havePFL has been organized and will beis operated in a manner that is intended to prevent usit from being substantively consolidated with PMI in the event of PMI’sPMI's bankruptcy, if PMI became subject to a bankruptcy or similar proceeding and wePFL were substantively consolidated with PMI, the risks described in the immediately preceding risk factorfactors regarding (i) payment delays, (ii) uncollectability of interest accrued during the bankruptcy proceeding, (iii) being subordinated to the interests of ourPFL's other creditors, or other creditors of PMI, and (iv) the indenture trustee’strustee's inability to access funds in the master servicingdeposit account or the FBO accountfunding accounts would all be present. 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 PFL (including holders of Notes).
In addition, in a bankruptcy or similar proceeding of PMI, (1)(i) the implementation of back-up servicing arrangements may be delayed or prevented, and (2) PMI’s(ii) PMI's ability to transfer its servicing obligations to a back-up servicer or its other corporate and marketplace 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 borrower loansBorrower Loans to the detriment of holders of the Notes.
For a discussion of the restrictions we havePFL has imposed upon ourselvesitself and the formalities we haveit has adopted under ourits organizational documents and agreed to in the Amended and Restated Indenture to prevent ourits being substantively consolidated with PMI in the event of PMI’sPMI's bankruptcy, see “Information about"Information About Prosper Funding LLC.”LLC" and "Information About Prosper Marketplace, Inc."
PMI owns and did not transfer to PFL 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 PFL (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 PFL or a back-up service provider to retrieve data and information in the possession of PMI and to operate our marketplace or elements thereof relevant to Borrower Loan and Note servicing.
PMI, in its capacity as servicer, has the authority to waive or modify the terms of a Borrower Loan without the consent of the Note holders.
Pursuant to the Administration Agreement, PMI is obligated to use commercially reasonable efforts to service and collect the Borrower Loans in accordance with industry standards. Subject to that obligation, the Administration Agreement grants PMI the authority to waive or modify any non-material term of a Borrower Loan or consent to the postponement of strict compliance with any such term or in any manner grant a non-material indulgence to any borrower. In addition, if a Borrower Loan is in default, or PMI determines default is reasonably foreseeable, or PMI determines such action is consistent with its servicing obligation, the Administration Agreement grants PMI the authority to waive or modify a material term of a Borrower Loan, to accept payment of an amount less than the principal balance in final satisfaction of a Borrower Loan and to grant any indulgence to a borrower,
provided that PMI has reasonably and prudently determined that such action will not be materially adverse to the interests of the relevant Note holders. If PMI approves a modification to the terms of any Borrower Loan it must promptly notify the corresponding Note holders in the Note holder's account.
There can be no assurance that PMI, in its capacity as servicer, will be able to collect the principal amount or interest rate agreed to and/or sell charged off Borrower Loans in the future as a result of business, regulatory or other considerations. Prosper has incurred annual operating losses since inception and may continue to incur net losses in the future.
Prosper has incurred annual operating losses since its inception and it may continue to incur net losses in the future. For the years ended December 31, 2017 and 2016 Prosper had cash inflows from operations of $1.1 million and outflows from operations of $62.7 million, respectively. Additionally, from its inception through June 30, 2018, Prosper had an accumulated deficit of $404.8 million.
Prosper has financed its operations to date primarily with proceeds from the sale of equity securities. At June 30, 2018, Prosper had approximately $58.7 million unrestricted cash and cash equivalents and $34.8 million available for sale investments at fair value. Prosper is dependent upon raising additional capital or debt financing to fund its current operating plan. Prosper'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, PFL's ability to continue to make payments on the Notes could be materially impaired.
Although our business has grown, we may be unable to manage our growth effectively and meet the demands that such growth places on our facilities, employees and infrastructure.
As the number of borrowers, investors and Borrower Loans originated through our marketplace increases, PMI will need to increase its facilities, personnel and infrastructure in order to continue performing effectively its obligations under the Administration Agreement and to accommodate the effects that such growth will have on our servicing and marketplace needs. PMI must constantly add new hardware and update its software and our marketplace, expand customer support services, and add new employees to maintain the operations of our marketplace as well as to satisfy its servicing obligations on the Borrower Loans and the Notes and its other obligations under the Administration Agreement. If PMI is unable to increase the capacity of our marketplace and maintain the necessary infrastructure to perform its duties under the Administration Agreement, PFL, or one or more other third-party service providers engaged by PFL, will have to perform the duties otherwise performed by PMI, and investors may experience delays in receipt of payments on their Notes and periodic downtime of our marketplace.
PFL has a limited operating history.
PFL is a recently formed limited purpose vehicle with a limited operating history. Under the Administration Agreement, PFL receives a license fee from PMI for granting PMI a non-exclusive, worldwide license to access and use our marketplace. In addition, PFL earns servicing fees in relation to the servicing of the Borrower Loans and Notes that it retains from collections on the Borrower Loans. PFL believes this fee income is sufficient to cover its reasonably anticipated obligations. While PFL believes that it is adequately capitalized to meet its foreseeable obligations, and that its fee income is sufficient to meet its ongoing operating costs, its financial resources are limited and could prove to be insufficient. In addition, PFL has no employees and relies on PMI, as servicer, or other third-party service providers, to perform most of its day-to-day operations. The lack of PFL's own employees, its limited operating history, and capitalization that is less than that of PMI could make it difficult for PFL to operate at a level that will be sustainable. Absent the services to be provided to PFL by PMI pursuant to the Administration Agreement, PFL's risk management process, ability to predict loss rates and the general operation of our marketplace would have a thinner margin for error than does PMI.
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.
Our 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 we 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 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 its operating results could be harmed.
Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than either of us does 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.
If PFL fails to promote and maintain its brand in a cost-effective manner, it may lose market share and its revenue may decrease.
To succeed, PFL must increase transaction volumes in our marketplace by attracting a large number of borrowers and investors in a cost-effective manner, many of whom have not previously participated in marketplace lending. If PFL is not able to attract qualified borrowers and sufficient investor purchase commitments, it will not be able to increase its transaction volumes. PFL believes that developing and maintaining awareness of its brand in a cost-effective manner is critical to achieving widespread acceptance of our marketplace and attracting new borrower and investors. Furthermore, it believes that the importance of brand recognition will increase as competition in the marketplace lending industry increases. Successful promotion of its brand will depend largely on the effectiveness of marketing efforts and the user experience on our marketplace. These brand promotion activities may not yield increased revenues. 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.
We are subject to extensive federal, state and local regulation that could adversely impact our ability to service the Notes.
We are subject to extensive federal, state and local regulation, non-compliance with which could have a negative impact on our ability to service the Notes, provide a trading market for the Notes, or maintain our marketplace.
Additionally, we hold lending licenses, collections licenses or similar authorizations in a number of states, each of which has the authority to supervise and examine our activities. Because PFL currently relies on PMI, pursuant to the Administration Agreement, to oversee the operation of our marketplace on its behalf, if PMI does not comply with applicable laws, PMI could lose one or more of its licenses or authorizations, which may have an adverse effect on PFL's ability to continue to perform its servicing obligations or maintain our marketplace.
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. Some states also impose similar obligations on companies that service accounts, as well as original creditors. While we employ procedures to ensure compliance with these requirements, and obligate the third party collection agencies and other service providers that we use to comply with applicable law in collecting Borrower Loans (and we have sought and will seek to comply with such law when we undertake direct collection activity in relation to Borrower Loans), it is possible that improper collection practices may occur that could adversely affect the collectability of particular Borrower Loans originated through our marketplace or could result in financial penalties or operating restrictions being imposed on us that adversely affect our ability to operate or perform our respective payment and other obligations.
The proprietary technology that makes operation of our marketplace possible is not protected by any patents. It may be difficult and costly for PFL 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 marketplace, including the proprietary technology and all of the rights related to the operation of the marketplace, to PFL. PFL's ability to maintain our marketplace depends, in part, upon this proprietary technology. We intend to vigorously protect proprietary interests in such technology. Despite our best efforts, however, we may not protect the proprietary technology effectively, which would allow competitors to duplicate our products and adversely affect our ability to compete. A third party may attempt to reverse engineer or otherwise obtain and use the proprietary technology without PFL's consent. In addition, our marketplace may infringe upon claims of third-party patents and PFL or PMI may face intellectual property challenges from such other parties. PFL 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 PFL will be able to successfully develop, obtain or use new technologies to adapt our marketplace to compete with other marketplace lending companies. If PFL cannot protect the proprietary technology embodied in and used by our marketplace from intellectual property challenges, or if our marketplace becomes obsolete, its ability to maintain our marketplace and perform its servicing obligations could be adversely affected and, in such event, its ability to continue to make payments on the Notes could be materially impaired.
PFL relies on a third-party commercial bank to process transactions. If PFL is unable to continue utilizing these services, its business and ability to service the Notes may be adversely affected.
Because PFL 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 PFL 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 investors' ability to receive principal and interest payments on the Notes will be delayed or impaired. If the security of our lender members’PFL's investors' and borrowers’borrowers' confidential information stored in our systems is breached or otherwise subjected to unauthorized access, yourusers' secure information may be stolen, our reputationreputations may be harmed, and we may be exposed to liability. The platformAs with any entity with a significant Internet presence, we and the third party that Prosper uses for website hosting occasionally have experienced cyber-attacks, attempts to breach their systems and other similar incidents, none of which have been successful. Our marketplace stores our lender members’PFL's investors' and borrowers’borrowers' bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause yourusers' secure information to be stolen and used for criminal purposes. Security breaches or unauthorized access to secure information could also expose us 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 PMI’sthe relevant software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any lender members’investors' or borrowers’borrowers' data, ourPFL's relationships with our membersits users will be severely damaged, and weit (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, we and ourPMI's 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 our membersusers to lose confidence in the effectiveness of ourits and PMI's data security measures. Any security breach, whether actual or perceived, would harm our reputation,reputations, and we could lose members.users.
Any significant disruption in service onin our websitemarketplace or in PMI’sPMI's computer systems could adversely affect PMI’sPMI's ability to perform its obligations under the ServicingAdministration Agreement.
PMI’sPMI's ability to perform its obligations under the ServicingAdministration Agreement could be materially and adversely affected by events outside of its control. The satisfactory performance, reliability and availability of PMI’sPMI's technology and its underlying network infrastructure are criticalimportant to our respective operations, level of customer service, reputation and ability to attract new membersusers and retain existing members. PMI’susers. PMI's system hardware is hosted in a hosting facilityfacilities located in San Francisco, California,Las Vegas, Nevada and Scottsdale, Arizona, owned and operated by Digital Realty Trust. PMI also maintains an off-site backup system located in Las Vegas, Nevada. Digital Realty Trust does not guarantee that access to our websitemarketplace or
to PMI's own systems will be uninterrupted, error-free or secure. PMI’s operationsThe operation of our marketplace and PMI's operation of its own systems depend on Digital Realty Trust’sTrust's ability to protect PMI’sthe relevant systems in Digital Realty Trust’sTrust's 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 harm PMI’s systems,them, criminal acts and similar events. If PMI’sPMI's arrangement with Digital Realty Trust is terminated, or there is a lapse of service or damage to Digital Realty Trust’sTrust's facilities, PMI could experience interruptions in providing its service as well asservices under the Administration Agreement, PFL could experience interruptions in the operations of our marketplace, and both could experience delays and additional expense in arranging new facilities. Any interruptions or delays in PMI’s service,PMI's performance of its services or in the functioning of and accessibility of our marketplace, whether as a result of Digital Realty Trust or other third-party error, PMI’sPMI's error, natural disasters or security breaches, whether accidental or willful, could harm ourPFL's relationships with our membersusers and ourits reputation. Additionally, in the event of damage or interruption, PMI’sPMI's insurance policies may not be sufficient for PMI to adequately compensate usPFL for any losses that weit may incur. PMI’sPMI'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 borrower loansBorrower Loans or the Notes, damage ourPFL's brand and reputation, divert the attention of PMI’sPMI's employees, reduce ourPFL's revenue, subject usPMI or PFL to liability and cause membersusers to abandon the platform,our marketplace, any of which could adversely affect our business,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”"hacker" were able to infiltrate the platform, youour 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 Note. Additionally, if a hacker were able to access our secure files, he or she might be able to gain access to yourusers' personal information. While we have taken steps to prevent such activity from affecting the platform,our marketplace, if we are unable to prevent such activity, the value of yourinvestors' investment in the Notes could be adversely affected.
Competition for PMI’sProsper's employees is intense, and PMIProsper may not be able to attract and retain the highly skilled employees it needs to perform under the ServicingAdministration Agreement.
Competition for highly skilled technical and financial personnel is extremely intense. PMIProsper 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 PMIProsper competes for experienced employees have greater resources than PMIProsper has and may be able to offer more attractive terms of employment.
In addition, PMIProsper invests significant time and expense in training its employees, which increases their value to competitors who may seek to recruit them. If PMIProsper fails to retain its employees, it could incur significant expenses in hiring and training their replacements and the quality of its services and its ability to serve borrowersborrower and lender membersinvestors could diminish, resulting in a material adverse effect on its ability to perform its obligations under the ServicingAdministration Agreement and, in such event, ourProsper's ability to continue to make payments on the Notes could be materially impaired.
Purchasers of Notes will have no control over us and will not be able to influence our corporate matters.
We arePFL is not offering and will not offer equity interests in ourits company. Lender membersInvestors who purchase Notes offered through the platformour marketplace will have no equity interest in Prosper Funding LLCeither of us and no ability to vote on or influence our decisions. As a result, PMI, which owns all of ourPFL's outstanding equity interests, will continue to have sole control over ourPFL's governance matters, subject to the presence of ourPFL's independent directors, whose consent will be required before wePFL can take certain extraordinary actions.actions, and subject to the limitations specified in PFL's organizational documents and the Amended and Restated Indenture. See “Information"Information About Prosper Funding LLC”.LLC" and "Information About Prosper Marketplace, Inc." for more information.
Events beyond our control may damage our ability to maintain adequate records, maintain the platformour marketplace or perform ourthe servicing obligations. If such events result in a system failure, yourinvestors' ability to receive principal and interest payments on the Notes would be substantially harmed.
If a catastrophic event resulted in a platformmarketplace outage and physical data loss, ourPFL's ability (and PMI's ability as servicer under the Administration Agreement) to perform ourits 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 storesis responsible for storing back-up records related to the operation of our marketplace in offsite facilities located in San Francisco, California and Las Vegas, Nevada. If itsPMI's electronic data storage and back-up data storage system are affected by such events, wePFL'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 marketplace outage or physical data loss described in this paragraph, PFL cannot guarantee that youinvestors would be able to recoup yourtheir investment in the Notes.
Risks RelatingPMI completed its first two acquisitions in 2015, and in the future PMI may continue to Compliance and Regulationenter into acquisitions that may be difficult to integrate, fail to achieve their strategic objectives, disrupt our business or divert management attention.
The platformPMI completed its first two acquisitions in 2015, and in the future PMI may continue to enter into acquisitions of businesses, technologies and products that it intends to complement its existing business, solutions, services and technologies. PMI cannot provide assurance that the acquisitions it has made or will make in the future will provide it with the benefits or achieve the results anticipated in entering into the transaction. Acquisitions are typically accompanied by a number of risks, including: difficulties assimilating and retaining 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 the 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 subject to impairment tests, which could result in future impairment charges.
PMI may enter into negotiations for acquisitions that are not ultimately 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 and its business and operating results could be adversely affected.
RISKS RELATING TO COMPLIANCE AND REGULATION
Our marketplace represents a novel approach to borrowing and lendinginvesting 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 make counterclaims regardingdispute the enforceability of their obligations under borrower or consumer protection laws after collection actions have commenced, or otherwise seek damages under these laws. LendersInvestors may attempt to rescind their Note purchases under securities laws. Regulatory agencies and their state counterparts may investigate our compliance, or the compliance of our business partners, with these regulatory obligations, and may take enforcement action with respect to alleged law violations. Compliance with such regulatory regimes is also costly and burdensome.
The platform operatesOur 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 borrower loans on the platform. The platformBorrower Loans in our marketplace. Our marketplace is also subject to other laws, such as:
· | the Federalthe 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; 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 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; 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; 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 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 Bank Secrecy Act, which relates to compliance with anti-money laundering, customer due diligence and record-keeping policies and procedures.
· | the Federal Fair Credit Reporting Act, which regulates the use and reporting 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; and |
· | state and federal securities laws, which require that we register any non-exempt offers and sales of Notes. |
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. LendersInvestors may attempt to rescind their Note purchases under securities laws, and ourPFL 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 its borrower payment dependent notes in several states, resulting in $35,800 in penalties in four states, and the repurchase of $21,900 of Notes from Florida residents pursuant to a rescission offer. Compliance with these requirements is also costly, time-consuming and limits our operational flexibility. See “Government Regulation—Regulation 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 Laws”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 more information.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 the loan products we facilitate. This system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus.
We are subject to the CFPB's jurisdiction, including its enforcement authority. The CFPB may therefore request reports concerning our organization, business conduct, markets and activities. In addition, the CFPB may conduct on-site examinations of our business on a periodic basis if the CFPB were to determine, based on, for example, consumer complaints, judicial opinions, or administrative decisions, that we are engaging in activities that pose risks to consumers. In addition, the CFPB has announced that it plans to make a rule for the direct supervision of nonbank installment lenders, which may permit the CFPB to conduct periodic examinations of our business.
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 our ability to facilitate the origination of or service borrower loans.Borrower Loans.
Generally, failure to comply with theapplicable laws and regulatory requirements applicable to our business may, among other things, limit our PMI’s or a third party collection agency’sagency's ability to collect all or part of the principal amount of or interest on the borrower loansBorrower Loans on which the Notes are dependent for payment. In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm ourPFL's business and ability to maintain the platformour marketplace and may result in borrowers rescinding their borrower loans.Borrower Loans.
Where applicable, we seek to comply with state lending, servicing and similar statutes. In all U.S. jurisdictions with licensing or other requirements that we believe may be applicable to the platform,our marketplace, we and PMI have obtained any necessary licenses or comply with the relevant requirements. Nevertheless, if we or PMI are found to not comply with applicable laws, we or PMI could lose one or more of our licenses or face other sanctions, which may have an adverse effect on our ability to continue to facilitate the origination of borrower loansBorrower Loans through the platform,our marketplace, and on our ability to perform our 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 yourthe Notes that youthey expect to receive. See “Government Regulation—Regulation of Consumer Protection Laws—State and Federal Laws and Regulations” 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.
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 and on Prosper’s ability to assist the bank in arranging such loans. 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 June 30, 2018 range from 5.31% to 32.32%, which equate to interest rates for Note investors that range from 4.31% to 31.32%. 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 or other state law violations, 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. Recent litigation has successfully challenged lending arrangements in which banks or other exempt entities make loans and sell those loans to a third party charged with servicing the loans.
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 preemption under the National Bank Act (“NBA��) and held that a nonbank assignee of a loan originated 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. The Madden 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 may create an increased risk of litigation by plaintiffs challenging our ability to collect interest in accordance with the terms of Borrower Loans. While the decision specifically addressed preemption under the National Bank Act, it could support future challenges to federal preemption for other institutions, including an FDIC-insured, state chartered industrial bank like WebBank. However, 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.
More recently, in January 2017, the Administrator of the Colorado Uniform Consumer Credit Code filed suits against online loan platforms Marlette Funding, LLC and Avant, Inc. The Administrator claims that loans to Colorado residents facilitated through these platforms were required to comply with Colorado laws regarding interest rates and fees, and that such laws were not preempted by the federal laws that apply to loans originated by Cross River Bank and WebBank, the federally regulated issuing banks that originate loans through the platforms operated by Marlette and Avant, respectively. In response to the Colorado regulator's lawsuits, Cross River Bank and WebBank have each filed its own lawsuit against the Administrator seeking declaratory relief that the loans originated by the bank are subject to federal requirements that pre-empt Colorado state requirements. We are currently in discussions with Colorado Department of Law regarding the terms of the loans offered to Colorado residents. However, no assurance can be provided as to the timing or outcome of these matters.
We and our counsel are monitoring these matters closely and, as developments warrant, we will consider any necessary changes to our marketplace required to avoid the impact of these cases on our business model. Because of investor demand, the maximum APRs offered through our marketplace may be lower in some states than others.
We rely on our agreementagreements with WebBank, pursuant to originatewhich WebBank originates loans to qualified borrower membersborrowers on a uniform basis throughout the United States.States and sells and assigns those loans to PFL. If our relationshiprelationships with WebBank were to end, we may need to rely on individual state lending licenses to originate borrower loans.Borrower Loans.
Borrower loanLoan requests take the form of an application to WebBank whichsubmitted through our marketplace. WebBank currently makes all loans to borrowers through the platform, andour marketplace, which allows the platformour marketplace to be available to borrowers on a uniform basis throughout the United States. If our relationshiprelationships with WebBank were to end or if WebBank were to cease operations, weone or both of us may need to rely on individual state lending licenses to originate borrower loans.Borrower Loans. Because we do notneither of us currently possess state lendingpossesses all required licenses to lend in every U.S. state, we might be forced to limit the rates of interest charged on borrower loansBorrower Loans in some states and we might not be able to originate loans in some states altogether. We also may face increased costs and compliance burdens if our agreementthe agreements with WebBank isare 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 one or both of us, borrower loansBorrower 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. Wecards and retail purchase finance. Although we believe that our activities are generally distinguishable from the activities involved in these cases.cases, a court or regulatory authority could disagree.
Nevertheless,Additional state consumer protection laws would be applicable to the Borrower Loans facilitated through our marketplace if weone or both of us were recharacterizedre-characterized as a lender, and the lender of borrower loans, such a recharacterizationBorrower Loans could render those loansbe voidable or unenforceable. In addition, we could be subject to claims by borrowers, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us. To date, no actions have been taken or threatened against us on the theory that we have engaged in unauthorized lending. However, such actions could have a material adverse effect on our business.
As Internet commerce develops, federal and state governments may draft and propose new laws to regulate Internet commerce, which may negatively affect our business.businesses.
As Internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely. Our businessbusinesses 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 our operating expenses, and we may be unable to pass along those costs to our membersusers 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.
If the SEC deems us to be an asset-backed issuer, we could be required to provide the disclosures and file the reports required of asset-backed issuers, which could adversely impact our business model and impose additional costs. Regulation AB under the Securities Act of 1933, as amended, defines an asset-backed security as “a security that is primarily serviced by the cash flows of a discrete pool of receivablesone or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders.” We do not believe that a Note is an asset-backed security under this definition, in part because our Notes are not backed by a “discrete pool” of assets since we will make payments on a Note from the cash flow generated by the single loan underlying the Note. We have not, however, sought a no-action letter or other informal confirmation from the staff of the SEC, and it is possible that the SEC or a court could disagree with our conclusion. In such circumstances, we would be required to seek an exemptive order or no-action relief, both of which impose significant costs and delays on our business, and if those are unsuccessful, prepare a registration statement and periodic reports that are substantially different from this registration statement and the periodic reports filed by PMI in connection with its outstanding Notes. For example, an asset-backed issuer must file a distribution report on Form 10-D within 15 days after each required distribution date for the asset-backed security as specified in the transaction documents. We make hundreds of distributions a week, and as a result, we could be required to file numerous Forms 10-D in the absence of no-action relief from the SEC. These requirements could adversely impact our business model and impose additional costs that we did not anticipate in structuring this offering, which could ultimately undermine the purpose for which we were organized.
If we or PMIus is required to register under the Investment Company Act, either of our ability to conduct our business could be materially adversely affected.
The Investment Company Act of 1940, or the “Investment"Investment Company Act,”" contains substantive legal requirements that regulate the manner in which “investment companies”"investment companies" are permitted to conduct their business activities. WePFL and PMI believe PMIeach has conducted its business, and we intend to conduct our business in a manner that does not result in our being characterized as an investment company. If, however, we arePFL is deemed to be an investment company under the Investment Company Act, weit may be required to institute burdensome compliance requirements and ourits activities may be restricted, which would materially adversely affect ourits 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 ServicingAdministration Agreement and thereby impair ourPFL's ability to make payments on the Notes. If wePFL or PMI were deemed to be an investment company, wePFL or PMI may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on our business.their businesses.
If weone or PMI areboth of us is required to register under the Investment Advisers Act, either of our ability to conduct our business could be materially adversely affected.
The Investment Advisers Act of 1940, or the “Investment"Investment Advisers Act,”" contains substantive legal requirements that regulate the manner in which “investment advisers”"investment advisers" are permitted to conduct their business activities. We believePFL believes that ourits 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 dodoes not believe that we areit 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 ourPFL'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’sclient'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 usPFL to comply with this obligation without meaningful changes to ourits business operations, and there is no guarantee that weit could do so successfully. If wePFL were ever deemed to be in non-compliance with applicable investment adviser regulations, weit 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 ourPFL's behalf. PMI's administration of Quick Invest under its previous offering and PFL’s administration of Quick Invest, Recurring Investment, and Auto Invest under its current offering, could create additional liability for PFL and such liability could be material.
Quick Invest was a loan search tool that allowed investors to identify Notes that meet their investment criteria. An investor using Quick Invest was asked to indicate (i) the Prosper Rating or Ratings he or she wished to use as search criteria, (ii) the total amount he or she wished to invest, and (iii) the amount he or she wished to invest per Note. Quick Invest then compiled a basket of Notes for his or her consideration that met his or her search criteria. 28
Recurring Investment (formerly known as Auto Quick Invest) is an automated loan search tool that allows investors to easily invest in Notes that meet their specific investment criteria by automatically bidding any available funds in their account on Notes that match their selected parameters, in accordance with their specified instructions. An investor using Recurring Investment is asked to indicate (i) the Prosper Rating or Ratings he or she wishes to use as search criteria, and (ii) the amount he or she wishes to invest per Note. If he or she wishes, the investor can further customize his or her investment criteria by applying one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio and credit score. The investor can also set aside a specific amount of his or her funds as a cash reserve that will not be invested by the Recurring Investment tool. After the investor has entered and saved the parameters of his or her search, Recurring Investment automatically (i) runs searches on their designated criteria as new listings are posted on the marketplace, and (ii) places bids on any Notes identified by each such search. For more information about the Recurring Investment tool and how it works, see "About the Marketplace-How to Bid to Purchase Notes-Recurring Investment."
Since the Notes purchased through Recurring Investment, Auto Invest and Quick Invest are the same as Notes purchased manually, they present the same risks of non-payment as all Notes that may be purchased through our marketplace. For example, there is a risk that a Borrower Loan identified through Recurring Investment, Auto 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 allocation target or the order or basket of Notes selected by Recurring Investment, 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 purchased a Note from PFL through Recurring Investment, Auto Invest or Quick Invest could pursue a claim against PFL in connection with its representations regarding the performance of the Borrower Loans bid upon through Recurring Investment, Auto Invest or Quick Invest, respectively. An investor could pursue such a claim under various anti-fraud theories under federal and state securities law.
We may face liability under state and federal securities law for statements in our prospectusthis Prospectus 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 ourPFL's website as well as in our 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 Notes with a right to bring a claim against one or both of us 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 wePFL and PMI have advised youinvestors of what wethey believe to be the material risks associated with an investment in the Notes and PMI management rights, the SEC or a court could determine that wethey have not advised youinvestors of all of the material facts regarding an investment in the Notes and PMI Management Rights, which could give youinvestors the right to rescind yourtheir investment and obtain damages, and could subject usPFL and PMI to civil fines or criminal penalties in addition to any such rescission rights or damages. OurPMI and PFL's activities in connection with the offer and sale of securities on the platformthrough our marketplace could result in potential violations of federal securities law and result in material liability to us.PFL and/or PMI.
Our business isPFL and PMI's respective businesses are subject to federal and state securities laws that may limit the kinds of activities in which wePFL and PMI may engage and the manner in which wethey engage in such activities. For example, changes to the manner in which we offerPFL offers and sellsells 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 usPFL 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 PFL's offering of Notes.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our consolidated ratio of earnings to fixed charges for each of the periods indicated. You should read these ratios in connection with our consolidated financial statements, included in Exhibit 99.1 to the Registration Statement of which this prospectus is a part and incorporated by reference herein.
29 | | | | | | | | | | | | | | | | | | | | Quarter Ended June 30, | | | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 | | | | (dollar amounts in thousands) | | Fixed Charges | | | | | | | | | | | | Interest expense | | (11,471 | ) | | (11,177 | ) | | (10,098 | ) | | (9,448 | ) | | (9,564 | ) | | Total fixed charges | | (11,471 | ) | | (11,177 | ) | | (10,098 | ) | | (9,448 | ) | | (9,564 | ) | | Earnings | | | | | | | | | | | | Net Income (loss) before income taxes | | (12,590 | ) | | (41,308 | ) | | (35,523 | ) | | (6,025 | ) | | 714 |
| | Add: | | | | | | | | | | | | Fixed charges | | (11,471 | ) | | (11,177 | ) | | (10,098 | ) | | (9,448 | ) | | (9,564 | ) | | Total adjusted earnings | | (1,119 | ) | | (30,131 | ) | | (25,425 | ) | | 3,423 |
| | 10,278 |
| | Ratio of earnings to fixed charges (1) | | — |
| | — |
| | — |
| | 0.4x |
| | 1.1x |
|
USE OF PROCEEDS
WePFL will use the proceeds of each series of Notes to facilitate the funding of a borrower loanthe related Borrower Loan through the platformmarketplace designated by the lender membersinvestors purchasing such series of Notes. WePFL will use the proceeds of each series of Notes to purchase the corresponding borrower loanBorrower Loan from WebBank. See “About"About the Platform”Marketplace" for more information.
PMI will not receive any consideration for issuance of the PMI Management Rights that accompany each Note.
PLAN OF DISTRIBUTION
WePFL will offer the Notes to lender membersinvestors at 100% of their principal amount. The Notes will be offered only by usPFL through www.prosper.com,www.prosper.com. See "About the Marketplace" and there will be no underwriters or underwriting discounts. See “About the Platform” and “About the Issuer”"About Prosper Funding LLC" for more information. The PMI Management Rights offered by PMI will accompany each Note offered through the marketplace.
FINANCIAL SUITABILITY REQUIREMENTS
The Notes and PMI Management Rights are highly risky and speculative. Investing in the Notes and PMI Management Rights should be considered only by persons who can afford the loss of their entire investment. Our platformThe marketplace currently allows lender membersinvestors to bid as little as $25. All bids may be up to 100% of the requested loan amount.
Investors can bid on listings in amounts ranging from as little as $25 and as much as 100% of the fullloan amount requested. It is typical to have multiple investors bid on a single listing.
Currently, the minimum amount an investor may bid is $25 and the maximum amount an investor may bid is 100% of the amount of any particular listing, up to anthe requested Borrower Loan. The maximum aggregate amount of $5,000,000an individual investor may bid on the marketplace is currently $25,000,000. There is no maximum aggregate bid amount for individuals and $50,000,000 for institutions. institutional users. PFL may change the minimum bid amount.
To purchase Notes lender membersand PMI Management Rights, investors located in Alaska, Idaho, Missouri, Nevada, New Hampshire, Oregon, Virginia or MissouriWashington must meet one or more of the following suitability requirements:
| | | a. | (i) You must have an annual gross income of at least $70,000;$80,000; (ii) your net worth must be at least $70,000;$80,000 (exclusive of home, home furnishings and automobiles); and (iii) the total amount of NotesSecurities you purchase cannot exceed 10% of your net worth (exclusive of home, home furnishings and automobiles); or |
| | | b. | (i) Your net worth must be at least $280,000 (exclusive of home, home furnishings and automobiles); and (ii) the total amount of Securities you purchase cannot exceed 10% of your net worth (exclusive of home, home furnishings and automobiles). |
Investors that are residents of California must meet one or more of the following suitability requirements:
| | | a. | (i) You must have had an annual gross income of at least $85,000 during the last tax year; (ii) you must have a good faith belief that your annual gross income for the current tax year will be at least $85,000; and (iii) the total amount of Securities you purchase cannot exceed 10% of your net worth; or |
| | | b. | (i) Your net worth must be at least $250,000; $200,000 (or $300,000 with your spouse); and (ii) the total amount of NotesSecurities you purchase cannot exceed 10% orof your net worth.worth; or |
| | | c. | (i) Your net investment in Securities cannot exceed $2,500; and (ii) the total amount of Securities you purchase cannot exceed 10% of your net worth. |
The Maine Office of Securities recommends and the Oregon Division of Finance and Corporate Securities requires that an investor's aggregate investment in this offering and similar offerings by PMI, PFL or its affiliates not exceed 10% of the investor's liquid net worth. For this purpose, "liquid net worth" is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.
For purposes of the suitability requirements described above, you and your spouse are considered to be a single person. In addition, the following definitions apply:
"annual gross income"means the total amount of money you earn each year, before deducting any amounts for taxes, insurance, retirement contributions or any other payments or expenses;
"net worth"means the total value of all your assets, minus the total value of all your liabilities. The value of an asset is equal to the price at which you could reasonably expect to sell it. In calculating your net worth, you should only include assets that are liquid, meaning assets that consist of cash or something that could be quickly and easily converted into cash, such as a publicly-traded stock. You shouldn't include any illiquid assets, such as homes, home furnishings or cars;
"net investment"means the principal amount of Notes and PMI Management Rights purchased, minus principal payments received on the Notes.Notes and PMI Management Rights.
We are seekingPFL and PMI intend to register the offer and sale of ourthe Notes and PMI Management Rights in all 50 states as well as the District of Columbia. As part of this process, wePFL and PMI expect that states in addition to those referenced above will impose minimum financial suitability standards and maximum investment limits for lender membersinvestors who reside in such states. Should this occur, wePFL and PMI will set forth these requirements in a supplement to this prospectus. Under the lenderinvestor registration agreement, lender membersinvestors are required to represent and warrant that they satisfy the applicable minimum financial suitability standards and maximum investment limits of the state in which they reside. Lender membersInvestors who fail to satisfy any such requirements will not be permitted to purchase Notes.
the Notes and PMI Management Rights.
Overview Prosper Funding LLC operates a peer-to-peer online credit platform, which we refer to as the “platform”, that enables its borrower members to borrow money and its lender members to purchase Borrower Payment Dependent Notes, or Notes, issued by Prosper Funding LLC, the proceeds of which facilitate the funding of the loans made to borrower members. Prosper Funding LLC is a wholly-owned subsidiary of Prosper Marketplace, Inc. We use the terms “we”, “us” and “our” to refer to Prosper Funding LLC, and we use the term “PMI” to refer to Prosper Marketplace, Inc.
PMI developedProsper 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. Our marketplace facilitated $1.6 billion in Borrower Loan originations during the platformsix months ended June 30, 2018, and owns the proprietary technology that makes operationas of the platform possible. We have entered into a Servicing Agreement with PMI pursuant to which PMI has licensed to us the right to operate the platform, and we have appointed PMI to provide certain administrative services relating to the platform (the “Servicing Agreement”). Prior to the commencement of this offering, PMI operated the platform directly, facilitated the origination of loans by WebBank through the platform and issued and sold notes corresponding to those loans. We refer to borrower loans originated and notes issued and sold through the platform prior to the commencement of this offering as “PMIJune 30, 2018, $12.8 billion in Borrower Loans” and “PMI Notes”, respectively.
The platform was designed to allow people to lend money to other peopleLoan originations since it first launched in an open transparent marketplace. Prosper believes peer-to-peer lending represents a new model of consumer lending, where individuals can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional lender. It is people that are the drivers of credit formation in peer-to-peer lending, not institutions.2006.
We 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 comparedour online marketplace model has key advantages relative to traditional sourcesbanks, 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 like traditional banks or consumer finance institutions do; instead, we use data and technology to drive automation and efficiency in our operation. As a result, we believe our business model has lower operating costs than traditional banks and consumer finance institutions, allowing us to deliver what we believe is higher value and a better experience for both borrowers and investors.
To consumer borrowers, we believe that we offer generally better pricing, on average, than the pricing those borrowers would pay on outstanding credit such as credit cards;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 lenders.
· ATo individual and institutional investors, we offer a new asset class for investors withthat we believe has attractive risk adjusted returns, transparency, access to consumer loans, and lower duration risk.
Our marketplace offers fixed rate, fully amortizing, unsecured consumer loans from $2,000 to $40,000. Loan terms of three and five years are available, depending upon the possibility of attractive risk-adjusted returns that are not directly correlatedProsper Rating assigned to the performanceborrower at issue 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. As part of operating our marketplace, we verify the stock market;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.
· An opportunityInvestors invest in Borrower Loans through two channels - (i) the first channel allows investors to combine social networking with financial servicespurchase Notes from PFL, the payments of which are dependent on the payments made on the corresponding Borrower Loan (the "Note Channel"); and (ii) the second channel allows accredited and institutional investors to purchase a Borrower Loan in a manner that allows users that help fund loans to feel they aretheir entirety directly helping other people while also potentially earning attractive returns;
· Growing acceptance of the Internet as an efficient and convenient forum for consumer transactions.from PFL (the "Whole Loan Channel").
How the PlatformOur Marketplace Works
The platformmarketplace that we operate is an online marketplace that matches individuals who wish to obtain unsecured consumer loans whom we refer to as “borrower members”,("borrowers") with personsthose who are willing to help fund those loans whom we refer to as “lender members”("investors"). A borrower member who wishes to obtain a loan through the platformour marketplace must post a loan listing or listing, on the platform. Lender members can review all the loan listings on the platform and make a commitment towards any listing they wish to help fund. A commitment is a commitment to purchase a promissory note, or “Note”, from us, the payments on which will be dependent on the payments we receive on the loan requested in the listing.our marketplace. If a listing receives enough lender memberinvestor commitments to be funded, our partner WebBank an FDIC-insured, Utah industrial bank, will originate the loan requested and then sell it to usPFL. Each Note issued and at the same time, we will sellsold by PFL comes attached with a NotePMI Management Right issued by PMI.
In order to each lender member that made a commitment towards the loan in the principal amount of that commitment. We refer to a borrower member who posts a loan listing as an “applicant” and an applicant who obtainsobtain a loan through the platform asour marketplace, a “borrower”.
In order to post a listing, an applicantborrower must first complete a loan application. We then obtain a credit report foron the applicantborrower and use data from that report as well as data supplied by the applicantborrower to assign a risk grade to the listing, which is called a “Prosper Rating”. The listing is"Prosper Rating." Each time we post a group of listings on our 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 our estimate of the relative overall demand in each channel. We then posteduse a random allocation methodology to allocate individual listings between the two channels based on those proportions. We currently post listings on our marketplace twice per day on weekdays and once per day on weekends, although the platform.frequency with which we post listings may change in the future. The format for listings is shown below. The actual images are not from actual listings, but rather depict hypothetical listings we created rather than actual listings.for purposes of illustration. Each listing includes the Prosper Rating, selected items from the applicant’sborrower's credit report and the intended use of the potential loan, plus information regarding any previous loans obtained by the applicant through the platform.
Lender members can bid on listings in amounts ranging from the entirerequested loan amount requested to as little as $25. Thus, itamount. It is typical to have multiple lender membersinvestors bid on a single listing. As the listing is funded, the listing will show the amount of commitments made towards that potential loan by lender members.
One unique aspect of peer-to-peer lending is that it allows lender members who are friends and family of an applicant to bid on that applicant’s listing. Friends and family bids can signal that a stronger social bond exists that could influence repayment rates. Friends and family can also vouch for the applicant’s character. These bids are also shown on the listing page for all lender members to review, as shown below.
OurThe registration, processing and payment systems are automated and electronic. We have no physical branches, no deposit-taking and interest payment activities and limited loan underwriting activities. OurThe website, which is located at www.prosper.com, provides detailed information about the platform,our marketplace, including detailed fee information, the full text of our memberthe user legal agreements and help pages and white papers.pages. In addition to the customer support materials available on ourthe website, we make additional customer support available to membersusers by email and phone. Our customer support team is currently located in Troy, Michigan, Phoenix, Arizona and at our headquarters in San Francisco, California.
We will attract lender membersinvestors and borrowers to www.prosper.comthe website through a variety of sources, including referrals from other parties (such as online communities, social networks and marketers), direct mail, search engine results and online and offline advertising. We are not dependent on any one source of traffic to ourthe website. Through the first nine months of 2011, our website was receiving an average of approximately 167,716 unique visitors per month. We generate revenue by charging lender members ongoing servicing fees on the Notes they have purchased, and from transaction fees paid by borrowers.
PlatformMarketplace Participants, Registration Requirements and Minimum Credit Criteria
All platformmarketplace participants must register with usPFL and agree to the platform’sour marketplace's rules and terms of use, including consent to receipt of disclosuresdoing 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 investor role for which they are registering.
Borrower Members
Borrowers A borrower member may be any
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.number may apply to become a borrower by registering at www.prosper.com. After passing Prosper’sthe anti-fraud and identity verification process, borrower membersborrowers can request unsecured borrower loansBorrower Loans at interest rates we set.set by us. We set minimum credit and other credit guidelines for borrowers, as discussed in the risk grading section.
When an applicanta borrower requests a loan, we first evaluate whether the applicantborrower meets the underwriting criteria we have established in conjunction with our origination partner, WebBank. WebBank makesoriginates loans to borrowers and then sells and assigns the promissory notes evidencing those loans to us.PFL. The underwriting criteria apply for all borrower loansBorrower Loans originated through the platformour marketplace and may not be changed without WebBank’sWebBank's consent. The underwriting criteria require thatAll borrowers who request a loan are subject to the following minimum eligibility criteria: (1) have at least a 640 credit score, (2) have fewer than five credit bureau inquiries (after excluding duplicate inquiries) within the last 6 months, (3) have an annual income greater than $0, (4) have a minimumdebt-to-income ratio of no more than 50%, (5) have at least three open trades reported on their credit scorereport, and (6) have not filed for bankruptcy within the last 12 months.
Borrowers may have up to two loans through Prosper outstanding at one time, provided that (1) the first loan is current, (2) the aggregate outstanding principal balance of a specified thresholdboth loans does not exceed the then-current maximum allowable loan amount for loans (currently 640, except that$40,000, the minimum is 600maximum principal amount for listings in the Whole Loan Channel), and (3) the borrower memberscomplies with the prior-borrower constraints above.
In addition, for borrowers who (1)have previously obtained a borrower loan and paid off the loan in full, or (2) are seeking a second loan and are otherwise eligible for a second loan), andBorrower Loan through our marketplace, such borrowers must also (1) have no prior charge-offs on loansBorrower Loans originated through the platform. In connection with our identitymarketplace, and anti-fraud verification process(2) have held their first Borrower Loan for applicants,at least 9 months and never been delinquent.
Underwriting requirements for Borrower Loans, including eligibility requirements for subsequent loans, are subject to change over time.
After receiving a borrower's loan request, we verify the deposit account into which the loanBorrower Loan proceeds will be deposited to determine that the applicantborrower is a holder of record of the account. Even if a listing receives bids that equal or exceed the minimum amount required to fund, we will cancel the listing if we are unable to verify the applicant’sborrower's deposit account. While we attempt to authenticate each platform participant’smarketplace participant's identity, our fraud checks could fail to detect identity theft, fraud and inaccuracies. See “Risk Factors—Risks"Risk Factors-Risks Related to Borrower Default”Default" for more information. Lender MembersInvestors
Our lender membersInvestors are individuals and institutions that have the opportunity to buy our Notes. Lender membersNotes or Borrower Loans. Investors must register on the platform. During lender registration, potential lender members must authorize us to obtain their credit report for identification purposes, they must also consent to any applicable tax withholding statement and must agree to the terms and conditions of our website. Lender members must also enter into a lender registration agreement with us, which agreement governs all sales of our Notes to lender members. Lender members are not required to give credit information to the same extent as borrower members.marketplace. 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’sdriver's license or state identification card number. InstitutionsAn institutional investor must provide theirits taxpayer identification number.number and entity formation documentation. During the investor registration process, potential investors who are individuals must authorize us to obtain their credit report for identification purposes. Individual and institutional investors also must consent to any applicable tax withholding statement and must agree to the terms and conditions of the website. Investors are not required to give credit information to the same extent as borrowers.
Investors who participate in the Note Channel must enter into an investor registration agreement, which agreement governs all sales of Notes to such investors. The investor registration agreement contains provisions that limit certain legal rights of investors in relation to PFL and PMI. See "Risk Factors -- Risks Inherent in Investing in the Notes" for more information. At the time a lender memberan investor registers with Prosper,to participate in the lender memberNote Channel, the investor must satisfy any minimum financial suitability standards and maximum investment limits established for the platform or the Note Trader platformChannel by the state in which the lender memberinvestor resides.
Only investors that are approved by us are eligible to participate in the Whole Loan Channel. At a minimum, an investor 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. Investors who participate in the Whole Loan Channel must enter into loan purchase and loan servicing agreements.
Prior to bidding on a listing, lender membersinvestors must transfer funds to ana funding account maintained on our marketplace. The funds of most investors are held in a single, pooled funding account, which is referred to as the platform,"pooled funding account". We have also established dedicated funding accounts for certain investors that participate in the Whole Loan Channel, each of which we referis referred to as a “funding account.”"dedicated funding account". The pooled funding account holdsand each dedicated funding account (collectively, the "FBO funding accounts") is a non-interest bearing, demand deposit account, currently maintained by PMI or PFL at Wells Fargo Bank, National Association ("Wells Fargo"). The pooled funding account is held in the name of PFL for the benefit of its investors, and each dedicated funding account is held in the name of PMI or PFL for the benefit of the applicable investor.
We cause all payments made or collected on any Note or Borrower Loan owned by an investor to be deposited into the applicable FBO funding account. An investor that wishes to make a commitment to purchase a Note or Borrower Loan must have funds supporting a lender member’s bidsequal to the sum of such commitment and all Note payments payablethe investor's other outstanding purchase commitments in the applicable FBO funding account. For the FBO funding accounts, we maintain sub-account balances on our system to track commitments and purchases made and loan proceeds received at the investor level. These sub-accounts are purely administrative and reflect balances and transactions concerning funds in the FBO funding accounts. Individual investors have no direct relationship with Wells Fargo by virtue of funds or transactions within the FBO funding accounts or by virtue of participating on our marketplace. Each FBO funding account is FDIC-insured on a "pass through" basis to each investor, subject to applicable limits. This means that each investor's cash balance is protected by FDIC insurance, up to the lender memberlimits established by the FDIC. Other funds the investor has on deposit with Wells Fargo may count against any applicable FDIC insurance limits. Funds of an investor in an FBO funding account can consist of amounts deposited by the investor but never committed to Note or Borrower Loan purchases; amounts the investor has committed to one or more such purchases, where origination of the corresponding Borrower Loan has not yet occurred; or amounts received as principal and interest payments on Notes or Borrower Loans owned by the investor that the investor has not yet withdrawn. Upon request by an investor, we will transfer funds from the applicable FBO funding account to the investor's designated and verified external bank account, provided such funds are depositednot already committed to Note and/or Borrower Loan purchases. To the extent an investor does not withdraw any such amounts, they will remain in the applicable FBO funding account.account indefinitely.
Our Relationship with WebBank
WebBank is a FDIC-insured, Utah-chartered industrial bank that originates all Borrower Loans made through our marketplace, although in the future, either or both of us may enter into agreements with other banks to originate Borrower Loans through our marketplace in addition to, or in lieu of, WebBank. WebBank and direct lenderProsper are parties to a Marketing Agreement, under which PMI manages the operations of our marketplace that makes loansrelate to the submission of Borrower Loan applications by borrowers, the making of related Borrower Loans by WebBank and the funding of such Borrower Loans by WebBank in exchange for a fee equal to the origination fee charged by WebBank. Under the Marketing Agreement, Prosper has agreed to indemnify WebBank with respect to any damages arising from WebBank's participation in the origination of Borrower Loans as contemplated in the Marketing Agreement. WebBank and Prosper are a parties to an Asset Sale Agreement, under which WebBank sells and assigns the promissory notes evidencing borrower loansthe Borrower Loans to us.PFL. As consideration for WebBank's agreement to sell and assign the promissory notes, PFL pays WebBank the purchase price of the promissory notes, as well as a monthly fee, which is partially tied to the terms and performance of the loans. PMI receives payments from WebBank as compensation for the activities it undertakes on WebBank's behalf.
Risk Management
TheOur risk management has evolved from its inception. We have consistently worked to improve the information provided to investors in order to help them make sound investment decisions. A major source of improvement has been to progressively incorporate the historical performance of Borrower Loans originated through our marketplace into our proprietary rating system (the "Prosper Rating") as more Borrower Loan outcome data becomes available over time. We intend to continuously refine the Prosper Rating Systemsystem by regularly reassessing the system. For more information about how the Prosper Rating and estimated loss rates are calculated and reassessed, see the following sections under this discussion of "Risk Management".
Prosper Rating Assigned to Listings
Each listing is assigned a Prosper Rating based on the estimated loss rate for that listing.Rating. The Prosper Rating is a letter that indicates the expected level of risk associated with a listing andthe listing. Each letter grade corresponds to an estimated average annualized loss rate range. The rating associated with a listing reflects the loss expectations for that listing as of the time the rating is given. This rating system allows usmeans that otherwise similar borrowers may have different Prosper Ratings at different points in time as the Prosper Rating is updated to maintain consistency when assigning a rating to a listing.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 theour marketplace dictates. We intend to regularly update the loss rates calibration to reflect the actual performance of Borrower Loans. The updates will occur at least annually. The current Prosper Ratings and the estimated average annualized loss rate ranges associated with them are as follows:
| | | | | Prosper Rating | | Est. Avg. Annual Annualized Loss Rate | | AA | | 0.00% - 1.99 %1.99% | | A | | 2.00% - 3.99% | | B | | 4.00% - 5.99% | | C | | 6.00% - 8.99% | | D | | 9.00% - 11.99% | | E | | 12.00% - 14.99% | | HR | | >=15.00% |
The estimated average annualized loss rate for each listing is based primarily on the historical performance of PMI Borrower Loans with similar characteristics and is primarily determined by two scores: (1)(i) a custom Prosper Score, and (2)(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 it 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.
For loan listings begun on or after December 21, 2016, the borrower's Prosper Rating and Prosper Score have been determined based on information obtained from the borrower's TransUnion credit report. For all listings begun prior to December 21, 2016, the Prosper Rating and Prosper Score were determined using information obtained from Experian. Prosper Score
The Prosper Score predicts the probability of a borrower loanBorrower Loan going “bad,”"bad," where “bad”"bad" is the probability ofdefined as going more than 60 days past due.due within twelve months of the application date. To create the Prosper Score, PMIwe developed a custom risk model using itsour historical data. PMIdata as well as a data archive from a consumer credit bureau. We built the model on the platform’s borrowera population of users that applied for a Borrower Loan so that the modelit would incorporate behavior that is unique and inherent to that population. In contrast, a credit score obtained from a credit reporting agency is based on a much broader population, of which platform borrowers through our marketplace are just a small subset. We use both the Prosper Score and a credit score to assess the level of risk associated with a listing.
To build and validate itsthe custom risk model, PMIwe used loans originatedborrowers from November 2013 through the platform from April 2007 through October 2008December 2015 and measured their performance for the fifteentwelve months following origination. PMItheir date of application. We analyzed variables available at the time of listing for potential inclusion in the final model, includingmodel. Potential variables included those from the credit report and also those provided by the borrower. PMIWe 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. SomeThe 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 consists of a large number of decision trees that are combined to generate a prediction of default. Selection of the variables included in the final model are: - Total Inquiries
- Inquiries last 6 months
- Total Trades
- Trades opened <= 6 months
- Trades Never Delinquent or Derogatory
- Trades with Delinquent Balance
- Available Credit on Open Bankcards
- Debt-to-Income Ratio
- Bankcard Utilization
The model assigns weights to all of its variablesused is based on their valuecombined accuracy in predicting the likelihoodprediction of a loan goingdefault or "probability of bad." For a given listing,borrower, the model estimates the probability of the related loanborrower becoming bad, which we callis called the listing’s “probabilityborrower's "probability of bad”.bad." The probability of bad for a listingborrower is then mapped to a Prosper Score, which is displayed as part of that listing. Prosper Scores range from 1 to 10,11, with 1011 being the best, or lowest risk value. The probability of bad ranges and the corresponding Prosper Scores are as follows.
| | | | | Probability of Bad | | Prosper Score | > 24.84%13.00% | | 1 | 20.33 < x <=24.84% | | 2 | 17.05 < x <= 20.33% | | 3 | 14.42 < x <= 17.05% | | 4 | 12.00 < x <= 14.42%13.00% | | 2 | | 9.50 < x <= 12.0% | | 3 | | 8.00 < x <= 9.50% | | 4 | | 6.90 < x <= 8.00% | | 5 | 10.005.90 < x <= 12.00%6.90% | | 6 | 8.175.00 < x <= 10.00%5.90% | | 7 | 5.984.20 < x <= 8.17%5.00% | | 8 | 4.503.50 < x <= 5.98%4.20% | | 9 | | 2.70 < x <= 3.50% | | 10 | 0.00 < x <= 4.50%2.70% | | 1011 |
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 6, and a probability of bad of 37.54% equates to a Prosper Score of 1.3. The probability of bad ranges is likely tomay change over time as we acquire additional performance data.data is acquired and the custom model is updated. Credit Bureau Score
In addition to the Prosper Score, the otheranother major element we useused to determine the Prosper Rating for a listing is a credit score from a consumer reporting agency. The credit score weWe currently use currently is Experian’s Scorex PLUSTransUnion's FICO08 score, although we may use one or more different scores in the future. We used Experian's FICO08 score for all listings begun between September 6, 2013 and December 20, 2016, and Experian's Scorex PLUS score for all listings begun prior to September 6, 2013. The minimum credit score required for an applicanta borrower to post a listing is 640, except for applicants who (i) previously obtained a borrower loan or a PMI Borrower Loan and paid off the loan in full, or (ii) are seeking a second loan while their first loan is still outstanding and are otherwise eligible for such second loan, for whom the minimum score required is 600.640.
We obtain an applicant’sa borrower's credit score at the time histhe listing is created, unless we already have 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, and the range that credit score falls within is also included in the listing. If available, we obtain updated credit scores on a monthly basis for borrowers with outstanding loans, and we include the applicable score ranges by month in listings on the Note Trader platform.Borrower Loans. We do not disclose applicant’sthe borrower's exact credit score to any of our customers,marketplace users, except for the applicantborrower himself.
Assigning Estimated Loss Rates
We assign estimatedEstimated average annualized loss rates for listingsare based on the historical performance of borrower loans and PMI Borrower Loans originated through our marketplace with similar characteristics.characteristics and are primarily determined by Prosper Scores and credit scores. The starting point for this determination is ourthe base loss rate table, shown below, which PMIwas created by dividing the range of Prosper Scores and credit scores into multiple segments and combining them into a single grid. We estimate aA base loss rate is estimated for each cell in the table, based on the historical performance of loansBorrower Loans originated on the platformthrough our marketplace that occupied the same cell (i.e., that had the same point of intersection for their Prosper Score and credit score). Cells are grouped togethermay be given the same loss rate due to small volume, similar behavior or both. We review our loan performance on a monthly basis to see how ourthe loss rate estimates compare to the actual performance of loans originated on the platform,Borrower Loans, and we make any adjustments to those estimates we deemas necessary based on such reviews. Please refer to ourthe website
for the estimated base loss rate table currently in use. Estimated base loss rates for the cells in the table below are based on performance of historical PMI Borrower Loanscorrespond to those in effect as of November 30, 2011.September 27, 2018. | | | | | | | | | | | | | | | | | | | | | | | TransUnion FICO08 Credit Score | | Prosper Score | | 639 -659 | | 659 -679 | | 679 -699 | | 699 -719 | | 719 -739 | | 739 -759 | | 759 -779 | | 779 -799 | | 799 -829 | | 829 -850 | | 1 | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 22.25% | | 2 | | 17.75% | | 17.75% | | 17.75% | | 17.25% | | 16.75% | | 14.25% | | 14.25% | | 14.25% | | 14.25% | | 13.75% | | 3 | | 16.25% | | 15.25% | | 15.25% | | 12.25% | | 12.25% | | 12.25% | | 12.25% | | 12.25% | | 11.25% | | 10.75% | | 4 | | 12.25% | | 12.25% | | 12.25% | | 11.75% | | 11.25% | | 10.25% | | 10.25% | | 10.25% | | 9.75% | | 9.75% | | 5 | | 11.75% | | 11.75% | | 10.25% | | 9.75% | | 8.99% | | 8.99% | | 8.99% | | 8.74% | | 8.49% | | 8.49% | | 6 | | 10.75% | | 9.75% | | 8.99% | | 8.74% | | 8.74% | | 7.99% | | 7.99% | | 7.99% | | 7.74% | | 7.74% | | 7 | | 8.99% | | 8.49% | | 8.24% | | 6.74% | | 6.74% | | 6.24% | | 6.24% | | 5.99% | | 5.99% | | 5.99% | | 8 | | 7.99% | | 7.74% | | 6.24% | | 6.24% | | 5.99% | | 5.74% | | 5.74% | | 5.74% | | 5.74% | | 5.74% | | 9 | | 6.74% | | 6.24% | | 5.99% | | 5.49% | | 3.99% | | 3.99% | | 3.99% | | 3.24% | | 3.24% | | 3.24% | | 10 | | 5.24% | | 5.24% | | 4.74% | | 3.99% | | 3.74% | | 3.49% | | 3.49% | | 3.24% | | 2.74% | | 2.24% | | 11 | | 4.49% | | 3.49% | | 3.24% | | 2.74% | | 2.24% | | 1.99% | | 1.24% | | 0.99% | | 0.74% | | 0.74% |
| | | Experian Scorex Plus Score | | Prosper Score | | 600-619 | | 620-639 | | 640-649 | | 650-664 | | 665-689 | | 690-701 | | 702-723 | | 724-747 | | 748-777 | | 778+ | | 1 | | 24.90% | | 24.90% | | 24.90% | | 24.90% | | 24.90% | | 24.90% | | 24.90% | | 24.90% | | 16.50% | | 16.50% | | 2 | | 24.90% | | 24.90% | | 24.90% | | 19.90% | | 19.90% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 3 | | 24.90% | | 24.90% | | 24.90% | | 19.90% | | 19.90% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 4 | | 19.90% | | 19.90% | | 19.90% | | 19.90% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 16.50% | | 5 | | 19.90% | | 19.90% | | 19.90% | | 19.90% | | 16.50% | | 16.50% | | 16.50% | | 11.90% | | 11.90% | | 11.90% | | 6 | | 19.90% | | 19.90% | | 19.90% | | 14.70% | | 14.70% | | 11.90% | | 11.90% | | 8.90% | | 8.90% | | 8.90% | | 7 | | 19.90% | | 19.90% | | 19.90% | | 8.90% | | 8.90% | | 8.90% | | 8.90% | | 8.90% | | 8.90% | | 8.90% | | 8 | | 14.70% | | 14.70% | | 14.70% | | 5.65% | | 5.65% | | 5.65% | | 5.65% | | 5.65% | | 5.65% | | 3.30% | | 9 | | 14.70% | | 14.70% | | 14.70% | | 5.65% | | 5.65% | | 5.65% | | 5.65% | | 3.30% | | 3.30% | | 3.30% | | 10 | | 14.70% | | 14.70% | | 14.70% | | 5.65% | | 5.65% | | 5.65% | | 5.65% | | 3.30% | | 3.30% | | 1.00% |
We canThe table above applies to borrowers seeking their first Borrower Loan through our marketplace. For example, we make adjustments tofor whether the base loss rate to determineborrower has already been a borrower through our marketplace and for the final loss rate.term of the Borrower Loan. The final loss rate determines the ProsperProper Rating. We currently make adjustments if the applicant has already been a borrower on the platform and based on loan term. The value of the adjustments are based on historical PMI data, where available, as well as observed industry performance. Currentperformance and behavior. An example of a potential adjustment variables and their values are:is shown below:
| | | Previous Prosper Loan | | Loan Term | | Base Loss Rate | | Yes | | No | | 1 year | | 3 year | | 5 year | | 0.00 – 1.99% | | -0.25% | | - | | -0.15% | | - | | - | | 2.00 – 3.99% | | -1.30% | | - | | 0.00% | | - | | - | | 4.00 – 5.99% | | -3.65% | | - | | 0.00% | | - | | - | | 6.00 – 8.99% | | -4.70% | | - | | -0.10% | | - | | - | | 9.00 – 11.99% | | -4.70% | | - | | -0.10% | | - | | - | | 12.00 – 14.99% | | -10.50% | | - | | -0.10% | | - | | - | | 15.00+% | | -10.00% | | - | | -0.45% | | - | | - |
Here is an example of how the final loss rate and Prosper Rating for a loan listing would be calculated: - Applicant
Borrower credit bureau score = 715730 and Prosper score = 98 - Applicant has borrowed through the platform beforeBorrower selects a 60 month loan term
| | | | Base Loss Rate: | | 5.65%5.99% | | Adjustments: | | | | -Loan Term: | -Previous Loan: | -3.65%2.25% | | Final Loss Rate: | | 2.00%8.24% | | Prosper Rating: | | AC |
Calculating Loss Estimates
To calculateLoss rates for a particular group of Borrower Loans will be a function of the estimatedgroup's delinquency and loss behavior over time, pre-payment behavior over time, and responsiveness to collections activity. For Borrower Loans originated through our marketplace, the largest driver of the loss rate is the rate at which a group of Borrower Loans becomes delinquent and charges off. A loan becomes "charged off" and is considered a loss when it becomes 121 or more days past due.
Modeling Loss Rates. The loss rate is the balance-weighted average of the monthly loss rates contained infor the basegroup of Borrower Loans over the term of such loans. The gross loss rate table and adjustment values, PMI developedis adjusted for principal recovery net of collection expenses to arrive at a loan model to simulatenet loss rate.
Estimating Losses. We determine the future performance of loans based on past performance data. The principal elementsloss component of the modelloss rate calculation by analyzing losses for 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 Borrower Loans, and so changes in loan delinquency and loss performance are as follows:monitored on at least a monthly basis.
Calculating Average Balance. To calculate the average balance for each period, PMIwe used the amount of loan principal on loansBorrower Loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each loanBorrower Loan declines over time. It is assumed that borrowers that are making scheduled payments on these loans do so according to their amortization schedule.
When a Borrower Loan pays faster than its amortization schedule (pre-payment), the loanportion of the principal that is paid off early, itpre-paid is no longer included in the outstanding balance for subsequent periods. Historical payoff rates were used to project the monthly payoffs and these rates were assumed to remain constant throughout the life of the loans. Similarly, onceOnce a loanBorrower Loan has been charged-off, the principal associated with thissuch loan is considered a credit loss and is no longer included in the outstanding periodic balance.
DelinquentCollection Expense and Charged-Off Loans.Recovery Adjustments. To estimate the number of current and delinquent accounts on a monthly basis, PMI applied roll rates to each group of given loans. PMI first calculated the historical roll rates of accounts in particular cells and then applied the historical rate to the given loans. A roll rate measures the percent of loans within a particular payment status that “roll” to the next late payment status if the loan is not paid. For example, a current account that is not paid “rolls” to a new payment status defined as 1 to 30 days past due. Similarly, an account that is already 1 to 30 days past due and does not make the next payment then “rolls” to a status of 31 to 60 days past due. An account is considered to be a loss, or charged-off, when it reaches 121+ days past due. The average historical roll rates were assumed to be constant for the life of the loan term.
Loss Rates. The estimated monthly dollar charge-offs are calculated by multiplying the estimated number of accounts that reach 121+ days past due in that month by the average balance of loans in that month.
Collection expenses and recovery payments are applied to gross losses to calculate net losses. When an account becomes more than 30 days past due, it is referredwe may collect on the account directly or refer the account to a third-party collection agency. CollectionOur 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. Payments collected by the collection agency reduce the amount of principal that is repaid to lenders. This expense is added to losses in the month the payment is made.
In addition, onceOnce an account has been charged-off, any subsequent payments received or proceeds from the sale of the loanBorrower Loan in a debt sale are considered recoveries and reduce the amount of principal lost. Recovery assumptions are based on historical recoveries through November 2009 on accounts that were 121+ days past due in 2008. The recovery rate assumptions were:
· | Prosper Rating AA-D = 6.0% annual recovery rate |
· | Prosper Rating E-HR = 2.0% annual recovery rate |
To calculate the estimated average annualized net loss rate:
| 1. | Calculate monthly net loss rate = (Net principal charge-offs in month X) / (Outstanding principal balance in month X) | | | | | 2. | Calculate average annualized net loss rate: |
· | monthly net loss rate x 12 |
· | balance-weighted average of the monthly rates over the life of the loan |
For each group of loans, the average loan amount for charged-off accounts was compared to that for total loans; if there was a significant difference, the ratio of average charged-off loan amount to average total loan amount was applied to the expected loss rate to account for this differential. Estimated loss rates determine the Prosper Rating.
Comparing Estimated Loss Rates to Actual Losses
We review our loanthe performance of Borrower Loans on a monthly basis to seedetermine how our loss rate estimates compare to actual performance. As part of this monthly review, the actual performance of our loans,processes for calculating and we make any adjustmentsassigning loss rates and Prosper Ratings are reassessed to those estimates we deem necessary based on such reviews.ensure continued accuracy. The graphs below show the expectedestimated versus actual cumulative dollar loss rates by Prosper Rating for PMI Borrower Loans, collectively, booked from July 13, 2009 through September 30, 2010.December 31, 2017. Performance is as of SeptemberJune 30, 2011.2018. The loss performance is tracked by quarterly vintage, meaning each line represents all the loansBorrower Loans originated in a given quarter. We haveperiod. The graphs only included quarterly vintages where all PMIinclude Borrower Loans originated during that quarter have been outstanding at least 10 months, to ensure that all of the loans included are adequately seasoned.6 months. In addition, we only include data for a point along the x axis is only included if at least 70% of the amount originated in thatentire vintage has been outstanding foris at least that number of cycles. For example, in our graph for AA PMImature. So, although Borrower Loans funded during Q3 2009, 70% or moreoriginated in July 2017 have 11 months of performance, only 9 months of performance are reflected in the graphs below because the September 2017 Borrower Loans, which are also a part of the original amount borrowed in that2017 Q3 vintage, has been outstanding for 24 cycles, but less than 70%have only completed 9 months of the original amount borrowed has been outstanding for 25 or more cycles. So, that graph includes a data point for cycle 24 but not for cycle 25.performance.
Quarterly vintagesVintages generally contain enough loan volume for their performance curves to be meaningful, but there are exceptions.meaningful. For example, the volume of PMI Borrower Loans originated in the 3rd quarter of 2009 was relatively low because the platform was closed during the first few weekspresentation purposes, some of the quarter,older vintages have been grouped into annual and also because the platform reopened during the quarter after having been shut down for almost nine months. And during the 4th quarter of 2010 only 31 PMI Borrower Loans were originated on the platform with a C Prosper Rating. For such vintages, a few loans charging-off, or even a single charge-off, can result in actual losses for that vintage being well above estimates. Therefore, we look at quarterly vintages individually as well as in aggregate to get a more complete picture of loan performance.half-year vintages.
 Note: Expectation lineBelow are two graphs that show the actual 3-year (36M) and 5-year (60M) term cumulative gross charge-offs as a percentage of originations in the respective term, across all Prosper Ratings by vintage for Borrower Loans, collectively, originated from July 13, 2009 to June 30, 2018. The addition of "H1" means that the information reported reflects the weighted average expected loss rate across all vintages atfirst six months of the timeyear presented, while "H2" reflects the second 6 months of originationthe year presented. Similarly, "Q1" or "Q2" means that the information reported reflects the first or second quarter of the year presented.
39
TableOverall, the majority of Contentsvintages continue to track below the cumulative loss rates experienced for the 2009-2012 vintages. The lowest risk vintages originated to date were originated in 2013-2014. Vintages originated from 2015 onward have exhibited greater volatility relative to 2013 and 2014. The higher absolute level of risk for the 2017Q1 and 2017Q2 vintages is primarily the result of a riskier mix of assets and is not a result of performance deterioration when compared to the 2015 and 2016 vintages. Mix adjusted performance for 2015-2017 vintages remains relatively stable with 2016H1 vintages currently exhibiting the highest risk on a rating adjusted basis.
The graphs below show the estimated and actual 3-year (36M) and 5-year (60M) term cumulative gross charge-offs for Borrower Loans, collectively, as a percentage of originations for respective term and for each Prosper Rating presented by vintage from July 13, 2009 to June 30, 2018.
Note
Note: Expectation: 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 we havethe estimated curve was set the expectation curve at 20%.19.75% cumulative principal loss.
In aggregate, all quarterly vintages are comingBecause Prosper tracks gross losses, it is important to note that the curves above do not reflect the meaningful improvements made in below the expected loss rates. Loss rates for some of the 2009 vintages have been higher than expected for the lower risk Prosper Ratings, AA-C, but subsequent vintages have generally been at or below expectations. The higher risk Prosper Ratings, D-HR, have consistently performed at or better than expectations.
We review our actual losses on a monthly basis2015 and analyze any material variances from our estimates. To the extent we conclude that any such variance seems likely2016 to continue, we adjust our loss estimates accordingly. For example, based on the continuing exceptional risk performance of repeat borrowers, we made adjustments in April 2011 to reduce expected lossProsper’s recovery rates on repeat borrowers.charged off Borrower Loans. In 2015, Prosper adopted a new program for obtaining recoveries on charged off Borrower Loans. Prior to implementation of this program, Prosper’s recovery rates on charged off Borrower Loans ranged from 2-3%. To date, recovery rates on charged off Borrower Loans under the new program have ranged from 7-10%. Although Prosper expects to devote substantial efforts to maximizing recoveries on charged off Borrower Loans for its investors going forward, there can be no guarantee that the recovery rates under the new program will continue to range from 7-10% in the future.
Please note that the historical performance of PMI Borrower Loans may not be indicative of the future performance of our borrower loans. See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.Borrower Loans.
Criteria for Applying a Second Loan
Borrowers may have up to two loans outstanding at any one time, provided that the aggregate outstanding principal balance of both borrower loans does not exceed the then-current maximum allowable loan amount for borrower loans (currently $25,000). We treat any outstanding PMI Borrower Loan as a "loan" for purposes of this two loan limit. Currently, to be eligible to obtain a second borrower loan while an existing loan is outstanding:
·Borrowers must be current on their existing borrower loan, and must not have been more than 30 days past due in making their most recent monthly borrower loan payments for a specified number of months (between six and twelve, depending on the borrower’s credit score range at time the existing loan was obtained);
·Borrowers may not post a listing for a second borrower loan within six to twelve months (depending on the borrower’s credit score range at time the existing loan was obtained) following the date of origination of their existing borrower loan; and
·Borrower’s credit score must be 600 or more.
Underwriting requirements for borrower loans, including eligibility requirements for second loans, are subject to change from time to time.
Maximum Loan Amount
The maximum loan amount for a listing is determined by the applicant’sborrower's Prosper Rating. The table below shows the maximum loan amount for each Prosper Rating:Rating as of September 27, 2018:
| Prosper Rating | | Maximum Loan Amount | | AA | | $ | 25,000 | | A | | | 25,000 | | B | | | 15,000 | | C | | | 15,000 | | D | | | 15,000 | | E | | | 4,000 | | HR | | $ | 4,000 |
| | | | | | | Prosper Rating | | Maximum Loan Amount | | AA | | $ | 40,000 |
| | A | | 40,000 |
| | B | | 40,000 |
| | C | | 35,000 |
| | D | | 25,000 |
| | E | | 15,000 |
| | HR | | 7,500 |
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Borrower Identity and Financial Information Verification
We reservePFL reserves the right in our memberits user agreements to verify the accuracy of all statements and information provided by borrower membersborrowers and lender membersinvestors in connection with listings, commitments and borrower loans.Borrower Loans. We may conduct our review at any time before, during or after the posting of a listing, or before or after the funding of a borrower loan.Borrower Loan. If we are unable to verify material information with respect to an applicanta borrower or listing, we will cancel or refuse to post the listing or cancel any or all commitments against the listing. We may also delay funding of a borrower loanBorrower Loan in order to verify the accuracy of information provided by an applicanta borrower in connection with the listing, or to determine whether there are any irregularities with respect to the listing. If we identify material misstatements or inaccuracies in the listing or in other information provided by the applicant,borrower, we will cancel the listing or related loan. Our participation in funding Borrower Loans through our marketplace 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.
We verify the identity of every borrower who obtainsborrowers by comparing supplied names, social security numbers, addresses and telephone numbers against the names, social security numbers, addresses and telephone numbers in the records of a loan through the platform using a combination of documentaryconsumer reporting agency, as well as other anti-fraud and non-documentary methods. Weidentity verification databases. In addition, we ask each applicantcertain borrowers to submit a copy of hertheir current driver’sdriver's license, passport or other government-issued, photo identification card, which we authenticateare then authenticated using third-party reference materials. In addition, we compare the information contained in the applicant’s credit report with the information contained in the application. We also run the applicant’s application information through a fraud database. Finally, we require the applicant to submit bank statements, cancelled checks or other documentary evidence to verify the accuracy of hereach borrower's bank account information. To the extent any of these processes identify inconsistencies between the information submitted by the applicantborrower and the information contained in another data source, we require the applicant toborrower must submit documentation to resolve the discrepancy to our satisfaction. For example, wethe borrower might require the applicantbe required to submit a recent utility bill to reconcile a discrepancy between the current address listed in his or her application and the one listed in his or her credit report. For the small number of applicants who do not have a current, government-issued photo identification card, we may rely on the other screening processes described above to verify their identity. But we obtain and authenticate photo identification from the great majority of applicants, and perform the other processes described above for all borrowers. If we are unable to verify the identity of an applicanta borrower in the manner described above, we will cancel the applicant’sborrower's listing or pending loan.
In addition to the identity verification processes just described, we verify income and employment information for a subset of applicantsborrowers based on a proprietary algorithm. The intention of this algorithm is to identify instances where the applicant’sborrower's self-reported income is highly determinative of the applicant’sborrower'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’sa borrower's income, we require the applicant to submit a paystub from within the last thirty days and a W-2will request documents such as recent paystubs, tax returns or Form 1099 from the prior calendar year.bank statements. To verify an applicant’sa borrower's employment, we obtain confirmation frommay contact the human resources department of the applicant’sborrower's employer verbally or by email, or phone the main phone number of the applicant’s employer and confirm that we can be connected directly to the applicant’s work number from that main number.use other databases. Between July 14, 2009 and SeptemberJune 30, 20112018 (based on start time of the applicable bidding period), PMIwe verified employment and/or income on approximately 42%65% of the PMI Borrower Loans originated on the platformthrough our marketplace on a unit basis (6,316(638,443 out of 15,139)976,358) and approximately 65%76% of originationssuch loans on a dollar basis ($55,766,0419.6 billion out of $85,985,988)$12.6 billion). Breaking these numbers down by Prosper Rating:
· | for PMI Borrower Loans with a Prosper Rating of AA, A or B, PMI verified income and/or employment information on approximately 58% of the loans originated on a unit basis (3,047 out of 5,274) and approximately 80% of originations on a dollar basis ($31,388,823 out of $39,303,272)for Borrower Loans with a Prosper Rating of AA, A or B, we verified income and/or employment information on approximately 68% of such loans on a unit basis (325,075 out of 478,586) and approximately 77% of such loans on a dollar basis ($5.2 billion out of $6.8 billion); |
for Borrower Loans with a Prosper Rating of C or D, we verified income and/or employment information on approximately 67% of such loans on a unit basis (253,730 out of 378,366) and approximately 76% of such loans on a dollar basis ($3.8 billion out of $5.0 billion); and · | for PMI Borrower Loans with a Prosper Rating of C or D, PMI verified income and/or employment information on approximately 42% of the loans originated on a unit basis (2,290 out of 5,493) and approximately 63% of originations on a dollar basis ($18,383,137 out of $29,292,670); and |
for Borrower Loans with a Prosper Rating of E or HR, we verified income and/or employment information on approximately 50% of such loans on a unit basis (59,638 of 119,406) and approximately 60% of such loans on a dollar basis ($0.5 billion out of $0.8 billion).
· | for PMI Borrower Loans with a Prosper Rating of E or HR, PMI verified income and/or employment information on approximately 22% of the loans originated on a unit basis (979 of 4,372) and approximately 34% of originations on a dollar basis ($5,994,081 out of $17,390,046). |
Our bases for selectingBetween July 14, 2009 and June 30, 2018, we canceled 11% of the loan listings for which we verified employment and/or income information because the listings contained inaccurate or insufficient employment or income verification are the same as the ones used by PMI for PMI Borrower Loans.information. Please note however, that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.future Borrower Loans. See “Risk Factors—Prosper Funding LLC, the Platform"Risk Factors-Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes”Notes" for more information.
If an applicanta borrower fails to provide satisfactory information in response to an income or employment verification inquiry, we will (a) request additional information from the applicant,borrower, (b) cancel the applicant’sborrower's listing or (c) refuse to proceed with the funding of the loan. Where we choose to verify an applicant’sa borrower's income or employment information, the verification is normally done after the applicant’sborrower's listing has already been posted. This allows us to focus our verification efforts on the listings most likely to fund, and increases the percentage of funded loans that are subject to verification.fund.
When we identify inaccurate employment or income information in an application or listing that has resulted in the applicantborrower obtaining a different Prosper Rating or interest rate for his or her listing than she would have obtained if he or she had provided the correct information, we cancel the listing. If we identify inaccurate information in a listing that does not trigger cancellation of the listing, we do not update the listing to include the corrected information. Cancellation automatically triggers a notice to the applicantborrower and any lender membersinvestors who made commitments to the listing that the listing has been cancelled, and we send an adverse action notice to the applicantborrower indicating the reasons for cancellation. We make the funds committed by the lender membersinvestors on the cancelled listing immediately available to them for bidding on other listings. We generally do not verify information included by applicantsborrowers in their listings other than identity, income and employment information. Similarly, we do not verify the information in any recommendations from an applicant’s Prosper friends. We derive the applicant’sborrower's debt-to-income ratio or “DTI,”("DTI") from a combination of the applicant’sborrower's self-reported income and information from the applicant’sborrower's credit report. The credit data that appears in listings is taken directly from the applicant’sborrower's credit report. Although applicantsborrowers 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 applicantborrower is presumed to be a homeowner. Lender membersInvestors should not rely on unverified information provided by applicants.borrowers. See "Item I.A. Risk Factors-Risks Related to Borrower Default-The maximum debt-to-income ratio for all borrowers is 50%" for more information.
Our or PMI’s participationPFL in funding loans on the platform from timemanner and to time has had, and will continue to have, no effect on our income and employment verification process, the selection of loan requests verified or the frequency of income and employment verification.
extent contemplated in this section. We are continuously looking for ways to improve our verification procedures in a cost-effective manner in order to increase the repayment performance of loans.Borrower Loans. See “Risk Factors—Risks"Risk Factors-Risks Related to Borrower Default—InformationDefault-Information supplied by applicantsborrowers may be inaccurate or intentionally false-false. Information regarding income and employment is not verified in many cases”cases" for more information.
Our Note Repurchase and Indemnification Obligations
Under the lender registration agreement, in the eventterms of each Note, if a material default under a series of Notes due"Repurchase Event" occurs with respect to verifiable identity theft of the named borrower’s identity, wethat Note, PFL will, at its sole option, either repurchase the Note and creditfrom the lender members’ account withholder or indemnify the remaining unpaid principal balanceholder of the Note. OurNote for any losses resulting from nonpayment of the Note or from any claim, demand or defense arising as a result of such Repurchase Event. A "Repurchase Event" with respect to a Note means (i) a Prosper Rating different from the Prosper Rating actually calculated by us was included in the listing for the corresponding Borrower Loan, as a result of which the interest of the holder in the 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 Borrower Loan because either we 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 Note is materially and adversely affected, or (iii) the corresponding Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower and a material payment default under the corresponding Borrower Loan has occurred.
Under PFL's standard form of loan purchase agreement for participants in the Whole Loan Channel, PFL will repurchase obligation will apply onlya Borrower Loan from the purchaser if the relevant NoteBorrower Loan is legally unenforceable because it did not comply with applicable laws in effect at least 120 days past-due; provided, that we may in our sole discretion elect to repurchase such Note at an earlier time. the time the Borrower Loan was originated, or if the Borrower Loan was obtained as a result of verifiable identify theft on the part of the purported borrower.
The determination of whether verifiable identityidentify theft has occurred is in our sole discretion.discretion, and we have the exclusive right to investigate such claims. We generally recognizemay, in our reasonable discretion, require proof of the occurrenceidentify theft, such as a copy of a police
report filed by the person whose identity was wrongfully used to obtain the Borrower Loan, an identity theft affidavit, a bank verification letter or all of the above. Because we are the sole entities with the ability to investigate and determine verifiable identity theft, which in turn triggers PFL's repurchase or indemnification obligations, a conflict of interest exists. We believe the risk created by this conflict of interest is mitigated by three factors that incent us to vigorously investigate claims of identity fraud upon receipttheft. First, without the protection offered by PFL's repurchase and indemnification obligations, fewer potential investors will have the confidence to participate in our marketplace, limiting the growth and long term profitability of PFL. Second, the Loan Program Agreement between Prosper and WebBank includes a police report regardingrequirement-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 were frivolously dismissed. See "Risk Factors-Risks Related to Borrower Default-The fact that we have the exclusive right and ability to investigate claims of identity fraud. Thistheft in the origination of Borrower Loans creates a significant conflict of interest between us and our investors."
PFL is under no obligation to repurchase a series of Notes or indemnify any holder of Notes if a correctly determined Prosper Rating fails to accurately predict the actual losses on a Borrower Loan. In addition, the remedy described above for identity fraudtheft with respect to Notes and Borrower Loans only provides protection against identity theft; in no way is it a guarantee of a borrower’sborrower's self-reported information (beyond identity) or a borrower’sborrower's creditworthiness. We expectSee "Item 1A. Risk Factors-Risks Inherent in Investing in the Notes-PFL is not obligated to indemnify a Note holder or repurchase any Notes except in limited circumstances." PFL expects the incidence of identity fraud on the platformin our marketplace to be low because of ourthe identity verification process. As of SeptemberFrom 2006 through June 30, 2011, PMI had2018, we experienced 23 cases of confirmed identity fraud cases affecting 36 PMI136 Borrower Loans since inception, but has not experienced any cases of confirmed identity fraud during the year ended December 31, 2010 or in the nine months ended September 30, 2011.Loans. In the cases of identity theft PMI haswe have experienced, itwe 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 our borrower loans.Borrower Loans. See “Risk Factors—Prosper Funding LLC, the Platform"Risk Factors-Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes”Notes" for more information.
We haveUnder PFL's investor registration agreements with investors who participate in the exclusive right to investigate claims of identity theftNote Channel, PFL represents and determine, in our sole discretion, whether verifiable identity theft has occurred. As PMI, acting as Servicer on our behalf, is the sole entity with the ability to investigate and determine verifiable identity theft, which triggers our repurchase obligation, a conflict of interest exists as the denial of a claim of identity theft would save us from our repurchase obligation. There are, however, three factorswarrants that mitigate the risk of this conflict. Without the protection(i) if an investor uses an automated bidding tool or order execution service offered by this repurchase obligation, fewer potential lender membersPFL, such as Auto Invest, Quick Invest, Auto Quick Invest or Premier, to identify Notes for purchase, each Note purchased will have the confidence to participate on the platform, limiting our growth and long term profitability. In addition, our relationship with WebBank includes a requirement – and accompanying audit function – to insure that claims of identity theft are thoroughly investigated and accurately reported. Finally, California statutes include severe penalties owedconform to the victiminvestment criteria provided by the investor through such tool or service, and (ii) each Note that an investor purchases from PFL will be in the principal amount of identity theftthe bid such investor placed and will correspond to the Borrower Loan on which such investor bid. If PFL breaches either of these representations and warranties and, as a result, the Note sold to an investor is materially different from the Note that would have been sold had the breach not occurred or if itthe investor would not have purchased the Note at all absent such breach, PFL will, at its sole option, either indemnify the investor from any losses resulting from such breach, repurchase the Note or cure the breach, if the breach is shown that a claim of identity theft was not adequately investigated or frivolously dismissed.
In the event we breachsusceptible to cure. If PFL breaches any of ourits other representations and warranties in the lenderinvestor registration agreement pertaining to the Notes, and such breach materially and adversely affects an investor's interest in a series of Notes, weNote, PFL will, at its sole option, either indemnify the lender members,investor, repurchase the series of Notesaffected Note from such investor or cure the breach. The circumstances where this may occur include where the listing contained the wrong Prosper Score, or where we miscalculated the Prosper Score, resulting in the wrong Prosper Rating appearing in the listing. We are not, however, under any obligationdetermination of whether a breach is susceptible to cure indemnify or repurchase a seriesis in PFL's sole discretion.
Calculation of Notes because a correctly determined Prosper Score or Prosper Rating fails to accurately predict the actual losses on a borrower loan. In addition, we are not obligatedRepurchase Price and Indemnification Payments
If PFL elects to repurchase a Note or indemnifyBorrower Loan in connection with a lender member whose investmentrepurchase event or breach described above, the repurchase price will be equal to the principal amount outstanding on the Note or Borrower Loan as of the date of repurchase and will not include accrued and unpaid interest. If PFL elects to provide indemnification in connection with a repurchase event or the breach of a representation or warranty under the investor registration agreement for Note Channel participants, PFL will not be required to take any action with respect to any losses suffered until the affected Note is not realized in whole or in part due to false or inaccurate statements or omissionsat least one hundred twenty (120) days past due. For purposes of fact in a listing, whether in credit data, borrower’s representations, user recommendations, group affiliations or similar indiciaindemnification, PFL will calculate the losses resulting from nonpayment of borrower intent and ability to repay the loan. Finally, if we repurchase a Note webased on the principal amount outstanding on the Note. If PFL makes an indemnification payment, PFL will only returnbe entitled to retain any subsequent recoveries that it receives on the outstanding principal balance to the lender member and not unpaid interest. affected Note.
Effect on PMI Management Rights
If PFL repurchases any Notes, PMI will concurrently repurchase the related PMI Management Rights for zero consideration.
Historical Performance of PMI Borrower Loans
The performance of borrower loansBorrower Loans is a function of the credit quality of borrowers and the risk and return preferences of lender members. Lender membersinvestors. Investors 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 membersinvestors consider applicants’borrowers' Prosper Rating,Ratings, credit score,scores, debt-to-income ratios and other credit data and information displayed with listings. See “Risk Factors—Risks"Risk Factors-Risks Related to Borrower Default.”"
The following seven graphs show performancegraph below displays the overall level of delinquency for PMI Borrower Loans, collectively, on a calendar basis from August 2009 through September 30, 2011 by delinquency rates and cumulative principal default rates. March 2018. The table belowhorizontal axis shows 1-30 and 31-120 day delinquency rates by quarter for PMI Borrower Loans originated between July 13, 2009 and September 30, 2011. This graph shows delinquencies as a percentage of total outstanding principal balance. We consider loans more than 30 days past due to be severely delinquent due to the significant decrease inmonth during the likelihood of receiving future payment once a loan has missed two payments.  The following graphs show cumulative principal default rates for PMI Borrower Loans originated by year. The cumulative charge-off rate is calculated asperiod covered, while the sum of the cumulative principal balance charged-off, divided by the original amount borrowed. The vertical axis shows the percentage of principal charged-off. The horizontal axis shows the age of the loan in monthly cycles. We only include data for a point along the x axis if at least 70% of the original amount borrowed in that vintage has been outstanding for at least that number of cycles.
The following table shows cumulative principal default rates for PMIbalance on Borrower Loans originated from July 13, 2009 to December 31, 2009, asthat was delinquent at the end of Septemberthat period. The delinquencies are grouped into two categories-Borrower Loans that have been delinquent for 30 2011.
The following table shows cumulative principal default rates for PMIdays or less and Borrower Loans originated from January 1, 2010 through September 30, 2010, asthat have been delinquent for 31 to 120 days. Loss estimates for the portfolio on a vintage basis may be found in the section "Comparing Estimated Loss Rates to Actual Losses".
Note: Beginning in November of September 30, 2011. 2015 Prosper implemented changes to its site that increased the proportion of newly booked loan customers opting to make manual rather than auto ACH payments. The result of these changes is that more customers temporarily end up 1-15 days past due. This change also means that the meaning of DPD 1-30 in the chart below is not perfectly comparable between the periods pre and post November 2015.
The following table presents aggregated information as of SeptemberJune 30, 2011,2018, grouped by Prosper Rating, for all PMI36 month Borrower Loans, collectively, originated on the platformthrough our marketplace from July 13, 2009 through SeptemberJune 30, 2011.2018. The table provides information regarding the total amount originated through our marketplace, the amount of such Borrower Loans that are current, and the number of such 36 month Borrower Loans that are 1-30 days past due. With respect to delinquent PMI36 month Borrower Loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of SeptemberJune 30, 2011. 2018.
36 Month Borrower Loan Originations July 13, 2009 - June 30, 2018 (as of June 30, 2018) (in thousands, except for number amounts) | Loan Originations | | | July 13, 2009 - September 30, 2011 | | | (as of September 30, 2011) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Loan Originations | | | Current Loans | | | 1-30 Days Past Due | | | Prosper Rating | | Number | | | Amount | | | Number | | | Origination Amount | | | Outstanding Principal | | | Number | | | Origination Amount | | | Outstanding Principal | | | AA | | | | 1,393 | | | $ | 10,873,454 | | | | 973 | | | $ | 8,340,325 | | | $ | 5,956,394 | | | | 4 | | | $ | 27,500 | | | $ | 23,284 | | | A | | | | 2,348 | | | | 15,928,899 | | | | 1,858 | | | | 13,403,704 | | | | 10,310,546 | | | | 15 | | | | 76,165 | | | | 49,957 | | | B | | | | 1,487 | | | | 11,318,661 | | | | 1,240 | | | | 9,685,457 | | | | 7,968,677 | | | | 12 | | | | 86,500 | | | | 74,709 | | | C | | | | 1,672 | | | | 9,235,753 | | | | 1,228 | | | | 7,080,821 | | | | 5,702,736 | | | | 23 | | | | 145,200 | | | | 98,790 | | | D | | | | 3,771 | | | | 19,336,546 | | | | 2,941 | | | | 15,929,843 | | | | 13,634,230 | | | | 89 | | | | 419,620 | | | | 352,042 | | | E | | | | 2,474 | | | | 11,152,797 | | | | 1,985 | | | | 9,232,551 | | | | 8,203,297 | | | | 75 | | | | 359,008 | | | | 322,333 | | | HR | | | | 1,856 | | | | 5,908,301 | | | | 1,360 | | | | 4,322,601 | | | | 3,541,855 | | | | 52 | | | | 182,180 | | | | 151,611 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,001 | | | $ | 83,754,411 | | | | 11,585 | | | $ | 67,995,301 | | | $ | 55,317,735 | | | | 270 | | | $ | 1,296,172 | | | $ | 1,072,727 | | | | | | | avg loan size: | | | $ | 5,583 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | percent of total | | | | | | | | | | | 77.2 | % | | | 81.2 | % | | | | | | | 1.8 | % | | | 1.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Paid In Full | | | 31+ Days Past Due | | | Defaulted 1 | | | Prosper Rating | | Number | | | Origination Amount | | | Number | | | Origination Amount | | | Outstanding Principal | | | Number | | | Origination Amount | | | Net Charged Off Principal | | | AA | | | | 389 | | | $ | 2,262,728 | | | | 9 | | | $ | 75,500 | | | $ | 51,114 | | | | 18 | | | $ | 167,400 | | | $ | 124,989 | | | A | | | | 401 | | | | 2,126,643 | | | | 15 | | | | 67,500 | | | | 46,246 | | | | 59 | | | | 254,887 | | | | 198,674 | | | B | | | | 198 | | | | 1,278,604 | | | | 12 | | | | 85,300 | | | | 71,400 | | | | 25 | | | | 182,800 | | | | 155,873 | | | C | | | | 324 | | | | 1,502,083 | | | | 23 | | | | 142,950 | | | | 112,460 | | | | 74 | | | | 364,700 | | | | 309,354 | | | D | | | | 474 | | | | 1,890,618 | | | | 102 | | | | 485,657 | | | | 426,843 | | | | 165 | | | | 610,809 | | | | 523,679 | | | E | | | | 241 | | | | 857,527 | | | | 73 | | | | 342,502 | | | | 320,180 | | | | 100 | | | | 361,210 | | | | 319,449 | | | HR | | | | 265 | | | | 834,954 | | | | 67 | | | | 221,335 | | | | 185,968 | | | | 112 | | | | 347,231 | | | | 315,082 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,292 | | | $ | 10,753,157 | | | | 301 | | | $ | 1,420,745 | | | $ | 1,214,211 | | | | 553 | | | $ | 2,289,037 | | | $ | 1,947,100 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | percent of total | | | 15.3 | % | | | 12.8 | % | | | 2.0 | % | | | 1.7 | % | | | | | | | 3.7 | % | | | 2.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Repurchased | | | | | | | | | | | | | | | Default due to Delinquency: | | | | | | | Prosper Rating | | Number | | | Origination Amount | | | | | | | | | | | | | | | | | | | | 501 | | | $ | 1,795,569 | | | AA | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | A | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | B | | | | - | | | | - | | | | | | | | | | | | | | | Default due to Bankruptcy2 : | | | | | | | C | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | 52 | | | $ | 151,531 | | | D | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | E | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | HR | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | - | | | | | | | | | | | | | | | | | | | | | | | | | | | percent of total | | | 0.0 | % | | | 0.0 | % | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Loan Originations | | Current Borrower Loans | | 1-30 Days Past Due | | Prosper Rating | No. | | Origination Amount | | No. | | Origination Amount | | Outstanding Principal | | No. | | Origination Amount | | Outstanding Principal | | AA | 84,779 |
| | $ | 1,103,362 |
| | 38,183 |
| | $ | 509,243 |
| | $ | 316,247 |
| | 162 |
| | $ | 2,186 |
| | $ | 944 |
| | A | 143,368 |
| | 1,921,063 |
| | 53,734 |
| | 731,820 |
| | 397,610 |
| | 557 |
| | 7,916 |
| | 2,786 |
| | B | 145,106 |
| | 1,873,155 |
| | 63,939 |
| | 824,715 |
| | 516,114 |
| | 971 |
| | 14,568 |
| | 6,569 |
| | C | 141,976 |
| | 1,714,287 |
| | 66,396 |
| | 812,725 |
| | 552,809 |
| | 1,455 |
| | 20,437 |
| | 11,763 |
| | D | 79,634 |
| | 834,749 |
| | 32,083 |
| | 354,004 |
| | 256,396 |
| | 1,022 |
| | 13,320 |
| | 8,764 |
| | E | 61,315 |
| | 444,961 |
| | 22,087 |
| | 177,262 |
| | 126,684 |
| | 930 |
| | 8,449 |
| | 5,726 |
| | HR | 35,440 |
| | 177,814 |
| | 12,606 |
| | 70,543 |
| | 50,153 |
| | 562 |
| | 3,359 |
| | 2,315 |
| | | 691,618 |
| | $ | 8,069,391 |
| | 289,028 |
| | $ | 3,480,312 |
| | $ | 2,216,013 |
| | 5,659 |
| | $ | 70,235 |
| | $ | 38,867 |
| | Avg loan size: | | | $ | 11.7 |
| | | | | | | | | | | | | | Percent of total | | | | | 41.8 | % | | 43.1 | % | | | | 0.8 | % | | 0.9 | % | | |
As the table reflects, 41.8% of the 36 month Borrower Loans made through our marketplace between July 13, 2009 and June 30, 2018 and 43.1% of the amount borrowed through our marketplace during that period are current, while 0.8% of the 36 month Borrower Loans and the amount borrowed during that period are 1-30 days past due.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | 43,297 |
| | $ | 551,471 |
| | 296 |
| | $ | 3,930 |
| | $ | 1,594 |
| | 2,841 |
| | $ | 36,531 |
| | $ | 18,552 |
| | A | 77,268 |
| | 1,024,717 |
| | 1,010 |
| | 14,029 |
| | 5,550 |
| | 10,799 |
| | 142,581 |
| | 75,058 |
| | B | 64,197 |
| | 815,742 |
| | 1,618 |
| | 22,837 |
| | 11,351 |
| | 14,381 |
| | 195,292 |
| | 112,276 |
| | C | 54,191 |
| | 621,773 |
| | 2,444 |
| | 33,678 |
| | 19,788 |
| | 17,490 |
| | 225,674 |
| | 140,342 |
| | D | 31,891 |
| | 305,194 |
| | 1,707 |
| | 21,968 |
| | 15,354 |
| | 12,931 |
| | 140,264 |
| | 93,126 |
| | E | 24,311 |
| | 156,352 |
| | 1,487 |
| | 13,790 |
| | 9,860 |
| | 12,500 |
| | 89,108 |
| | 61,175 |
| | HR | 13,309 |
| | 59,588 |
| | 959 |
| | 5,641 |
| | 4,163 |
| | 8,004 |
| | 38,684 |
| | 27,626 |
| | | 308,464 |
| | $ | 3,534,837 |
| | 9,521 |
| | $ | 115,873 |
| | $ | 67,660 |
| | 78,946 |
| | $ | 868,134 |
| | $ | 528,155 |
| | Percent of total | 44.6 | % | | 43.8 | % | | 1.4 | % | | 1.4 | % | | | | 11.4 | % | | 10.8 | % | | |
1 | includes | | (1) | Includes all loans >120Borrower Loans more than 120 days past due | | | | | | | | 2 | Only includes loans where the bankruptcy notification date is prior to the date the loan became 121 days past due. If we were notified of a bankruptcy after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals. |
From July 13, 2009 through September 30, 2011, 15,001 PMI Borrower Loans were originated on the platform with an average original principal amount of $5,583 and an aggregate original principal amount of $83,754,411. As of September 30, 2011, 77.2% of these loans were current or had not reached their first billing cycle and 15.3% were paid in full, 1.8% were 1 to 30 days past due, 2.0% were more than 30 days past due, and 3.7% had defaulted. A PMI Borrower Loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy. Of these 15,001 loans, 1,282 loans, or 9%, have been greater than 15 days past due at any time, 952 loans, or 6%, have been more than 30 days past due at any time, and 735 or 5%, have been more than 60 days past due at any time.
Of PMI Borrower Loans originated after July 13, 2009, 553 have defaulted as of September 30, 2011, equaling a total net defaulted amount of $1,947,110. Of these 553 defaulted loans, the borrowers of 52 of the loans have filed for bankruptcy, resulting in a net defaulted amount of $151,531.
The data in the preceding tables regarding PMI Borrower Loans may not be representative of the loss experience that will develop for our borrower loans.future Borrower Loans. In addition, the data in the preceding tables regarding prepayments may not be representative of the impact of prepayments we expectexperienced on Borrower Loans over time. The following table presents aggregated information as of June 30, 2018, grouped by Prosper Rating, for all 60 month Borrower Loans, collectively, originated through our marketplace from July 13, 2009 through June 30, 2018. The table provides information regarding the total amount originated through our marketplace, the amount of such Borrower Loans that are current, and the number of such 60 month Borrower Loans that are 1-30 days past due. With respect to delinquent 60 month Borrower Loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of June 30, 2018.
60 Month Borrower Loan Originations July 13, 2009 - June 30, 2018 (as of June 30, 2018) (in thousands, except for number amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Loan Originations | | Current Borrower Loans | | 1-30 Days Past Due | | Prosper Rating | No. | | Origination Amount | | No. | | Origination Amount | | Outstanding Principal | | No. | | Origination Amount | | Outstanding Principal | | AA | 3,491 |
| | $ | 74,368 |
| | 2,268 |
| | $ | 51,948 |
| | $ | 42,019 |
| | 9 |
| | $ | 209 |
| | $ | 148 |
| | A | 30,350 |
| | 534,509 |
| | 18,538 |
| | 342,170 |
| | 256,346 |
| | 135 |
| | 2,458 |
| | 1,483 |
| | B | 69,572 |
| | 1,245,868 |
| | 38,701 |
| | 703,373 |
| | 490,490 |
| | 509 |
| | 9,243 |
| | 5,512 |
| | C | 102,092 |
| | 1,693,774 |
| | 51,753 |
| | 869,640 |
| | 630,987 |
| | 1,180 |
| | 20,754 |
| | 13,686 |
| | D | 53,230 |
| | 786,745 |
| | 24,526 |
| | 366,358 |
| | 283,588 |
| | 853 |
| | 13,527 |
| | 9,951 |
| | E | 22,147 |
| | 205,489 |
| | 10,458 |
| | 102,032 |
| | 85,259 |
| | 429 |
| | 4,391 |
| | 3,649 |
| | | 280,882 |
| | $ | 4,540,753 |
| | 146,244 |
| | $ | 2,435,521 |
| | $ | 1,788,689 |
| | 3,115 |
| | $ | 50,582 |
| | $ | 34,429 |
| | Avg loan size: | | | $ | 16.2 |
| | | | | | | | | | | | | | Percent of total | | | | | 52.1 | % | | 53.6 | % | | | | 1.1 | % | | 1.1 | % | | |
As the table reflects, 52.1% of the 60 month Borrower Loans made through our marketplace between July 13, 2009 and June 30, 2018 and 53.6% of the amount borrowed through our marketplace during that period are current, while 1.1% of the 60 month Borrower Loans and the amount borrowed during that period are 1-30 days past due.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | 1,089 |
| | $ | 19,935 |
| | 7 |
| | $ | 176 |
| | $ | 119 |
| | 118 |
| | $ | 2,100 |
| | $ | 1,313 |
| | A | 9,461 |
| | 154,046 |
| | 183 |
| | 3,073 |
| | 1,914 |
| | 2,033 |
| | 32,761 |
| | 21,390 |
| | B | 21,965 |
| | 386,892 |
| | 824 |
| | 14,757 |
| | 8,958 |
| | 7,573 |
| | 131,603 |
| | 89,735 |
| | C | 30,960 |
| | 504,331 |
| | 1,765 |
| | 29,725 |
| | 20,501 |
| | 16,434 |
| | 269,323 |
| | 193,445 |
| | D | 15,789 |
| | 226,007 |
| | 1,326 |
| | 21,027 |
| | 16,263 |
| | 10,736 |
| | 159,826 |
| | 120,879 |
| | E | 6,094 |
| | 52,180 |
| | 655 |
| | 6,651 |
| | 5,585 |
| | 4,511 |
| | 40,235 |
| | 31,632 |
| | | 85,358 |
| | $ | 1,343,391 |
| | 4,760 |
| | $ | 75,409 |
| | $ | 53,340 |
| | 41,405 |
| | $ | 635,848 |
| | $ | 458,394 |
| | Percent of total | 30.4 | % | | 29.6 | % | | 1.7 | % | | 1.7 | % | | | | 14.7 | % | | 14.0 | % | | |
| | | (1) | Includes all Borrower Loans more than 120 days past due |
The data in the preceding tables regarding Borrower Loans may not be representative of the loss experience that will develop for future Borrower Loans. In addition, the data in the preceding tables may not be representative of the impact of prepayments experienced on Borrower Loans over time.
The following table presents aggregate information, as of SeptemberJune 30, 2011,2018, regarding the results of PMI’s collectionProsper's recovery efforts for PMI36 month Borrower Loans, collectively, originated after July 13, 2009 that became more than 30 days past due at any time,were charged off, grouped by Prosper Rating. Rating (in thousands except for number amounts). The recovery amounts include the proceeds from sales of charged off debt. | 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 | | | | 36 | | | $ | 281,400 | | | $ | 18,369 | | | $ | 6,194 | | | | 18 | | | $ | 137,489 | | | $ | 12,500 | | | $ | 124,989 | | | A | | | | 94 | | | | 398,512 | | | | 25,917 | | | | 14,841 | | | | 59 | | | | 204,248 | | | | 5,574 | | | | 198,674 | | | B | | | | 42 | | | | 283,100 | | | | 19,722 | | | | 4,577 | | | | 25 | | | | 157,652 | | | | 1,779 | | | | 155,873 | | | C | | | | 127 | | | | 640,706 | | | | 48,996 | | | | 19,920 | | | | 74 | | | | 319,015 | | | | 9,660 | | | | 309,354 | | | D | | | | 314 | | | | 1,261,216 | | | | 103,266 | | | | 47,416 | | | | 165 | | | | 547,323 | | | | 23,644 | | | | 523,679 | | | E | | | | 209 | | | | 842,707 | | | | 73,732 | | | | 27,988 | | | | 100 | | | | 332,199 | | | | 12,750 | | | | 319,449 | | | HR | | | | 211 | | | | 664,453 | | | | 58,848 | | | | 31,519 | | | | 112 | | | | 320,318 | | | | 5,236 | | | | 315,082 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | 1,033 | | | $ | 4,372,094 | | | $ | 348,850 | | | $ | *152,455 | | | | 553 | | | $ | 2,018,244 | | | $ | 71,144 | | | $ | 1,947,100 | | * This amount excludes collection agency payments that were subsequently returned by the bank | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | Prosper Rating | 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 | 2,841 |
| | $ | 20,521 |
| | $ | 1,969 |
| | $ | 18,552 |
| | A | 10,799 |
| | 83,313 |
| | 8,255 |
| | 75,058 |
| | B | 14,381 |
| | 125,220 |
| | 12,944 |
| | 112,276 |
| | C | 17,490 |
| | 156,712 |
| | 16,371 |
| | 140,342 |
| | D | 12,931 |
| | 104,350 |
| | 11,225 |
| | 93,126 |
| | E | 12,500 |
| | 68,572 |
| | 7,397 |
| | 61,175 |
| | HR | 8,004 |
| | 30,965 |
| | 3,339 |
| | 27,626 |
| | | 78,946 |
| | $ | 589,653 |
| | $ | 61,500 |
| | $ | 528,155 |
|
* This amount excludes collection agency payments that were subsequently returned due to insufficient funds.
The following table presents aggregate information, as of June 30, 2018, regarding the results of Prosper's recovery efforts for 60 month Borrower Loans, collectively, originated after July 13, 2009 that were charged off, grouped by Prosper Rating (in thousands except for number amounts). The recovery amounts include the proceeds from sales of charged off debt. | | | | | | | | | | | | | | | | | Prosper Rating | 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 | 118 |
| | $ | 1,472 |
| | $ | 159 |
| | $ | 1,313 |
| | A | 2,033 |
| | 23,605 |
| | 2,216 |
| | 21,390 |
| | B | 7,573 |
| | 99,430 |
| | 9,696 |
| | 89,735 |
| | C | 16,434 |
| | 214,950 |
| | 21,505 |
| | 193,445 |
| | D | 10,736 |
| | 134,824 |
| | 13,946 |
| | 120,879 |
| | E | 4,511 |
| | 35,331 |
| | 3,698 |
| | 31,632 |
| | | 41,405 |
| | $ | 509,612 |
| | $ | 51,220 |
| | $ | 458,394 |
|
* This amount excludes collection agency payments that were subsequently returned due to insufficient funds.
We may alter the terms or make principal reductions on some loans,Borrower Loans, which may include cases where a reduction in the initial interest rate is required by law. The Servicemembers’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, Prosper may refund, or reverse and reapply, interest payments received from the borrower while he or she is on active duty. PMI
Loan Originations
The following table presents aggregated information about Borrower Loans, collectively, originated over the period from July 13, 2009 to June 30, 2018, grouped by Prosper Rating (in thousands except for number amounts). As reflected by the table, we have issued 974,114 Borrower Loans, for aggregate proceeds of $12.6 billion, with an average loan size of $12,953. The weighted average investor yield for such Borrower Loans is 13.74%, the weighted-average borrower rate is 14.74% and the weighted-average borrower annual percentage rate for such Borrower Loans is 17.67%.
| | | | | | | | | | | | | | | | | | | | | | | Prosper Rating | Number | | Amount | | Average Loan Size | | Weighted Average Investor Yield | | Weighted Average Borrower Rate | | Weighted Average Borrower APR | | AA | $ | 88,451 |
| | $ | 1,178,680 |
| | 13.3 |
| | 5.83 | % | | 6.83 | % | | 8.28 | % | | A | 173,987 |
| | 2,456,943 |
| | 14.1 |
| | 8.46 | % | | 9.46 | % | | 12.31 | % | | B | 214,995 |
| | 3,120,571 |
| | 14.5 |
| | 11.33 | % | | 12.33 | % | | 15.40 | % | | C | 244,332 |
| | 3,409,444 |
| | 14.0 |
| | 15.48 | % | | 16.48 | % | | 19.53 | % | | D | 133,159 |
| | 1,622,738 |
| | 12.2 |
| | 21.38 | % | | 22.38 | % | | 25.59 | % | | E | 83,750 |
| | 651,530 |
| | 7.8 |
| | 26.86 | % | | 27.86 | % | | 31.42 | % | | HR | 35,440 |
| | 177,814 |
| | 5.0 |
| | 30.33 | % | | 31.33 | % | | 35.35 | % | | Total | 974,114 |
| | $ | 12,617,720 |
| | $ | 13.0 |
| | 13.74 | % | | 14.74 | % | | 17.67 | % |
On September 6, 2013, Prosper ceased using Experian's ScorexPlus credit score and began using Experian's FICO08 credit score. On December 21, 2016, Prosper ceased using Experian’s FICO08 credit score and began using TransUnion’s FICO08 credit score. All listings begun on or after December 21, 2016 use TransUnion's FICO08 credit score.
The following table presents aggregated information about borrowers for PMI Borrower Loans originated over the period from July 13, 2009September 6, 2013 to SeptemberJune 30, 2011, grouped by Prosper Rating. | Prosper Rating | | Number | | Amount | | Average Loan Size | | Weighted Average Lender Yield | | | Weighted Average Borrower Rate | | | Weighted Average Borrower APR | | | AA | | | 1,393 | | $ | 10,873,454 | | $ | 7,806 | | | 7.85 | % | | | 8.85 | % | | | 9.27 | % | | A | | | 2,348 | | | 15,928,899 | | | 6,784 | | | 10.05 | % | | | 11.06 | % | | | 13.10 | % | | B | | | 1,487 | | | 11,318,661 | | | 7,612 | | | 14.59 | % | | | 15.59 | % | | | 17.69 | % | | C | | | 1,672 | | | 9,235,753 | | | 5,524 | | | 19.45 | % | | | 20.45 | % | | | 23.30 | % | | D | | | 3,771 | | | 19,336,546 | | | 5,128 | | | 25.54 | % | | | 26.54 | % | | | 29.79 | % | | E | | | 2,474 | | | 11,152,797 | | | 4,508 | | | 30.57 | % | | | 31.57 | % | | | 35.30 | % | | HR | | | 1,856 | | | 5,908,301 | | | 3,183 | | | 31.19 | % | | | 32.19 | % | | | 35.52 | % | | Total | | | 15,001 | | $ | 83,754,411 | | $ | 5,583 | | | 19.21 | % | | | 20.22 | % | | | 22.74 | % |
The following table presents aggregated information about borrowers for PMI Borrower Loans originated over the period from July 13, 2009 to September 30, 2011,2018, grouped by Prosper Rating. The information for each borrower was obtained from a credit reporting agency at the time the borrower’s loanborrower's application was submitted. PMI hasWe have not independently verified this information:information. As reflected by the table, the average FICO08 score for borrowers on our marketplace was 702, the average number of current delinquencies for such borrowers was 0.25, the average number of open credit lines was 10.8 and the average number of total credit lines was 24.6.
| | | Prosper Rating | | Average Experian ScorexPlus Score | | Average Number of Current Delinquencies | | Average Number of Open Credit Lines | | Average Number of Total Credit Lines | | Average FICO 08 Score | | Average Number of Current Delinquencies | | Average Number of Open Credit Lines | | Average Number of Total Credit Lines | | AA | | 800 | | 0.03 | | 8.95 | | 26.44 | | 752 |
| | 0.07 |
| | 11.3 |
| | 26.2 |
| | A | | 752 | | 0.10 | | 9.07 | | 25.89 | | 720 |
| | 0.15 |
| | 10.8 |
| | 25.1 |
| | B | | 739 | | 0.19 | | 8.55 | | 25.30 | | 706 |
| | 0.20 |
| | 10.8 |
| | 24.7 |
| | C | | 701 | | 0.23 | | 8.92 | | 27.30 | | 693 |
| | 0.27 |
| | 10.8 |
| | 24.3 |
| | D | | 695 | | 0.41 | | 7.90 | | 25.17 | | 682 |
| | 0.34 |
| | 10.9 |
| | 24.2 |
| | E | | 673 | | 0.64 | | 8.18 | | 26.95 | | 671 |
| | 0.42 |
| | 10.6 |
| | 23.5 |
| | HR | | 667 | | 0.79 | | 7.78 | | 26.75 | | 663 |
| | 0.52 |
| | 10.6 |
| | 22.9 |
| | Total | | | 702 |
| | 0.25 |
| | 10.8 |
| | 24.6 |
|
Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.future Borrower Loans. See “Risk Factors—Prosper Funding LLC, the Platform"Risk Factors- Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes”Notes" for more information.
Posted Borrower Loan Listings
Once a loan listing is completed by an applicant,borrower, the listing is posted on ourthe website and then becomes available for bidding by lender members.investors. A loan listing is a request by the applicantborrower for a borrower loanBorrower Loan in a specified amount.
When creating a listing,Listings funded through the applicantNote Channel may opt for partial funding.be partially funded. Partial funding means the applicant’sborrower's 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 indicates whetherposted in the applicant has elected partial funding and, if so,Note Channel indicates the minimum amount of bids required for the loanlisting to fund. We may change the percentage threshold for partial funding, which is currently set at 70%, from time to time. Any such change will be disclosed on ourthe website, and will only affect listings created after we have implemented such change.change is implemented. Bids placed on listings posted in the Whole Loan Channel must be for 100% of the amount requested, so partial funding cannot occur for Borrower Loans funded through the Whole Loan Channel.
Borrower loansLoans are unsecured obligations of individual borrowers with an interest rate determined by us and with a specified loan term, currently set at one, three or five years, but which we may in the future extend to between three months to seven years. ApplicantsBorrowers may currently request loans within specified minimum and maximum principal amounts (currently, between $2,000 and $25,000)$40,000), which are subject to change from time to time. Borrower loansLoans may be repaid at any time by borrowers without prepayment penalty. A borrower loanBorrower Loan will be made to an applicanta borrower only if the applicant’sborrower's listing has received bids equal to or exceeding the minimum amount required for the listing to fund.
In addition to the applicant’sborrower's requested loan amount, listings include:
·the borrower interest rate, annual percentage rate and monthly payment amount on the requested loan;
·the servicing fee lenders must pay;
·the lenderinvestor yield percentage (interest(borrower interest rate on the loan, net of the servicing fee);
·the Prosper Rating and estimated loss rate;Rating;
·the Prosper Score and credit score range;
·the minimum amount required for the loan to fund and whether(for listings posted in the applicant has opted for partial funding;Note Channel);
·the number of accounts on which the applicantborrower is currently late on a payment, including unpaid derogatory accounts;
·the total past-due amount the applicantborrower owes on all delinquent and derogatory accounts;
·the number of 90+ days past due delinquencies on the applicant’sborrower's credit report;
·the number of public records (e.g., bankruptcies, liens, and judgments) on the applicant’sborrower's credit report over the last 12 months, and over the last 10 years;
·the number of inquiries made by creditors to the applicant’sborrower's credit report in the last six months;
·the month and year the applicant’sborrower's oldest recorded credit line (e.g., revolving, installment, or mortgage credit) was opened;
·the total number of credit lines appearing on the applicant’sborrower's credit report, along with the number that are open and current;
·the total balance on all of the applicant’sborrower's open revolving credit lines;
·the applicant’sborrower'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’sborrower's open bankcards;
·whether the applicant ownsborrower has a home;mortgage;
DTI percentage (updated to include requested Prosper loan amount); and ·DTI percentage;
·the applicant’sborrower's self-reported income range, occupation, employment status, and intended use of funds;funds.
·
For loan listings begun on or after December 21, 2016, the amountsborrower's Prosper Rating and dates ofProsper Score have been determined based on information obtained from his or her TransUnion credit report. For all lender member bids;listings begun prior to December 21, 2016, the Prosper Rating and Prosper Score were determined using information obtained from Experian. ·the applicant’s Prosper friends who have bid on the listing, together with any narrative recommendation from a bidding Prosper friend;
·the applicant’s group affiliations, if any; and
·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 Prosper loan.
Part of an applicant’sa borrower's credit profile displayed in listings is a DTI ratio. DTI is a measurementone measure of the applicant’sborrower's ability to take on additional debt. This number takes into consideration how much debt the applicantborrower has orand will have, including the requested
loan amount. The DTI is expressed as a percentage and is calculated by dividing the applicant’sborrower's monthly debt payments, including the debt resulting from the borrower loanBorrower Loan being requested, by the applicant’sborrower's monthly income. Such debt amounts are taken from the applicant’sborrower's credit report without verification and exclude monthly housing payments, andverification. In addition, the applicant’sborrower's income is self-reported and may not be verified by us. Listings may include the applicant’s narrative description of why the loan is being requested, and of the applicant’s financial situation.
For PMI Borrower Loans fundedoriginated through our marketplace by WebBank between July 13, 2009 and SeptemberJune 30, 2011,2018, borrowers identified their intended use of loan proceeds by unit distribution as follows:
·debt consolidation (approximately 47%75%);
·business use, such as financing their home-based or small businesses (approximately 10%1.6%);
·home improvement (approximately 10%8.8%);
·financing the purchase of an automobilemedical/dental procedures (approximately 6%2.9%); and
·other (approximately 27%11.7%).
_________________________
Applicants typically state the use of funds in a short sentence or clause, such as “Consolidate my credit card debt and be rid of it.” Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.Borrower Loans. See “Risk Factors—Prosper Funding LLC, the Platform"Risk Factors- Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes”Notes" for more information.
Loan listings and other borrower information available on the platform or in our sales and listing reports are statements made in connection with the purchase and sale of securities, and are therefore subject to Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as the antifraud provisions of the Securities Act of 1933, as amended (the “Securities Act”). In general, Section 10b-5 and the antifraud provisions of the Securities Act provide the purchaser of securities with a right to bring a claim against the issuer for damages arising from any untrue statement of material fact or failure to state a material fact necessary to make any statements made by the issuer not misleading. In this prospectus, we advise you of the limitations on the reliability of the information provided by applicants with respect to loan listings. Accordingly, a court could determine that we have advised you of all material facts regarding the information supplied by applicants and your recourse in the event this information is false or misleading may be extremely limited under the securities laws because you have been so advised. Alternatively, the SEC or a court could determine that we have not advised you of all of the material facts regarding an investment in the Notes, which could give you the right to rescind your investment and obtain damages, and could subject us to civil fines or criminal penalties in addition to any such rescission rights or damages.
How to Bid to Purchase Notes
Investors may browse online through available listings displayed in our marketplace by desired loan amount, yield percentage, Prosper Rating, estimated loss rate, debt-to-income ratio, or other borrower characteristics. Only investors 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 bid on a listing posted in the Note Channel is a lender member’san investor's binding commitment to purchase a Note in the principal amount of the lender member’sinvestor's bid, should the listing receive bids equaling or exceeding the amount required for the listing to fund. Lender membersInvestors bid the amount they are willing to commit to purchase a Note dependent for payment on payments we receivePFL receives on the borrower loanBorrower Loan described in the listing. A bid on a listing posted in the Whole Loan Channel is an investor's commitment to purchase the entire Borrower Loan.
The maximum bidding period for a listing, whether posted to the Note Channel, the Whole Loan Channel or both, is 14 days after posting (the "maximum listing period"). The bidding period for a listing begins whenwill end before 14 days if (i) for listings posted to the Note Channel, the listing is posted on the platform and ends either 14days after posting or on the first date on which the listing has receivedreceives bids totaling the loan amount requested, whichever is earlier. Lender members cannot place bids onor (ii) for listings posted to the Whole Loan Channel, the listing receives a bid. If a listing once its bidding period has ended. Ifposted in the applicant opts for partial funding,Whole Loan Channel does not receive a bid before the bidding period still will not end prior tofor that channel has ended (which period is determined by us in our sole discretion), then the endlisting may be posted in the Note Channel for the remainder of the 14 daymaximum listing period unlessperiod. Such a listing is identified to investors as having first been posted in the Whole Loan Channel. If a listing has received bids totalingin the full amount of the loan requested. If the listingNote Channel does not receive bids equal to or exceeding the minimum amount required for the loan to fund by the end of the maximum 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,to our marketplace, although we havePFL has the right under ourthe borrower registration agreement to limit the number of listings a borrower member may post on the platform.to our marketplace.
In order to bid on a listing, a lender memberan investor must have funds on deposit in his lender memberthe applicable FBO funding account in at least the amount of the bid. Once bids are placed, they are irrevocable. Lender membersInvestors may not cancel their bids or withdraw the amount of their bids from theirthe applicable FBO 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.canceled. See “About"About the Platform—Structure of Lender Member AccountsMarketplace-Marketplace Participants, Registration Requirements and Treatment of Lender Member Balances”Minimum Credit Criteria-Investors" for more information.
Currently, the minimum amount a lender member may bid is $25, and the maximum amount a lender member may bid is the amount of the requested borrower loan. The maximum aggregate amount a single lender memberan investor may bid on listings posted in the platformNote Channel is currently $5,000,000 for individuals and $50,000,000 for institutions. We may change the minimum bid amount or the maximum aggregate bid amounts from time to time.$25. Depending on the amount of the winning bids at the end of the bidding period, there may be a winning bidder on a listing in the Note Channel with a winning bid of less than $25. But$25, but there cannot be more than one partial winning bid on a listing.
A listing that gets funded typically receivesAll bids from many different lender members. For example, from July 2009 through September 30, 2011, the average aggregate size of a PMI Borrower Loan was approximately $5,583 and the average bid was approximately $59. Please note that historical data regarding PMI Borrower Loans may not be indicativeup to 100% of the future characteristics ofrequested loan amount. The maximum aggregate amount an individual investor may bid in our borrower loans. See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes”marketplace is currently $25 million. There is no maximum aggregate bid amount for more information.institutional users. We may change
Lender members may browse online through available listings displayed on the platform by desired borrower loanminimum bid amount yield percentage, Prosper Rating, estimated loss rate, debt-to-income ratio, group or other applicant characteristics. Alternatively, lender members can use our loan search tool, Quick Invest,the maximum aggregate bid amounts from time to identify loan listings that meet their investment criteria. A lender membertime. An investor can bid on as many listings as the lender memberinvestor desires, subject, in the case of individual investors, to the aggregate bidding limit. A lender memberAn investor can diversify her risk of default if she elects to do so. It is solely up to the individual lender membersinvestors to select their bidding method and the credit characteristics that are acceptable to the lender memberinvestor and to determine a diversification strategy.
Borrower Loans funded through the Note Channel was approximately $13.0 thousand and the average purchase price paid for corresponding Notes was approximately $592. Please note that historical data regarding Borrower Loans may not be indicative of the future characteristics of Borrower Loans. See "Risk Factors- Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes" for more information. Quick InvestRecurring Investment
OurRecurring Investment (formerly known as Auto Quick Invest) is an automated loan search tool Quick Invest,that allows lender membersinvestors to identify listingseasily invest in Notes that meet their specific investment criteria. A lender membercriteria by automatically bidding any available funds in their account on Notes that match their selected parameters, in accordance with their instructions. An investor using Quick InvestRecurring Investment is asked to indicate (i) the Prosper Ratinghis or Ratings she wishes to use as searchher investment criteria (ii) the total amount she wishes to invest and (iii) the amount she wishes to invest per Note. If she wishes to search for Notes using criteria other than, or in addition to, Prosper Rating, she can useby applying one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio, credit score and credit score.Prosper Rating. The investor is then asked to specify the amount he or she wishes to invest per note, and can also set aside a specific amount of his or her funds as a cash reserve that will not be invested by the Recurring Investment tool.
Quick Invest then compiles a basketAfter the investor has entered and saved the parameters of Notes for the lender member’s consideration that meethis or her search, criteria. Recurring Investment automatically (i) runs searches on his or her designated criteria as new listings are posted on the marketplace, and (ii) places bids on any Notes identified by each such search.
If the pool of Noteslistings that meet herthe investor's criteria exceeds the total amount she wishes to invest, Quick Investof available funds in his or her account, Recurring Investment selects Noteslistings from the pool based on how farwhat percentage of the loan amount requested under the corresponding listing has already received funding commitments, with those listings corresponding tohaving the Notes have progressed through ourhighest percentage of their requested loan verification process, i.e., Notes from the pool that correspond to listings for which we have completed our loan verification process will beamounts funded selected first. If there are two or more Notes whose corresponding listings have received the poolsame percentage of Notes that meet the lender member’s criteria and for which we have completed loan verification still exceeds the amount she wishes to invest, Quick Investrequested funds, Recurring Investment selects Noteslistings from that subset of the pool based on the principle of first in, first out, i.e., the Notes from the pool with thelistings whose corresponding listings that were posted on our websitemarketplace earliest will be selected first. To the extent available 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 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 Notes with the other Prosper Ratings selected in equal proportions. To the extent available 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.
For example, if a lender member using Quick Invest indicated that she wished to invest a total of $600 in 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 Notes ($200 – B; $200 – C; $200 – D). If there were only $100 of D Notes available, the search tool would attempt to increase the allocation of B and C Notes from $200 to $250 ($250 – B; $250 – C; $100 – D). If there were $250 of B Notes available but only $200 of C Notes available, the search tool would then attempt to make up the remaining gap by increasing the allocation of B Notes from $250 to $300 ($300 – B; $200 – C; $100 – D). But if there were only $275 worth of B 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 Notes: $275 of B Notes, $200 of C Notes and $100 of D Notes.
Our 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 Notes identified by each such search. As with a lenderan investor making manual bids, a lender memberan investor using Quick Investthe Recurring Investment tool is not permitted to place a bid unless the investor's funds in herthe applicable funding account are sufficient to cover the bid, and funds will only be debited from his or her account if and when his or her bid is successful.
In the event of any errors in Recurring Investment that cause an investor to purchase a Note that such investor would not otherwise have purchased or that differs materially from the Note such investor would have purchased had there been no error, PFL will either repurchase the Note, indemnify the investor against losses suffered on that Note or cure the breach. Recurring Investment cannot be used to bid on listings posted in the Whole Loan Channel.
Auto Invest
Our automated loan search and investment tool, Auto Invest, makes it easier for investors to build 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 select (i) a loan allocation target, or target mix of loans based on Prosper 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 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 allocation targets, cash reserve and other investment criteria, and pause and restart Auto Invest, at any time.
The frequency with which Auto Invest will place orders on the investor’s behalf is based on the cash balance of his or her account, the availability of listings matching his or her investment criteria, and the demand from other investors. The investor’s account and investment criteria will be reviewed by Auto Invest automatically each time new listings are posted on the marketplace and Auto Invest will place bids based on a randomized ordering of accounts. Auto Invest does not prioritize accounts based on overall account size or investment criteria. Once the investor turns on Auto Invest, the tool may immediately begin placing orders for Notes in accordance with the investor’s current and target allocations and other criteria. The mix of 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.
If Auto Invest identifies two or more Notes that meet the investor’s specified criteria and such pool of Notes exceeds the amount of available cash in the investor’s account, Auto Invest selects Notes from the pool based on the Prosper Ratings of the listings corresponding to the Notes. For each Prosper Rating, Auto Invest compares the investor’s current portfolio allocation against his or her target portfolio allocation to determine the current “allocation level” of the Rating. Auto Invest prioritizes the Notes based on which of the corresponding listings have Prosper Ratings with the lowest allocation levels. If two or more Prosper Ratings have the same allocation level, Auto Invest prioritizes the Notes from that subset of the pool based on which of the corresponding listings have Prosper Ratings with the highest target allocation. If there are two or more Notes whose corresponding
listing have Prosper Ratings with the same allocation level and allocation target, Auto Invest prioritizes the Notes from that subset of the pool based on how far the corresponding listings have progressed through the loan verification process. If there are two or more Notes whose corresponding listings have progressed to the same point in the loan verification process, the Notes from that subset of the pool whose corresponding listings have the earliest estimated end date will be selected first.
If Auto Invest identifies two or more Notes that meet the investor’s specified criteria and the Notes have the same Prosper Rating, Auto Invest will place an order for the Note whose corresponding listing has progressed the furthest in the loan verification process. If there are two or more Notes whose corresponding listings have progressed to the same point in the loan verification process, Auto Invest will select from that subset the Note whose corresponding listing has the earliest estimated end date.
As with an investor making a manual bid, Auto Invest will not place an order for a Note unless the investor's funds in the applicable funding account are sufficient to cover the Note order, and funds will only be debited from his or her account if and when his or her order is successful. If the investor has set a cash reserve, Auto Invest will not place an order for a Note if doing so would cause the percentage of cash in the investor’s account to fall below his or her cash reserve level.
In the event of any errors in Auto Invest that cause an investor to purchase a Note that such investor would not otherwise have purchased or that differs materially from the Note such investor would have purchased had there been no error, PFL will either repurchase the Note, indemnify the investor against losses suffered on that Note or cure the breach. Auto Invest cannot be used to bid on listings posted in the Whole Loan Channel.
Setting Interest Rates
PMI hasWe have an interest rate committee consisting of its Chief Executive Officer, Chief Financial Officer, Executive Vice President, Acquisition and Risk Management, and General Counsel, which meets regularly to set interest rates for all borrower loans. These rates are set forth in a rate table, which is posted at www.prosper.com. The table dictates the interest rate for all borrower loans, based on Prosper Rating, as well as additional factors, such as loan terms, group affiliations, competitive conditions and the general economic environment. The yield percentage on each series of Notes is equal to the interest rate on the related borrower loan, minus our servicing fee, currently set at 1%, which we may increase in the future to up to 3%.
Borrower Loans.
The interest rate committee meets on at least a monthly basis, but may meet more frequently as changes in market conditions and the general economic environment dictate. At each meeting, the committee reviews the interest rate table and makes adjustments to it the extent the committee deems necessary. The factors besides Proper Rating that the committee takes into consideration in updating the table, as well as the weight the committee accords each such factor, may change from time to time.
The interest rate table currently in effect for the Note Channel is set forth below. In addition, the interest rate for each loan listing, as well as the yield percentage for the corresponding Notes, is included in the listing report we filefiled for that listing. This information is also included in the listing itself when it is posted on ourthe website. In addition, we keep the copy of the current interest rate table posted on our website. | Prosper Rating | Term (years) | Number of Previous Prosper Loans | Borrower Rate | | AA | 1 | 1+ | 5.65% | | AA | 3 | 1+ | 6.25% | | AA | 5 | 1+ | 9.11% | | | | | | | AA | 1 | 0 | 5.65% | | AA | 3 | 0 | 6.49% | | AA | 5 | 0 | 9.61% | | A | 1 | 1+ | 6.09% | | A | 3 | 1+ | 8.99% | | A | 5 | 1+ | 12.96% | | | | | | | A | 1 | 0 | 6.08% | | A | 3 | 0 | 9.99% | | A | 5 | 0 | 13.96% | | B | 1 | 1+ | 9.58% | | B | 3 | 1+ | 14.49% | | B | 5 | 1+ | 18.45% | | | | | | | B | 1 | 0 | 9.58% | | B | 3 | 0 | 14.49% | | B | 5 | 0 | 18.45% | | C | 1 | 1+ | 12.59% | | C | 3 | 1+ | 18.74% | | C | 5 | 1+ | 22.93% | | | | | | | C | 1 | 0 | 14.34% | | C | 3 | 0 | 20.49% | | C | 5 | 0 | 24.68% | | D | 1 | 1+ | 16.72% | | D | 3 | 1+ | 22.87% | | D | 5 | 1+ | 27.05% | | | | | | | D | 1 | 0 | 18.37% | | D | 3 | 0 | 24.52% | | D | 5 | 0 | 28.70% | | E | 3 | 1+ | 29.99% | | E | 5 | 1+ | 33.04% | | | | | | | E | 3 | 0 | 29.58% | | E | 5 | 0 | 33.04% | | HR | 3 | 0 | 31.77% |
55 | | | | | | | | Prosper Rating | | Borrower Rate Min | | Borrower Rate Max | | AA | | 3.00 | % | | 15.00 | % | | | | |
| | |
| | A | | 6.00 | % | | 19.00 | % | | | | |
| | |
| | B | | 9.00 | % | | 23.00 | % | | | | |
| | |
| | C | | 12.00 | % | | 27.00 | % | | | | |
| | |
| | D | | 16.00 | % | | 33.00 | % | | | | |
| | |
| | E | | 21.00 | % | | 36.00 | % | | | | |
| | |
| | HR | | 25.00 | % | | 36.00 | % |
Purchase of Notes by Prosper Funding LLCUs or Related Parties
From time to time, we or PMI may bid on listings and each of us may hold any Notes we or PMI purchaseBorrower Loans purchased as a result of such bids for our or PMI’s own account. Any bid on a loan by us or PMI will be made public in the same manner in which bids by other bidders on a particular listing are made public. In addition, loans upon which we or PMI bids will be identified to other bidders through the use of a special symbol and a user profile that are intended to make it clear that we or PMI are bidding on a particular listing.
We and PMI will participate in bidding on the listings under the same terms and conditions and through the use of the same information that is made available to other lender members on the platform. In some cases, our 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 we or PMI may choose to bid on any particular listing may vary significantly and we and PMI each reserve the right to bid up to the entire amount of a listing.
SomeThe Notes and Borrower Loans either of our or PMI’s executive officers, directors and 5% shareholders have bid on listings andus has purchased PMI Notes from time to time in the past, and may purchase Notes in the future. As of September 30, 2011, these individuals had purchased $3,313,654 in PMI Notes or loans. These loans and PMI Notes were obtained on the same terms and conditions as those obtained by other lender members.investors.
In addition, our executive officers and directors may bid on listings and may hold Notes purchased as a result of such bids for their own account. The Notes purchased by such personnel were obtained on the same terms and conditions as those obtained by other investors. However, asbecause certain of theseour executive officerofficers and directors, by virtue of their duties as employeesexecutive officers or directors of PMI,us, have access to information not available to the general population of lender members,investors, we and PMI have adopted the following procedures to prevent or detect the improper use of non-public information in bidding activities by any of our respective officers and directors:
· PMI’sProsper's corporate policies, distributed to all employees, prohibit an employee’semployee's use of non-public information and any violation of this policy is grounds for immediate termination.
·Security features of our system limit access to data only to that needed to perform particular employee job functions. These limitations are defined by “security"security group,”" which corresponds to both job title and function and the number of PMI’s
Prosper's employees that have access to such non-public information on a “bulk”"bulk" or “query”"query" basis is extremely limited. ·In addition to prevention efforts, we 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
We maintain a pooled account at Wells Fargo Bank, N.A. to hold the funds of lender members. This account is titled “Prosper Funding LLC for the benefit of its lender members” and we refer to it as the “FBO account”. In order to bid on listings, a lender member must have sufficient funds in the FBO account. A lender member can transfer funds into the FBO 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 the FBO account. All payments on Notes are made by deposit into the FBO account. Upon request by the lender member, we will transfer lender member funds in the FBO 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 Notes.
On our system, we divide the FBO account into sub-accounts for each lender member. These sub-accounts allow us to track and report for each lender member the funds the lender member has transferred into and out of the FBO account, the funds the lender member has committed to purchase Notes, and the payments the lender member has received on outstanding Notes. We refer to each lender member’s sub-account as his or her “lender member account”. Lender members have no direct relationship with Wells Fargo Bank by virtue of having a lender member account or participating on the platform.
The FBO account is FDIC-insured on a “pass through” basis to the individual lender members, subject to applicable limits. This means that each lender member’s balance is protected by FDIC insurance up to the aggregate per person limit established by the FDIC. Other funds the lender member has on deposit with the same institution where the FBO account is maintained may count against the FDIC insurance limits for that member. We will always maintain the FBO account with an FDIC member financial institution. Funds of a lender member may stay in the FBO account indefinitely and do not earn interest. We never commingle our assets or any assets of PMI with the assets in the FBO account."suspicious."
Borrower Loan Funding and Purchases; Sale of Notes
Once the bidding period for a listing ends, if the listing has received bids from lender membersinvestors equal to or exceeding the minimum amount required to fund, the funding of the corresponding borrower loanBorrower Loan and the sale of the Notes or Borrower Loan to the lender membersinvestors who bid on the listing will proceed.
ApplicantsBorrowers execute an electronic borrower registration agreement at the time they post a listing on the platform.our marketplace. After expiration of the bidding period for the listing and satisfactory completion of ourthe pre-funding verification process, the applicantborrower executes an electronic promissory note in favor of WebBank in an amount equal to the funded total amount of winning bids.amount. WebBank then electronically endorses the promissory note to us and sells and assigns the promissory note to usPFL without recourse. The promissory note and the borrower registration agreement contain customary agreements and covenants requiring the applicantsborrowers to repay their loans and describing the process of posting listings and obtaining loans through the platform.our marketplace.
WebBank fundsoriginates all loans originated on the platform,made through our marketplace, and we disbursedisburses the loan proceeds on WebBank’s behalf to the borrower. Each borrower authorizes the loan proceeds to be disbursed by ACH transfer into the borrower’sborrower's designated bank account. Borrowers are able to use the 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, (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), or (iii) engaging in any illegal activity or gambling, and they warrant, represent and agree that they will not use the proceeds of any loan for such purposes.
Borrowers pay an origination fee out of the proceeds of the loanBorrower Loan at the time of funding. As of September 30, 2011, borrowers with a AA Prosper Rating pay an27, 2018, origination fee equal to 0.5% of the loan amount, borrowers with a Prosper Rating of A and B pay 3% of the loan amount, and borrowers with Prosper Ratings C through HR pay 4.5%. fees on Borrower Loans were as follows:
| | | | | | | | | Prosper Rating | | Origination Fee % (3 Year Loan) | | Origination Fee % (5 Year Loan) | | AA | | 1.00% - 4.00% |
| | 2.00% - 5.00% |
| | A | | 5.00 | % | | 5.00 | % | | B | | 5.00 | % | | 5.00 | % | | C - HR | | 5.00 | % | | 5.00 | % |
The origination fees are charged by WebBank, and we receiveProsper receives payments from WebBank equal to the origination fees as compensation for its loan origination activities it undertakes on WebBank’sWebBank's behalf.
Lender membersInvestors know only the screen names, and do not know the actual names, of applicants.borrowers. The actual names and mailing addresses of the applicantsborrowers are known only to us. We maintain custody ofus and WebBank. In addition, investors who purchase Borrower Loans through the electronically-executed promissory notes evidencingWhole Loan Channel are entitled to receive borrower loans as well asapplication information for Borrower Loans that they purchase. Such investors are required to use a qualified custodian (as that term is defined in the NotesInvestment Advisers Act) to hold such borrower information, and also must ensure that such information is handled in electronic form on the platform.a manner that is compliant with all applicable privacy laws.
When we issuePFL issues and sellsells a Note or a Borrower Loan to a lender member, we registeran investor, the Note or Borrower Loan is registered in the name of the lender memberinvestor on ourPFL's books and records. For each loan originated onEach origination of a Borrower Loan through our marketplace is followed by a two-step sale transaction: (i) WebBank sells the platform, we transferBorrower Loan to PFL, and (ii) PFL either sells Notes corresponding to the principal amountBorrower Loan to a group of investors (if the Borrower Loan is funded through the Note Channel), or resells the Borrower Loan to an investor (if the Borrower Loan is funded through the Whole Loan Channel). In connection with this two-step transaction, the purchase price of the Notes corresponding to that loanor Borrower Loan, as the case may be, is transferred from the applicable FBO accountfunding accounts to Web Bank.WebBank. This transfer represents the payment (i) by the lender members who have agreed to purchase the Notes to us of the purchase price forboth by the Notesapplicable investors to PFL and (ii) by usPFL to WebBank ofWebBank. PFL is
dependent on third party funding sources to provide the funds to purchase price for the corresponding loan. WebBank is the lender for all borrower loans, which allows the platformBorrower Loans originated by WebBank. However, PFL believes that if any particular third party funding sources were to be available on a uniform basis to borrowers throughoutterminated, given the United States. The lender registration agreement provides that,demand from existing and potential investors in the event of a material breach of our representations and warranties pertaining to a Note, we must either cure the defect, repurchaseboth the Note or indemnifyChannel and hold the lender member harmless against losses resulting from the breach.Whole Loan Channel, PFL would not expect any material decrease in available funding to purchase Borrower Loans. Loan Servicing and Collection
Following our purchaseWe each maintain certain accounts at Wells Fargo, each of borrower loanswhich serves as a dedicated account for receipt of payments on Borrower Loans purchased by a particular investor through the Whole Loan Channel (each, a "dedicated servicing account"). PFL also maintains a pooled account at Wells Fargo for receipt of payments on all Borrower Loans not associated with a dedicated servicing account (the "master servicing account"). The master servicing account and our salethe dedicated servicing accounts (collectively, the "Servicing Accounts") are all non-interest bearing, demand deposit accounts. The master servicing account is held in the name of Notes correspondingPFL for the benefit of its investors, and each dedicated servicing account is held in the name of PFL for the benefit of the applicable investor. Servicing fees are netted from any Borrower Loan proceeds deposited into the Servicing Accounts. After netting out servicing fees and any non-sufficient funds and check processing fees, we remit the remaining funds from the Servicing Accounts to the borrower loans, we begin servicing the borrower loans and Notes. We have entered into a servicing agreement with PMI, pursuant to which we have engaged PMI to assist us in performing these duties and to perform various other tasks on our behalf relating to the operation of the platform. In general, any actions described below that we take in servicing the borrower loans or Notes may be taken on our behalfdeposit accounts designated by the Servicer acting as our agent. See “Summary of Indenture, Form of Notes and Servicing Agreement - Servicing Agreement.”
We collect payments from borrowers on borrower loans. We transfer amounts collected to the lender members who own Notes corresponding to the borrower loan, after deducting servicing fees. On Notes, theapplicable investors. The payment dates willfor all Notes fall onno later than the sixth business day after the due date for each monthly installment of principal and interest on the corresponding borrower loan.
To the extent we do not receive the anticipated payments on a borrower loan, we will not make any paymentsBorrower Loan, but interest accrues on the Notes related to that borrower loan, and a holder of a Note will not have any rights against us or the borrower in respect of the Note or the corresponding borrower loan. Each holder’s right to receive principal and interest payments and other amounts in respect of that Note is limited in all cases to the holder’s pro rata portion of the amounts we receive on the corresponding borrower loan, including without limitation, all payments or prepayments of principal and interest, subject to servicing fees and charges retained by a third party, as set forth in the following chart. Our current collection agencies charge collection fees from 17.0% to 30.0% of the amount recovered up to the “total amount delinquent.” To the extent that we place loans with another collection agency, we will disclose the collection fees percentages on its website.
Description of Fee | | Fee Amount | | When Fee is Charged | | Effect on Lender Member | | | | | | | | Prosper Borrower Notes | | | | | | | | | | | | Servicing fee | | Annualized rate currently set at 1% of outstanding principal balance, but which we may increase in the future to an amount greater than 1% but less than or equal to 3%. The servicing fee percentage is subject to change from time to time, is disclosed in all loan listings and is posted in the Fees and Charges section at www.prosper.com, but will not change during the course of the loan.
| | The servicing fee is payable on all payments received on borrower loans, including, without limitation, partial payments. | | The servicing fee will reduce the effective yield below the interest rate on the borrower loan. This reduction is reflected in the yield percentage included in each listing. | | | | | | | | Non-sufficient funds fee | | $15, unless a lesser amount is required by applicable law. | | First failed payment for each billing period. | | We retain 100% of the non-sufficient funds fees to cover our administrative expenses. | | | | | | | | Late payment fee
| | Equal 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, we assess a late fee. The late payment fee is charged only once per payment period. | | Any late payment fees we receive are paid to the lender members, subject to deductions for Collection Charges and Servicing Fees. | | | | | | | |
Collection Charges | | Our current collection agencies charge collection fees from 17.0% to 30.0% of the amount recovered up to the “total amount delinquent,” plus any legal fees incurred in the event legal action is taken to collect a loan. The collection fees vary depending upon the collection agency used. These fees are posted in the Fees and Charges section of the our website.
| | After a borrower loan becomes more than 30 days past due, the loan may be referred to a collection agency. Collection charges and any related legal fees are only charged if delinquent amounts are collected.
Our servicing fee is also deducted from the net payments we receive as a result of any collection efforts on a delinquent borrower loan.
| | Lender members will not receive any collection fees we or a third-party collection agency charges, which fees will be retained by the party charging the fees as additional servicing compensation.
The collection fees and any related legal fees will be deducted from any borrower loan payments we receive. These fees will reduce the lender member’s effective yield, and are not reflected in the yield percentage shown on the listing.
| | | | | | | | Loan modification fees | | We will not charge a fee for restructuring a borrower loan. | | We may work with the borrower to structure a new payment plan in respect of the borrower loan without the consent of any holder of the Notes corresponding to the borrower loan. This generally would only occur in lieu of bankruptcy or a similar proceeding. | | Not applicable. |
Our procedures for collecting borrower loan payments generally involve the automatic debiting of borrower bank accounts by ACH transfer. Such funds are transferred to a master servicing account in our name that we maintain with Wells Fargo Bank, N.A. Thereafter, we make payments on the Notes by transferring the appropriate funds from the master servicing account to the FBO account and allocating amounts received on specific borrower loans to the appropriate lender member accounts. We transfer amounts due to us for servicing from the master servicing account to another operating account of ours. A lender member may transfer uncommitted funds out of the FBO account by ACH transfer to the lender member’s designated bank account at any time, subject to normal execution times for such transfers (generally 2-3 days).
We will make payments on the Notes upon receiving payments under the corresponding borrower loan, in accordance with the payment schedule for each Note. Each Note will have a payment schedule providing for monthly payments over a term equal to the corresponding borrower loan. The payment date for Notes will fall on the sixth business day afteronly through the due date for each installment of principal and interest on the corresponding borrower loan.related Borrower Loan payment. The stated interest rate on each Note will beis the lenderinvestor yield percentage set forth in the loan listing. The yield percentage is the Borrower Loan interest rate net of the servicing fee.
We disclose borrowers’ payment performance on loans to the relevant lender members on our website and also report such information to consumer reporting agencies.
We subtract a servicing fee from every loanBorrower Loan payment we receive.received. 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’sborrower's last payment (or, in the case of the borrower's first payment, since the date on which the relevant Borrower Loan was funded) and the denominator of which is 365, and (b) multiplying the product obtained by the outstanding principal balance of the loanBorrower Loan prior to applying the current payment. The rate of our annual servicing fee rate is currently set at 1.0%, per annum of the outstanding principal balance, but we may increase that in the future to a rate greater than 1% but less than or equal to 3%. Our per annum. Any change to our servicing fee will only apply to Notes and Borrower Loans offered and sold after the date of the change.
To the extent PMI or PFL does not receive the anticipated payments on a Borrower Loan funded through the Note Channel on or before any loan payment date, it will not make any payments on the corresponding Notes on the corresponding Note payment date, and a holder of any such Note will not have any rights against PFL or the borrower in relation to any such delay or for any shortfalls in accrued Note interest that result then or in relation to the final maturity of the Note. Each holder's right to receive principal and interest payments and other amounts in respect of that Note is limited in all cases to the holder's pro rata portion of the amounts PFL timely receives on the corresponding Borrower Loan, including without limitation, all payments or prepayments of principal and interest, subject to servicing fees are subject to change from time to time, and are postedother charges and other fees retained by us or by a third party, as set forth in the Fees and Charges section at www.prosper.com.following chart.
The following table summarizes the fees that may be charged and how these fees affect investors:
| | | | | | | | Description of Fee Charged | | Fee Amount | | When Fee is Charged | | Effect on Investor | | Servicing Fee | | Annualized rate currently set at 1% per annum of outstanding principal balance, but which may increase in the future to an amount greater than 1% but less than or equal to 3% per annum. Any change to the servicing fee will only apply to Notes and Borrower Loans offered and sold after the date of the change. | | The servicing fee is payable on all payments received from borrowers on Borrower Loans, including, without limitation, partial payments. | | The servicing fee reduces the effective yield for Note or Borrower Loan holders below the interest rate on the Borrower Loan. This reduction is reflected in the yield percentage. | | Non-Sufficient Funds Fee | | $15, unless a lesser amount is required by applicable law. | | First failed payment for each billing period. | | We retain 100% of the non-sufficient funds fees to cover its administrative expenses. | | Late Payment Fee | | Equal to the greater of 5% of the unpaid installment amount or $15, unless a lesser amount is required by applicable law or assessed by Prosper in its sole discretion. | | After 15-day grace period, we assess a late payment fee. The late payment fee is charged only once per payment period. | | Any late payment fees received are paid to the investors, subject to deductions for Collection Fees. | | Collection Fees | | Up to 40% of the amount recovered on pre and post charged-off loans, plus any legal fees and transaction fees associated with payment processing and litigation costs, up to the "total amount delinquent". | | We may collect on a Borrower Loan that becomes past due directly or we may refer such 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 us, a third party servicer's in-house collections department or a third party collection agency will reduce payments and the effective yield for Note or Borrower Loan holders, and are not reflected in the yield percentage shown on the listing; Collection fees will be retained by us, the third party servicer's in-house collection department or the collection agency as additional servicing compensation. In addition, the servicing fee is also deducted from the net payments received from a borrower as a result of any collection efforts on a delinquent Borrower Loan. | | Check Processing Fee | | Equal to (a) the lesser of 5% of the borrower payment or $5 for payments of $100 or less, and (b) $5 for payments over $100. | | This fee may be assessed at the time the payment is processed. | | We retain 100% of the check processing fee to cover our costs. |
We disclose borrowers' payment performance on Borrower Loans to the relevant investors on the website and also reports such information to consumer reporting agencies. We keep lender members apprisedinvestors informed of the delinquency status of borrower loansBorrower Loans by identifying delinquent loans on ourthe website as “1 month late,” “2 months late,” “3 months late,"Late (< 15 days)" "Late (15 - 30 days)" "Late (31 - 60 Days)" “Late (61 - 90 Days)” or “current.“Late (91 - 120 days).” Borrower loansLoans that become more than 120 days overdue are charged off and designated as such on ourthe website. Through their online Prosper account, lender membersthe website, investors are able to monitor the borrower loans correspondingBorrower Loans they have purchased and Borrower Loans that correspond to their 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 Borrower Loans originated, collectively, between July 13, 2009 and June 30, 2018, 15.5% have been greater than 30 days past due at any time and 14.1% have been greater than 60 days past due at any time. Of all Borrower Loans originated, collectively, between July 13, 2009 and June 30, 2018, a total of 120,438 Borrower loans or 12.4% have been charged off.
Please note that historical data regarding Borrower Loans may not be indicative of the future characteristics of Borrower Loans. See "Risk Factors-Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes" for more information.
If a borrower dies while a borrower loanBorrower Loan is in repayment, we require the executor or administrator of the estate to send a death certificate to us. Depending on the size of the estate and the other liabilities thereof, we may not be able to recover the outstanding amount of the loan. If the estate does not include sufficient assets to repay the outstanding borrower loanBorrower Loan in full, or the estate allocates its assets to other liabilities, we will treat the unsatisfied portion of that borrower loanBorrower Loan as charged off with zero value. In addition, if a borrower dies near the end of the term of a borrower loan,Borrower Loan funded through the Note Channel, it is unlikely that any further payments will be made on theany Notes corresponding to such borrower loan,Borrower Loan, because the time required for the probate of the estate may extend beyond the final maturity date of the Notes.Notes corresponding to such Borrower Loan.
When we receive notice of a borrower bankruptcy filing, it ceaseswe cease all automatic monthly payments on the borrower loanany related Borrower Loan and defersdefer any other collection activity, as required by law. The status of the borrower loan,Borrower Loan, which the relevant lender membersinvestors may view through their online Prosper account,the website, switches to “bankruptcy.”"bankruptcy." We then determine whether we have 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, we attempt to determine if the proceeding is a “no asset”"no asset" proceeding, based on instructions we receive from the bankruptcy court. If the proceeding is a “no asset”"no asset" proceeding, we take no further action and assume that no recovery will be made on the borrower loan.Borrower Loan.
In all other cases, we file 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 our discretion and will depend upon certain factors including:
·if the borrower used the proceeds of the loanBorrower 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”"best effort" on the borrower’sborrower's behalf; and
·our view of the costs and benefits to us of any proposed action.
Note Trader Platform
Lender members may not transfer their 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 their Notes for sale or bid on and purchase 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, we refer to lender members who have established such brokerage relationships as “subscribers.” Only transactions involving the sale of previously-issued 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 Notes by us.
Subscribers who sell 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 Note sold.
Neither we 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 we, nor PMI nor FOLIOfn Investments, Inc. will make any recommendations with respect to transactions on the Note Trader platform. There is no assurance that subscribers will be able to establish a brokerage relationship with FOLIOfn Investments, Inc. Furthermore, we cannot assure subscribers that they will be able to sell Notes they offer for sale through the Note Trader platform at the offered price or any other price, nor can we offer any assurance that the Note Trader platform will continue to be available to subscribers.
Sale of Borrower Loans Purchased through Whole Loan Channel
Investors who participate in the Notes Notes SubjectWhole Loan Channel may transfer ownership of Borrower Loans to Sale by Subscribers. All Notes, including Notes for whichinstitutional investors that meet the corresponding 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 Note may be sold on the Note Trader platform, so long as the Note is outstanding.
Lender Members Eligible to Bid on 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 suitabilityeligibility requirements he or she will not be able to participate on the Note Trader platform.
Creation of Note Listings. Subscribers may offer one or more of their 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 Notes they ownWhole Loan Channel, subject to certain notice requirements and may offerour right to sell more than one Note atcontinue servicing the same time. When posting a Note listing,transferred Borrower Loans.
During the subscriber will designate a minimum sale pricequarter ended June 30, 2017, our marketplace facilitated $775 million in Borrower Loan originations, of which $725 million were funded through the subscriber is willing to receive for the 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 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 expirationWhole Loan Channel, representing 94% of the auction bidding period, before any bids are received. Note listings with at least one bid cannot be withdrawn bytotal Borrower Loans originated through our marketplace during this period. During the selling subscriber.
Displayquarter ended June 30, 2018, our marketplace facilitated $867 million in Borrower Loan originations, of Note Listings. Note listings will be displayed for auction onwhich $822 million were funded through the Note Trader platform, and include the selling subscriber’s screen name, the offered sale priceWhole Loan Channel, representing 95% of the Note,total Borrower Loans originated through our marketplace during this period.
From inception through June 30, 2018, our marketplace facilitated $12.8 billion in Borrower Loan originations, of which $11.3 billion were funded through the interest rate on the Note, the remaining termWhole Loan Channel, representing 88% of the Note, and the yield to maturity that corresponds to the offered sale price. Note listings will also include the repayment status of the borrower loan corresponding to the Note (i.e., current or delinquent), the payment history on the borrower loan and the next scheduled payment on the 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, description, credit data, recommendations and original bidding history) for the borrower loan that corresponds to the 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 Notes listed for sale on the Note Trader platform. Subscribers may bid for and purchase one or more Notes from selling subscribers. As with bidding on loan listings, subscribers who bid on Note listings must have funds on deposit in the subscriber’s funding account in at least the aggregate amount of the subscriber’s bids. Subscribers are prohibited from withdrawing amounts from the subscriber’s 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 Note being sold, and there may be only one winning bidder for a Note offered for sale by a selling subscriber.
total Borrower Loans originated through our marketplace during this period.
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 Notes. When a Note listing ends with a winning bidder, upon settlement of the sale of the 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 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 Note is sold, transferred and assigned by the selling subscriber to the winning bidder without recourse. All further payments made on the Note following settlement of the sale will be credited to the account of the purchasing subscriber. The purchasing subscriber may retain ownership of the Note for the remainder of its term, or list the Note for sale on the Note Trader platform. The electronic original Note is kept in our possession and control, as servicer of the Note, for the remaining term of the Note.
SUMMARY OF INDENTURE, FORM OF NOTES, PMI MANAGEMENT RIGHTS AND SERVICINGADMINISTRATION AGREEMENT
Indenture and Form of Notes
The following summaryOn January 22, 2013, PFL, PMI and Wells Fargo Bank, National Association, as trustee, entered into a supplemental indenture to PMI's existing indenture pursuant to which, effective February 1, 2013 (i) PFL succeeded to and was substituted for PMI, and PMI was discharged from all of its obligations, under the Indentureindenture and formunder all notes previously issued by PMI under the indenture (collectively, the "PMI Notes"), and (ii) the indenture was amended and restated to reflect such succession, substitution and discharge and to make certain other amendments to the indenture. See "Transactions with Related Parties" for more information about the supplemental indenture. On November 12, 2013, CSC Trust Company of Note does not purport to be complete and is qualified in its entirety byDelaware replaced Wells Fargo Bank, National Association as the complete terms and conditions oftrustee under the Indenture and form of Note. We haveindenture. PFL has filed a copy of the Indenturesupplemental indenture and the amended and restated indenture (which includes the form of NoteNote) as an exhibit to the registration statement of which this prospectus forms a part. For purposes of this section, we refer to the PMI indenture, as amended, restated and assumed by PFL, as the "indenture" and to the form of note attached thereto as the "form of Note." The indenture contains provisions that define your rights under the Notes. In addition, the indenture governs the obligations of PFL under the Notes. The terms of the Notes include those stated in the indenture (including the form of Note) and those made part of the indenture by reference to the Trust Indenture Act of 1939.
General
PFL's Borrower Payment Dependent Notes or “Prosper Borrower Notes,” or “Notes”"Notes" will be issued in series under the indenture entered into between Prosper Funding LLC and Wells Fargo Bank, National Association.indenture. Each series of Notes will correspond to one borrower loan.Borrower Loan. Each series of Notes are dependent for payment on payments we receivePFL receives on one borrower loan.such Borrower Loan.
All Notes will be U.S. dollar denominated, fully amortizing and have a fixed rate of interest. The Notes will have a stated interest rate that is the same as the yield percentage for the corresponding borrower loanBorrower Loan and an aggregate stated principal amount equal to the principal amount of the corresponding borrower loan.Borrower Loan. Notwithstanding the foregoing, we havePFL has no obligation to make any payments on the Notes unless, and then only to the extent that, we haveit has received payments on the corresponding borrower loan.Borrower Loan. The Notes will also be subject to full or partial prepayment without penalty.
The indenture willdoes not limit the aggregate principal amount of Notes that wePFL can issue under the indenture, but each series of Notes will beis effectively limited to the maximum allowable principal amount (currently $25,000)$40,000) of a borrower loan.Borrower Loan. If in the future we changePFL changes the maximum allowable borrower loanBorrower Loan amount, then the maximum aggregate principal amount of Notes per series would also increase. WePFL will use all proceeds we receiveit receives from sales of the Notes to purchase the corresponding borrower loansBorrower Loans from WebBank.
Maturity Dates
Prosper BorrowerPMI Notes currently havehad a term of one, three or five years. Notes currently have terms of three or five years, but wePFL may in the future extend the range of available maturity dates to between three months and seven years. If there are amounts owing to usPFL in respect of the corresponding borrower loanBorrower Loan at the initial maturity of a Note, the term of the Note will be automatically extended by one year, which we referthis prospectus refers to as the “final"final maturity,”" to allow the Note holder to receive any payments that we receivePFL receives during such period on the corresponding borrower loanBorrower Loan after the maturity of the corresponding borrower loan. However, because we may, in our sole discretion and subject to our servicing standard, amend, modify, sell to a third-party debt purchaser or charge off the borrower loan at any time after the 31st day of its delinquency, and we generally will charge off a loan after it becomes more than 120 days past due, such borrower loan may never reach the final maturity date.Borrower Loan. Following the final maturity of a Note, the holder of that Note will have no right to receive any further payments from usPFL even if the borrower under the corresponding borrower loan,Borrower Loan, or a bankruptcy trustee or estate of such borrower, subsequently remits payments to usPFL or the servicer of the borrower loan.Borrower Loan.
Ranking
Ranking; Security Interest
The Notes will be special, limited obligations of Prosper Funding LLC. WePFL. The Notes are not guaranteed or insured by PMI, any governmental agency or instrumentality or any third party. PFL will be obligated to make payments on each Note in a series only if and to the extent that we receivethe borrower makes principal or interest payments from the borrower on the corresponding borrower loanBorrower Loan purchased by usPFL with the proceeds of that series, and such borrower loanBorrower Loan payments will be shared ratably among all owners of Notes of the series, subject to ourPFL's servicing fees.fees and the fees and charges retained by PFL or paid to third parties as described above. In the event of a bankruptcy or similar proceeding of Prosper Funding LLC,PFL, the relative rights of the holder of a Note as compared to the holders of other indebtedness of Prosper Funding LLCPFL with respect to payment from the proceeds of the borrower loanBorrower Loan corresponding to that Note or other assets of Prosper Funding LLCPFL is uncertain. To limit the riskrisks to holder of ourNotes of its insolvency, we havePFL has granted the trustee under the indenture for the Notes, referred to as the “indenture"indenture trustee,”" for the benefit of the Note holders, a security interest in all of the borrower loans,Borrower Loans corresponding to the Notes and all payments and proceeds received by usPFL on the borrower loans andsuch Borrower Loans, in the deposit account into which such Borrower Loan payments are deposited and the in the FBO account. PFL will perfect the security interest of the indenture trustee in such collateral by maintaining this bank account in whichwith the borrower loan payments are deposited.indenture trustee (thus providing the indenture trustee with "control" of the account under applicable law governing the perfection of security interests) and by filing a Uniform Commercial Code financing statement with the Delaware Secretary of State. The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture. Any Borrower Loans that PMI, performing loan servicing as PFL's agent pursuant to the Administration Agreement, sells or otherwise transfers on PFL's behalf for the purpose of realizing the value thereof (though not the proceeds of any such sale or transfer) will automatically be released from the security interest as will any Borrower Loan that remains unpaid on its final maturity date.
The indenture does not contain any provisions that limit ourPFL's ability to incur indebtedness in addition to the Notes.
Notes; however, PFL's organizational documents do impose such limitations. See "Information About Prosper Funding LLC-Overview."
Payments and Paying Agents
Subject to the limitations described below under “Limitations"Limitations on Payments,” we" PFL will make payments of principal and interest on the Notes upon receiving borrower loanBorrower Loan payments in respect of the corresponding borrower loan,Borrower Loan, in accordance with the payment schedule for each Note. Each Note will have a payment schedule providing for monthly payments over a term equal to the maturity of the corresponding borrower loan.Borrower Loan. The payment dates will fall on the sixth business day after the due date for each monthly installment of principal and interest on the corresponding borrower loan.Borrower Loan, but interest on the Notes will accrue only through the corresponding payment dates for the related Borrower Loan.
We requestPFL requests an ACH payment from a borrower on the business day prior to the payment due date, and normally receivereceives payment the following business day. A borrower’sborrower's loan payment is initially deposited in our servicingthe deposit account upon receipt and is not distributed to the lender member’sinvestor's funding account until the sixth business day after the ACH payment was requested and the short return window for ACH funds has expired. Lenders membersInvestors can review their account statements online and see if they received payment on the Notes on thesuch following sixth business day. Upon maturity of the Note, the same process occurs. Although payment to lender membersinvestors under the Notes is made six business days after the applicable loan payment and loan maturity date, we treatPFL treats the payment date and maturity date of the Note to be the same as the dates set forth in the corresponding borrower loan.Borrower Loan.
The stated interest rate on each Note will be the lenderinvestor yield percentage set forth in the loan listing. The lenderinvestor yield percentage is equal to the interest rate on the corresponding borrower loanBorrower Loan net of the servicing fee. The stated interest rate on each Note will not be the same as the interest rate on the corresponding borrower loanBorrower Loan because itthe interest rate on the corresponding Borrower Loan takes into account the servicing fee. Interest will be computed on the Notes in the same manner as the interest on the corresponding borrower loansBorrower Loans is computed.
“"Business day”day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is (1) not a day on which the Automated Clearing House system operated by the U.S. Federal Reserve Bank (the “ACH System”"ACH System") is closed and (2) not a day on which banking institutions in San Francisco, California or New York, New York are authorized or obligated to close.
Limitations on Payments
Subject to the servicing fees described below and PFL's retention or payment to third parties of the other fees and charges described below, any amounts received from borrowers on borrower loansBorrower Loans will be forwarded by usPFL to the holder of the Notes corresponding to the borrower loan.Borrower Loan. Each Note holder’sholder's right to receive principal and interest payments and other amounts in respect of that Note is limited in all cases to the holder’s holder's pro rata portion of the amounts received by usPFL in connection with the corresponding borrower loan,Borrower Loan, including without limitation, all payments or prepayments of principal and interest, subject to servicing fees charged by us. We are entitledPFL and PFL's retention or payment to subtractthird parties of the other fees and charges described below.
PFL retains a servicing fee from every loan payment we receiveit receives as compensation for servicing the borrower loansBorrower Loans and Notes. The amount of the servicing fee with respect to a particular payment on a particular Borrower Loan is calculatedequal to (a) the product obtained 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’sborrower's last payment (or, in the case of the borrower's first payment, since the date on which the relevant loan was funded) and the denominator of which is 365, andmultiplied by (b) multiplying the product obtained by the outstanding principal balance of the loan prior to applying the current payment. . WePFL currently charge lenderscharges investors a servicing fee of 1.0%, per annum, but weit may increase that fee in the future to a rate greater than 1% but less than or equal to 3%. Our per annum. Any change to the servicing fees are subjectfee will only apply to change from time to time,Notes offered and sold after the date of the change. PFL's servicing fees are posted in the Fees and ChargesHelp Center section at www.prosper.com. Servicing fees will reduce the effective yield on borrower loansBorrower Loans below the borrower interest rate. The servicing fee rate will be disclosed in all loan listings. The servicing fee is payable on all payments received on borrower loansBorrower Loans corresponding to the Notes, including without limitation partial payments. Wepayments, prepayments and late payment fees paid by the related borrower. PFL will not pay Note holders any non-sufficientnon- sufficient funds fees we receive,and check processing fees it receives, but will retain such fees as additional servicing compensation. In addition, any attorneys' fees or collection fees that a third party chargesservicer or collection agency imposes in respect ofconnection with collection efforts related to any borrower loancorresponding Borrower Loan will be retained by the party earning such fees and will reduce the amount of collections available for payment on the Notes. WePFL will pay Note holders any late fees we receiveit receives on corresponding borrower loans. Any prepayments received on borrower loans will be paid ratably to the corresponding Note holders.
The “"non-sufficient funds fee”" is a fee charged by Prosper Funding LLCPFL or a third-party servicer or collection agency when a payment request is denied or a check is returned unpaid for any reason, including but not limited to, insufficient funds in the borrower member’sborrower's bank account or the closing of that bank account. The non-sufficient funds fee currently charged by usPFL on borrower loansBorrower Loans is $15 or such lesser amount permitted by law. To the extent we doit does not receive the anticipated payments on a borrower loan, weBorrower Loan, PFL will not make any payments on the Notes related to that borrower loan,Borrower Loan, and a holder of a Note will not have any rights against usPFL or the borrower member in respect of the Note or the corresponding borrower loan.Borrower Loan. Prepayments
To the extent that a borrower member prepays a borrower loan,Borrower Loan, such prepayment amount will be a borrower loanBorrower Loan payment, and holders of Notes corresponding to that borrower loanBorrower Loan will be entitled to receive their pro rata shares of the prepayment, net of applicable servicing fees.fees and PFL's retention or payment to third parties of the other fees and charges described above. Mandatory RedemptionRepurchase and Indemnification
UponUnder the occurrence ofIndenture, if a confirmed identity fraud incident"Repurchase Event" occurs with respect to a borrower loan, weNote, PFL will, redeem allat its sole option, either repurchase the Note from the holder or indemnify the holder of the NotesNote for any losses resulting from nonpayment of the seriesNote or from any claim, demand or defense arising as a result of such Repurchase Event. A "Repurchase Event" with respect to a Note means (i) a Prosper Rating different from the Prosper Rating actually calculated by PFL was included in the listing for the corresponding to such borrower loan for 100%Borrower Loan, as a result of which the interest of the remaining outstanding principal amount of such Notes if such Notes are at least 120 days past-due (subject to our right to repurchase,holder in our sole discretion, such Notes at an earlier date). An “identity fraud incident” meansthe 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 borrower loan has beenBorrower Loan because either PFL 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 Note is materially and adversely affected, or (iii) the corresponding Borrower Loan was obtained as a result of verifiable identityidentify theft on the part of the purported borrower member. Weand a material payment default under the corresponding Borrower Loan has occurred.
The determination of whether verifiable identify theft has occurred is in PFL's sole discretion. PFL may, in ourits reasonable discretion, require proof of the identityidentify theft, such as a copy of thea police report filed by the person whose identityidentify was wrongfully used to obtain the borrower loan.corresponding Borrower Loan, an identity theft affidavit, a bank verification letter or all of the above.
If PFL elects to repurchase a Note in connection with a Repurchase Event, the repurchase price will be equal to the principal amount outstanding on the Note as of the date of repurchase and will not include accrued and unpaid interest. If PFL elects to provide indemnification in connection with a Repurchase Event, PFL will not be required to take any action with respect to any losses suffered until the effected Note is at least one hundred twenty (120) days past due. For purposes of indemnification, PFL will calculate the losses resulting from nonpayment of a Note based on the principal amount outstanding on the Note. If PFL makes an indemnification payment, PFL will be entitled to retain any subsequent recoveries that it receives on the effected Note.
If PFL repurchases any Notes, PMI will concurrently repurchase the related PMI Management Right for zero consideration.
Servicing Covenant
We arePFL is obligated to use commercially reasonable efforts to service and collect borrower loans,Borrower Loans, in good faith, accurately and in accordance with industry standards customary for servicing loans such as the borrower loans.Borrower Loans. If we referPFL refers a delinquent borrower loanBorrower Loan to a collection agency within five (5) business days after it becomes thirty30 days past-due, that referral shall be deemed to constitute commercially reasonable servicing and collection efforts. WePFL may, in ourits sole discretion and subject to ourits servicing standard, refer a borrower loanBorrower Loan to a collection agency, elect to initiate legal action to collect a borrower loanBorrower Loan or sell a borrower loanBorrower Loan to a third party debt buyer at any time. WePFL may also work with the borrower member to structure a new payment plan for the borrower loanBorrower Loans without the consent of any of the corresponding Note holders. We arePFL is obligated to use commercially reasonable efforts to maintain backupback-up servicing arrangements for the borrower loans. Borrower Loans. It has entered into a back-up servicing arrangement with First Associates Loan Servicing, LLC ("First Associates") a financial services company that has entered into numerous successor loan servicing agreements. It is unlikely that First Associates would be able to perform functions other than servicing the existing Borrower Loans and Notes. For instance, First Associates likely would not be able to facilitate the creation of new Borrower Loans through the marketplace or manage PFL's marketing efforts. PFL believes that it could find one or more other parties who could perform these and any other functions necessary to fully operate the marketplace in the absence of PMI. However, it could take some time to find another such party or parties who could perform the necessary functions and it could take such party or parties additional time to become comfortable with the operation of the marketplace. Any such delay should not affect existing Note holders, because the back-up servicer should be able to continue servicing existing loans and Notes, but it could delay PFL's ability to facilitate the creation of new loans and issue new Notes through the marketplace, which could adversely affect PFL's finances and customer relationships.
In servicing borrower loans, weBorrower Loans, PFL may, in ourits discretion, utilize affiliated or unaffiliated third party loan servicers, collection agencies or other agents or contractors. We are obligated to use commercially reasonable efforts to service and collect the borrower loans in accordance with prudent industry standards for loans of the same general type and character. Any modification or restructuring of borrower payment terms that PFL approves must be done in compliance with thisthe servicing standard described above, which means that the servicer must make a reasonable and prudent determination that any such modification is not materially adverse to the interests of the Note holders. The modifications contemplated by this servicing provision would be made in situations, common to loan servicing industry practices, where a reasonable forbearance or extension of time for payment to be received would prevent a borrower from defaulting entirely on the loan or filing for bankruptcy. From the Note holder’sholder's perspective, such modifications would only be employed in situations where a greater loss would be avoided.
In the event the terms of any borrower loanBorrower Loan are modified, wePMI will notify the corresponding Note holders via emailin the Note holder's account.
Administration Covenants
PFL is obligated to use, or to cause a third party administrator to use (which may include, for example, PMI as the Corporate Administrator), commercially reasonable efforts to administer its day-to-day business and operations and provide the other administrative services described under the heading "Corporate Administration Services" in this prospectus in accordance with industry standards customary for administrative services of the material termssame general type and character.
In addition, PFL is obligated to use, or to cause a third party administrator to use (which may include, for example, PMI as the Loan Marketplace Administrator), commercially reasonable efforts to manage the marketplace and provide certain other marketplace-related services in accordance with industry standards customary for online credit platforms of the borrower loan modificationssame general type and character as the effect such changes will have on their Notes, including changes to payments they will receive under the Notes.marketplace.
Notification Requirements
We keep lender membersPFL keeps investors apprised of the delinquency status of borrower loansBorrower Loans by identifying delinquent loans on ourits website as “1 month late,” “2 months late,” “3 months late,"Late (< 15 days)" "Late (15 - 30 days)" "Late (31 - 60 Days)" “Late (61 - 90 Days)” or “current.“Late (91 - 120 days).” Borrower loansLoans that become more than 120 days overdue are charged off and designated as such on ourPFL's website. Lender membersInvestors are able to monitor the borrower loansBorrower Loans corresponding to their Notes, but cannot participate in or otherwise intervene in the collection process.
If a default with respect to the Notes of any series occurs and is continuing, and if it is known to the indenture trustee, the trustee is required to notify each holder of the Notes within 90 days after it occurs. The trustee may withhold the notice if and so long as a committee of its trust officers in good faith determines that withholding the notice is in the interests of the Note holders, except for defaults caused by ourPFL's failure to make principal and interest payments when required.
In addition, if required by Section 313(a) of the Trust Indenture Act of 1939, within 60 days after each May 15, the Trustee shall mail or transmit electronically to each Note holder a brief report dated as of such May 15 that complies with Trust Indenture Act Section 313(a).
Consolidation, Merger, Sale of Assets
The indenture prohibits usPFL from consolidating with or merging into another business entity or conveying, transferring or leasing ourits properties and assets substantially as an entirety to any business entity, unless:
| ·the surviving or acquiring entity is a U.S. corporation, limited liability company, partnership or trust and it expressly assumes our obligations with respect to the outstanding Notes by executing a supplemental indenture;
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PFL is the continuing corporation or limited liability company after such consolidation, merger or sale of assets;the surviving or acquiring entity is a U.S. corporation, limited liability company, partnership or trust and it expressly assumes PFL's obligations with respect to the outstanding Notes by executing a supplemental indenture; | ·immediately after giving effect to the transaction, no default shall have occurred or be continuing; and
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| ·we have delivered to the trustee an officers’PFL has delivered to the trustee an officers' certificate and an opinion of counsel, each stating that the transaction, and if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with the indenture and all conditions precedent relating to such transaction have been complied with.
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Denominations, Form and Registration
WePFL will issue the Notes only in registered form and only in electronic form. This means that each Note will be stored on ourPFL's website. You can view a record of the Notes you own and the form of your Notes online and print copies for your records, by visiting your secure, password-protectedpassword- protected webpage in the “My Account”"My Account" section of ourPFL's website. WePFL will not issue certificates for the Notes. Lender membersInvestors will be required to hold their Notes through ourPFL's electronic Note register.
The laws of some states in the United States may require that certain persons take physical delivery in definitive, certificated form, of securities that they own. This may limit or curtail the ability of such persons to purchase Notes. We reservePFL reserves the right to issue certificated Notes only if we determineit determines not to have the Notes held solely in electronic form.
WePFL and the indenture trustee will treat the lender membersinvestors in whose names the Notes are registered as the owners thereof for the purpose of receiving payments and for any and all other purposes whatsoever with respect to the Notes.
Restrictions on Transfer
The Notes will not be listed on any securities exchange. Allexchange and all Notes mustcan be held only by our lender members. The Notes will not be transferable except through the Note Trader platform operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer. Under the terms of the Notes, any transfer of a Note will be wrongful unless (1) the transfer is effected on a trading system that we approve as a Note trading system and (2) the Note has been presented by the registered holder to us or our agent for registration of transfer.PFL's investors. The registrar for the Notes, which initially will be us,PFL, will not be obligated to recognize any purported transfer of a Note, except a transfer through the trading system, of which none currently exists, or except as required by applicable law or court order. ThereWe may, in our sole discretion, permit the establishment of a platform on which a secondary market may be made with respect to the Notes. In connection with Prosper’s termination of its relationship with FOLIOfn in October 2016, no trading platform for the transfer of
Notes and PMI Management Rights exists and there can be no assurance however, that a markettrading platform for the Notes and PMI Management Rights will develop onin the Note Trader platform, or that the platform will continue to operate.future. Therefore, lender membersnote purchasers must be prepared to hold their Notes and PMI Management Rights to maturity. See “About“Risk Factors-Risks Inherent in Investing in the Platform—Notes-The Notes will not be listed on any securities exchange and can be held only by PFL’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 Notes they purchase until maturity."
Note Trader Platform”Repurchase and Indemnification Obligations
Under the Notes, in the event of a material default under a series of Notes due to verifiable identity theft of the named borrower's identity, PFL will in its discretion either repurchase the Note or indemnify the Note holder. PFL's indemnification obligation will apply only if the relevant Note is at least 120 days past-due; provided, that PFL may in its sole discretion elect to take action at an earlier time. The determination of whether verifiable identity theft has occurred is in PFL's sole discretion and PFL may require proof of identity theft, such as a copy of a police report filed by the person whose identity was wrongfully used to obtain the fraudulently-induced Borrower Loan, an identity affidavit or a bank verification letter (or all of the above) in order to determine that verifiable identity theft has occurred.
In the event PFL inserts a Prosper Rating in a Borrower Loan listing that is different from the Prosper Rating calculated by PFL for more information.listing such Borrower Loan on the marketplace, or if PFL incorrectly inputs data into its formula or incorrectly applies its formula to determine the Prosper Rating, resulting in a Prosper Rating different from the Prosper Rating that should have appeared in a Borrower Loan listing, then, if such breach materially and adversely affects the interest of the holder of the Note corresponding to such Borrower Loan, PFL will in its discretion either repurchase such Note holder or indemnify the Note holder.
No Sinking Fund
The Notes are fully amortizing and will not have the benefit of a sinking fund.
Events of Default
Under the terms of the indenture, any of the following events will constitute an event of default for a series of Notes:
| ·ourPFL's failure to make required payments on the Notes for thirty days past the applicable due date;
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PFL's failure to perform, or the breach of, any other covenant for the benefit of the holders of the Notes which continues for 90 days after written notice from the indenture trustee or holders of 25% of the outstanding principal amount of the Notes for which such default exists, subject to an additional 90 day cure period; or | ·our failure to perform, or the breach of, any other covenant for the benefit of the holders of the Notes which continues for 90 days after written notice from the indenture trustee or holders of 25% of the outstanding principal amount of the Notes for which such default exists, subject to an additional 90 day cure period; or
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specified events relating to PFL's bankruptcy, insolvency or reorganization. | ·specified events relating to our bankruptcy, insolvency or reorganization.
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It is not a default or event of default under the terms of the indenture if we doPFL does not make payments on a series of Notes when a borrower does not make payments on the corresponding borrower loan.Borrower Loan. In that case, we arePFL is not required to make payments on the Notes, so no default occurs. See “Risk Factors—Risks"Risk Factors-Risks Related to Borrower Default,”" for more information. An event of default with respect to one series of Notes is not automatically an event of default for any other series.series, even where the same borrower is the loan borrower on both loans.
ToAs described above under "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Indenture and Form of Notes-Ranking; Security Interest," to limit the risk of ourPFL's insolvency, we havePFL has granted the indenture trustee a security interest in all of the borrower loans, allBorrower Loans corresponding to the Notes, in the deposit account into which such Borrower Loan payments and proceeds received by us on the borrower loansare deposited and in the bank account in which the borrower loan payments are deposited.FBO funding account. The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture. Only the indenture trustee, not the holders of the Notes, will have a secured claim to the above collateral.
If an event of default occurs due to bankruptcy, insolvency or reorganization as provided in the indenture, then the stated principal amount of theall outstanding Notes shall become due and payable immediately without any act by the trustee or any holder
of Notes. If an event of default occurs with respect to a series of Notes due to a reason other than bankruptcy, insolvency or reorganization, then, upon notification by the Trustee or by holders of at least 25% in aggregate principal amount of the outstanding Notes of such series, the stated principal amount of such series of outstanding Notes and all interest accrued thereon shall become due and payable immediately.
The holders of a majority in aggregate principal amount of the outstanding Notes of any series, by notice to the trustee (and without notice to any other holder of Notes), may on behalf of the holders of all Notes of the series waive an existing default with respect to such Notes, except (1) a default in the payment of amounts due in respect of such Notes or (2) a default in respect of a provision of the indenture that cannot be amended without the consent of each holder affected by such waiver. When a default is permanently and irrevocably waived, it is deemed cured, but no such waiver shall extend to any subsequent or other default or impair any consequent right.
In addition, pursuant to the indenture, and subject to the conditions set forth therein, (1) the holders of at least 25% in aggregate principal amount of the outstanding Notes offered hereby and the PMI Notes collectively, will have the right to cause the indenture trustee to enforce its rights with respect to PMI's obligations as Loan and Note Servicer under the Administration Agreement and (2) the holders of at least 25% in aggregate principal amount of the outstanding Notes offered hereby will have the right to cause the indenture trustee to enforce its rights with respect to all other provisions of the Administration Agreement. The conditions to the holders' rights to cause the indenture trustee to enforce its rights under the Administration Agreement include, among others, that the holders indemnify the indenture trustee for taking such action.
A Note holder may not institute a suit against usPFL for enforcement of such holder’sholder's rights under the indenture or pursue any other remedy with respect to the indenture or the Notes unless: | ·the holder gives the trustee written notice stating that an event of default with respect to the Notes is continuing;
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the holders of at least 25% in aggregate principal amount of the outstanding Notes of that series make a written request to the trustee to pursue a remedy available under the indenture with respect to such default; | ·the holders of at least 25% in aggregate principal amount of the outstanding Notes of that series make a written request to the trustee to pursue a remedy available under the indenture with respect to such default;
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such holder or holders offer the trustee security or indemnity satisfactory to it against any loss, liability or expense;the trustee does not comply with the request within 60 days after receipt of the notice, request and offer of security or indemnity; and | ·such holder or holders offer the trustee security or indemnity satisfactory to it against any loss, liability or expense;
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the holders of a majority in aggregate principal amount of the outstanding Notes of that series do not give the trustee a direction inconsistent with such request during such 60-day period.
| ·the trustee does not comply with the request within 60 days after receipt of the notice, request and offer of security or indemnity; and
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| ·the holders of a majority in aggregate principal amount of the outstanding Notes of that series do not give the trustee a direction inconsistent with such request during such 60-day period.
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The indenture will require usPFL every year to deliver to the indenture trustee a statement as to performance of ourits obligations under the indenture and as to any defaults.
Satisfaction and Discharge of the Indenture
The indenture will generally cease to be of any further effect with respect to a series of Notes if:
| ·all of the Notes of that series (with certain limited exceptions) have been delivered for cancellation; or
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all Notes of that series not previously delivered for cancellation have become due and payable or will become due and payable within one year and PFL has deposited with the trustee as trust funds the entire amount sufficient to pay at maturity all of the amounts due with respect to those Notes. | ·all Notes of that series not previously delivered for cancellation have become due and payable or will become due and payable within one year and we have deposited with the trustee as trust funds the entire amount sufficient to pay at maturity all of the amounts due with respect to those Notes.
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In either case, wePFL must also pay or cause to be paid all other sums payable under the indenture by usit and deliver to the trustee an officers’officers' certificate and opinion of counsel stating that all conditions precedent to the satisfaction and discharge of the indenture have been complied with.
The indenture does not contain any provisions for legal or covenant defeasance of the Notes.
No Recourse Against Others
The Notes are solely limited recourse obligations of Prosper Funding LLC,PFL, payable from collections on the corresponding borrower loansBorrower Loans as described herein, and are not the obligations of any other person. Neither PMI, in its capacity as Servicerservicer, as issuer of the related PMI Management Rights or otherwise, nor any of ourPFL's directors, officers or affiliates, has any liability for any amounts due on the Notes or the corresponding borrower loans.Borrower Loans. Each purchaser of a Note, by accepting the same, is deemed to waive and release all such liability.
Governing Law
The indenture and the Notes are governed by the laws of the State of New York without regard to any principle of conflict of laws that would require or permit the application of the laws of any other jurisdiction.
Information Concerning the Trustee
We have selected Wells Fargo Bank, National Association, to serve asCSC Trust Company of Delaware is the trustee under the indenture. From time to time, we maintain deposit accounts and conduct other banking transactions with the trustee and its affiliates in the ordinary course of business. If and when the trustee becomes a creditor of ours,PFL, the trustee will be subject to the provisions of the Trust Indenture Act regarding the collection of claims against us.PFL. The trustee and its affiliates will be permitted to engage in other transactions; however, if they acquire any conflicting interest, the conflict must be eliminated or the trustee must resign.
PMI Management Rights
ServicingEach Note will come attached with a PMI Management Right issued by PMI. PFL will be the sole issuer of the Notes and PMI will be the sole issuer of the PMI Management Rights. The PMI Management Rights will not be separable from the Notes offered on the marketplace and will not be assigned a value separate from the Notes. The PMI Management Rights are "investment contracts" issued by PMI directly to Note holders. The phrase "investment contract" is a concept under federal securities law that refers to an arrangement where investors invest money in a common enterprise with the expectation of profits, primarily from the efforts of others. Here, the "investment contracts" that PMI is registering as PMI Management Rights arise from the services that PMI has provided and will provide, as described in the Administration Agreement, the Indenture, the Investor Registration Agreement, and in this prospectus, which services include, but are not limited to:
the existence and operation of the marketplace; verification of borrower information; evaluation and validation of the Prosper Score and Prosper Rating; remitting borrower payments; and collecting on delinquent accounts.
Investors who purchase PMI Management Rights will have rights under the federal securities laws as a purchaser of a registered security. Investors will have limited contractual rights, collectively through the indenture trustee, to enforce PMI's contractual obligations under the Administration Agreement. Such contractual rights exist under state law and will not, in any way, affect the rights of investors under the federal securities laws.
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 Borrower Loans or in any way related to PFL's payment obligations in relation to the Notes. The PMI Management Rights attached to the Notes will not comprise collateral therefor nor guarantees of any Borrower Loans or Notes, nor generate any funds or proceeds that will be payable to PFL, the indenture trustee or holders of Notes in relation to any Borrower Loans or Notes. Holders of Notes will have no recourse to PMI or its assets in relation to payments on Borrower Loans or Notes. If PFL repurchases any Notes, PMI will concurrently repurchase the related PMI Management Right for zero consideration.
The indenture trustee is a third-party beneficiary of the Administration Agreement on behalf of holders of Notes and PMI Management Rights. Holders of Notes and PMI Management Rights will not have the contractual right individually to enforce PMI's obligations under the Administration Agreement, but the holders of at least 25% of the outstanding Notes will have the contractual right, subject to the conditions set forth in the Indenture, collectively to cause the indenture trustee to enforce its rights as a third-party beneficiary under the Administration Agreement. In addition, holders of PMI Management Rights will have rights under the federal securities laws that are not limited, contractually or otherwise. PMI's obligations to provide services under the Administration Agreement may be terminated by PMI or by PFL under certain circumstances described in this prospectus. For more information, see "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Administration Agreement-Indenture Trustee as Third-Party Beneficiary."
Termination of the Administration Agreement would not affect the rights of holders of previously issued PMI Management Rights under the federal securities laws. If PFL or PMI were to terminate PMI's obligations to provide services under the Administration Agreement, PMI would cease to issue new PMI Management Rights. PFL has entered into a back-up servicing agreement with a loan servicing company who is willing and able to transition loan and Note servicing responsibilities from PMI, but it is unlikely that the back-up servicer would be able to perform functions other than servicing the outstanding Borrower Loans and Notes. Therefore, PFL might have to suspend the facilitation of new Borrower Loans and the issuance of new Notes until it could find another party or parties that could perform the services PMI had been performing under the Administration Agreement. PFL believes it could find another party or parties to perform such services, but the search could take time. For more information, see "Risk Factors-Risks Related to PFL and PMI, Our Marketplace and Our Ability to Service the Notes." Administration Agreement
Prosper Funding LLCPFL and PMI have executed a Servicingentered into an Administration Agreement pursuant to which PMI has licensed to Prosper Funding LLC the right to operate the platform and Prosper Funding LLC has appointed PMI towill provide certain administrativecorporate administration services and tomarketplace administration services and will service all borrower loansBorrower Loans and Notes, as well as all PMI Notes. We referThis prospectus refers to PMI in its separate capacities under the Administration Agreement as follows: (i) in its capacity as the servicerparty providing the corporate administration services, as the "Servicer.”
"Corporate Administrator," (ii) in its capacity as the party providing the marketplace administration services, as the "Loan Marketplace Administrator," and (iii) in its capacity as the party servicing all Borrower Loans, Notes, and PMI Notes, as the "Loan and Note Servicer."
The following summary of the ServicingAdministration Agreement does not purport to be complete and is qualified in its entirety by the complete terms and conditions of the ServicingAdministration Agreement. We have filed aA copy of the ServicingAdministration Agreement is filed as an exhibit to the registration statement of which this prospectus forms a part.
License of the Platform
PMI developed the platform and owns the proprietary technology that makes operation of the platform possible. Pursuant to the Servicing Agreement, PMI has granted to Prosper Funding LLC an exclusive right to operate the platform and to use such technology. The license will expire on May 31, 2023 but may be extended by agreement of the parties. The license will terminate prior to its scheduled termination date if the Servicing Agreement otherwise terminates in its entirety – see “- Termination and Replacement of Servicer” below – or if certain events of default occur and PMI declares an early termination of the license. If the license terminates prior to its scheduled termination date for any reason, we will continue to operate the platform in relation to any Notes that are then outstanding or we will transfer the platform to PMI or to a new licensee, in each case in a manner that does not adversely impact the holders of such Notes or the related borrowers. We will pay certain licensing fees to PMI to compensate PMI for the use of the platform and its technology. These fees are included in (and are not to be supplemental to) the servicing fee discussed below.Corporate Administration Services
Administrative Services
The ServicerCorporate Administrator will manageoversee the daily business operations of Prosper Funding LLCPFL and provide a number of related administrative services. Among other matters, the ServicerCorporate Administrator's duties shall include:
administering PFL's day-to day operations, including paying (solely from PFL's funds) PFL's fees and expenses, giving notices and communications in PFL's behalf as PFL may be required to give from time to time under its various agreements, maintaining PFL's general accounting records and preparing monthly, quarterly and annual financial statements as may be necessary or appropriate, retaining in PFL's behalf an accounting firm to audit PFL's year-end financial statements, preparing and filing PFL's income, franchise or other tax returns, causing to be paid (solely from PFL's funds) any taxes required to be paid by PFL, not knowingly causing PFL to engage in any activity that would cause PFL to be subject to income or franchise tax on a net income basis by any taxing jurisdiction outside of the United States, retaining on PFL's behalf outside counsel, reviewing and analyzing any agreements entered into by PFL and establishing, in consultation with PFL, operating procedures to enable PFL to comply with the terms of such agreements,
providing recordkeeping and maintenance to maintain PFL's limited liability company existence, preparing resolutions for consideration by PFL's board of directors in accordance with its limited liability company agreement, preparing and having executed and filed all documents necessary to qualify PFL to do business in any jurisdiction in which such qualification is necessary or appropriate, in conjunction with PFL's counsel, monitoring compliance with licensing requirements and applicable laws, receiving notices on PFL's behalf, notifying PFL of the institution of any action, suit or proceeding against, or regulatory investigation of, PFL, establishing and maintaining all necessary bank accounts for PFL and managing PFL's cash in accordance with the terms and provisions of PFL's material contracts, notifying PFL, to the extent the Corporate Administrator has actual knowledge thereof, of any failure of a party to a material agreement to perform any of its obligations with respect to PFL, and from time to time taking at PFL's expense such actions as PFL may reasonably request, or as the Corporate Administrator deems appropriate.
The Corporate Administrator has agreed to provide PFL with an annual service provider compliance statement confirming that the Corporate Administrator has reviewed its activities and performance under the Administration Agreement during the preceding calendar year and, based upon such review, has determined that it materially fulfilled all of its obligations under the Administration Agreement during that year or, if there has been a failure to perform any such obligation in any material respect, specifically identifying each such failure and the nature and the status thereof. PFL and PMI will supervise (i) provide a summary of the Corporate Administrator's service provider compliance statement in their annual reports on Form 10-K. Loan Marketplace Administration Services
The Loan Marketplace Administrator will manage the marketplace and provide a number of related services. Among other matters, the Loan Marketplace Administrator's duties shall include supervision with respect to:
managing, maintaining and operating the marketplace, the issuance, sale and payment of the Notes, (ii) our PFL's purchase of borrower loans, (iii) Borrower Loans, the operation of www.prosper.com, and (iv) the payment (solely from our funds except as stated below)PFL's funds) of ourrelated fees and expenses. In this connection,
Among other things, the ServicerLoan Marketplace Administrator will oversee our complianceassist PFL with applicable federalthe issuance and state laws (including consumer protection laws, state lender licensing requirements and securities registration requirements), and will coordinate all funds transfers (including Note payments) and document deliveries that we are required to make in relation tosale of the borrower loansNotes and the Notes. The Servicer will also reviewposting and funding of Borrower Loans (including reviewing the eligibility of applicants to participate on the platform, performmarketplace and performing the applicant verification processes described hereinherein), and will manage the posting of listings on ourthe website. The ServicerLoan Marketplace Administrator will also assign a Prosper Rating and an interest rate to each listing. See "About the Platform"Marketplace" for more information.
The Servicer will maintain booksLoan Marketplace Administrator has agreed to provide PFL with an annual service provider compliance statement confirming that the Loan Marketplace Administrator has reviewed its activities and records for Prosper Funding LLC (including our general accounting records), provide us with certain periodic reports relatingperformance under the Administration Agreement during the preceding calendar year and, based upon such review, has determined that it materially fulfilled all of its obligations under the Administration Agreement during that year or, if there has been a failure to the borrower loansperform any such obligation in any material respect, specifically identifying each such failure and the Notesnature and act as our custodian to hold all borrower loan documentation. In addition, the Servicerstatus thereof. PFL and PMI will represent (or otherwise assist) usprovide a summary of the Loan Marketplace Administrator's service provider compliance statement in any arbitration proceedings that we or any borrower or lender member may initiate under any member registration agreement. their annual reports on Form 10-K.
The Servicer will in no event be responsible to make payments from its own funds on any Notes or other obligations of Prosper Funding LLC. The Servicer may elect in its sole discretion to advance funds for the payment of Prosper Funding LLC operating expenses. Prosper Funding LLC will be required to reimburse the Servicer for any such advances that the Servicer makes.
Servicing of Borrower Loans and Notes
The Loan and Note Servicer has agreed to service each borrower loanBorrower Loan and the corresponding Notes.Notes, as well as each PMI Note. The Loan and Note Servicer is required at all times to use commercially reasonable efforts to service and collect the borrower loansBorrower Loans in accordance with industry standards customary for loans of the same general type and character, in each case (i) case:
as long as PMI is the Loan and Note Servicer, in accordance with the provisions of PFL's Amended and Restated Limited Liability Company Agreement (in particular the sections governing the limitations on PFL's activities), as long as PMI is the Loan and Note Servicer, in accordance with the provisions of the Unanimous Written Consent of the Board of Directors of Prosper Marketplace, Inc. with respect to the separateness principles to be observed by PMI in dealing with PFL, in accordance with all applicable laws, and (ii) without regard to (A) any relationship that the Servicer or its affiliates may have with the applicable borrower or Note holder, or (B) the Servicer’s right to receive compensation for its services. to: | | | ◦ | any relationship that the Loan and Note Servicer or its affiliates may have with the applicable borrower or Note holder, or |
| | | ◦ | the Loan and Note Servicer's right to receive compensation for its services. |
This standard of care applicable to the Loan and Note Servicer is called the "Servicing Standard”.Standard." Subject to the Servicing Standard, the Loan and Note Servicer has full power and authority to take any actions in connection with the servicing and administration of the borrower loansBorrower Loans that the Servicerit deems to be necessary or desirable. The Loan and Note Servicer may act alone or through agents, but will remain responsible for the proper performance of its duties by any agents it appoints. OurPFL's ability to collect payments on the borrower loans,Borrower Loans, and therefore the amount of payments received by the holders of Notes, will be dependent upon the Loan and Note Servicer's performance of its duties under the ServicingAdministration Agreement.
Subject to the Servicing Standard, the Loan and Note Servicer is responsible for protecting the interest of Prosper Funding LLCPFL in the borrower loansBorrower Loans by dealing effectively with borrowers who are delinquent or in default. The Loan and Note Servicer is required to maintain an adequate accounting system that will immediately identify delinquent loans and to maintain procedures for sending delinquent notices, assessing late charges and preparing individual analyses of distressed or chronically delinquent borrower loans.Borrower Loans. The Loan and Note Servicer has sole discretion to determine (i) the timing and content of communications sent to delinquent borrowers, and (ii) when and whether to refer a delinquent loan for collection, initiate legal action to collect a delinquent loan, sell a delinquent loan to a third party, accelerate the maturity of a delinquent loan that is at least thirty days past due or write off a delinquent loan in whole or in part. The Loan and Note Servicer is authorized to select and engage on ourPFL's behalf any collection agency to which any delinquent loan is referred for collection and to determine the amount of its compensation (which shall not, however, exceed 30%40% of the amount of any recoveries obtained)obtained, in addition to any legal fees and transaction fees associated with payment processing incurred in the collection effort). The Loan and Note Servicer will be deemed to have undertaken commercially reasonable servicing and collection efforts if it refers a delinquent loan to a collection agency within five business days after such loan first became thirty days past due. The Loan and Note Servicer will charge off borrower loansBorrower Loans that are 120 days past due and in such event the holders of the related Notes will not receive any further payments on their Notes. The Servicer also may charge off delinquent loans that are less than 120 (but at least 31) days past due if the Loan and Note Servicer deems such action appropriate under the Servicing Standard. Notwithstanding any decision by the Loan and Note Servicer to charge off a delinquent loan, holders of the Notes related to such loan will continue to receive their pro rata shares (net of servicing fees and other fees and charges, if applicable) of any payments that PFL receives on such loan on or prior to its Final Maturity Date.
Subject to the Servicing Standard, the Loan and Note Servicer may waive, modify or vary any non-material terms of any borrower loan,Borrower Loan, consent to the postponement of strict compliance with any such term or grant a non-material indulgence to any borrower. Notwithstanding the foregoing, in the event that any borrower loanBorrower Loan is in default, or in the judgment of the Loan and Note Servicer, such default is reasonably foreseeable, or the Loan and Note Servicer otherwise determines that such action would be consistent with the Servicing Standard, and provided that the Loan and Note Servicer has reasonably and prudently determined that such action will not be materially adverse to the interests of the relevant Note holders, the Loan and Note Servicer may also waive, modify or vary any term of any borrower loanBorrower Loan (including material modifications that would change the interest rate, defer or forgive the payment of principal or interest, change the payment dates or change the place and manner of making payments on such borrower loan)Borrower Loan), accept payment from the related borrower of an amount less than the principal balance in final satisfaction of such borrower loanBorrower Loan or consent to the postponement of strict compliance with any term or otherwise grant any indulgence to any borrower. The modifications contemplated by this servicing provision would be in situations, common to loan servicing industry practices, where a reasonable forbearance or extension of time for payment to be received would prevent a borrower from defaulting entirely on the loan or filing for bankruptcy. From the Note holder’sholder's perspective, such modifications would only be employed in situations where a greater loss would be avoided.
Any such actions taken by the Loan and Note Servicer in relation to any borrower loanBorrower Loan will be binding on the holders of the related Notes and may reduce the amount of payments to be made on such Notes or result in no further payments being made. If the Loan and Note Servicer approves modifications to the terms of any borrower loan,Borrower Loan, it will promptly, arrange for Prosper Funding LLC toon behalf of PFL, notify the corresponding lender members by emailinvestors in the investor's account.
The Loan and Note Servicer has agreed to provide PFL with an annual servicer compliance statement confirming that the Loan and Note Servicer has reviewed its activities and performance under the Administration Agreement during the preceding calendar year and, based upon such review, has determined that it materially fulfilled all of its obligations under the Administration Agreement during that year or, if there has been a failure to perform any such obligation in any material respect, specifically identifying each such failure and the nature and the status thereof. PFL and PMI will provide a summary of the material termsservicer compliance statement in their annual reports on Form 10-K. PMI Fees
PFL has agreed to compensate PMI with three fees for its various roles and related services under the Administration Agreement.
First, PFL owes PMI, in PMI's capacity as Corporate Administrator, a monthly corporate administration fee for its administrative services in overseeing the daily business operations of such modificationsPFL (the "PMI Corporate Administration Fee"). This monthly fee is in the amount of $500,000; provided that, in the case of the last payment of the PMI Corporate Administration Fee due under the Administration Agreement, the amount due shall be pro-rated by the number of days from the last monthly fee payment date and the effect such modifications will havedate on their Notes, including any changeswhich the Corporate Administrator stopped providing the corporate administrative services specified in the Administration Agreement.
Second, PFL owes PMI, in PMI's capacity as Loan Marketplace Administrator, a monthly marketplace administration fee for its services in managing the marketplace (the "PMI Loan Marketplace Servicing Fee"). This fee is equal to the payments they will receive underproduct of $150 and the Notes.number of Borrower Loans funded since the last monthly fee payment date.
Third, PFL owes PMI, in PMI's capacity as Loan and Note Servicer, a monthly fee for its services in servicing the Borrower Loans (such fee, together with the PMI Corporate Administration Fee and the PMI Loan Marketplace Servicing Fee,
Each the "PMI Fees"). This fee is equal to 62.5% of all servicing fees collected from Note holder is required to pay us a servicing fee calculated at an annualized rate against the outstanding principalholders by or on behalf of the related borrower loan, together with anyPFL and 100% of all non-sufficient funds fees for failed borrower payments. This annualized rate is currently set at 1% but we may increase it incollected from Note holders by or on behalf of PFL since the future to an amount greater than 1% but less than or equal to 3%. See "About the Platform—Loan Servicing and Collection." In addition, we receive payments from WebBank equal to the origination fees charged by WebBank on borrower loans, as compensation for our loan origination activities on WebBank’s behalf. See “"About the Platform—Borrower Loan Funding and Purchases; Sale of Notes.” We have agreed to compensate the Servicer for its services under the Servicing Agreement by paying the Servicer all such servicing, non-sufficient funds fees and origination fees that we receive, net of a specified portion of such fees that we will retain for our own account (such net amount payable to the Servicer being the "PMI Servicing Fee”). The Servicer also will be entitled to reimbursement from us for any expenses the Servicer advances on our behalf. However, we will make such reimbursement payments only from funds that are not allocated to thelast monthly fee payment of Notes or the PMI Servicing Fee (and thus such reimbursement payments will not reduce the amount of borrower collections available to make payments on the Notes). See "About the Platform—Loan Servicing and Collection".
Exculpation and Servicer Indemnity
ThePMI, in its capacity as Loan and Note Servicer under the Administration Agreement, will not be liable under the Administration Agreement to the Company,PFL, any Note holder, any borrower or any other person for any actions it takes or fails to take in connection with the servicing of the borrower loansBorrower Loans or Notes or for any errors in judgment, except as described below. The Servicer
PMI, in its various capacities under the Administration Agreement, and any director, officer, employeeof its directors, officers, employees or agent of the Serviceragents may rely in good faith on any document of any kind that appears to be properly executed and submitted by any person respecting any matters arising in connection with the ServicingAdministration Agreement, except to the extent that the ServicerPMI knows that such document is false, misleading, inaccurate or incomplete.
The ServicerPMI, in its various capacities under the Administration Agreement, has agreed in the Servicing Agreement to indemnify Prosper Funding LLCPFL and itsPFL's officers, directors, employees and agents against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable counsel fees and disbursements), joint or several (collectively, “Damages”"Damages"), directly or indirectly resulting from (i) from:
the failure of the ServicerPMI to perform its duties under the ServicingAdministration Agreement, (ii) the material breach of any of the Servicer’sPMI's representations, warranties, covenants or agreements contained in the ServicingAdministration Agreement (iii)
the acts or omissions of any permitted subservicer or service provider engaged by thePMI, in its capacity as Loan and Note Servicer, to service the borrower loansBorrower Loans or Notes in accordance with the ServicingAdministration Agreement, and (iv) any infringement or misappropriation by the ServicerPMI of any patent, copyright, trademark, servicemark, trade secret or other proprietary right of any other person; provided, however, that the ServicerPMI will not be responsible for any Damages resulting from (A) from: the failure of Prosper Funding LLCPFL to perform its duties under the ServicingAdministration Agreement (unless such failure resulted from the actions or omissions of the Servicer)PMI), (B) the material breach of any of Prosper Funding LLC’sPFL's representations, warranties, covenants or agreements contained in the ServicingAdministration Agreement (unless such breach resulted from the actions or omissions of the Servicer)PMI), (C) the origination, making, funding, sale or servicing of any borrower loansBorrower Loans or Notes following the termination of the ServicingAdministration Agreement, (D) the absence or unavailability of any books, records, data, files or other documents relating to a borrower loan,Borrower Loan, unless resulting from the Servicer'sPMI's actions or omissions, or (E) compliance with any instructions of Prosper Funding LLCPFL if such instructions did not comply with applicable law.
Assignment and Subservicing
The ServicerPMI may not assign its various roles under the ServicingAdministration Agreement or its duties thereunder without the prior written consent of Prosper Funding LLCPFL (excluding any assignment to an entity into which the ServicerPMI is merged or consolidated or that succeeds to the Servicer'sPMI's business). The ServicerPMI may in its discretion engage service providers to assist it in performing specific obligations under the ServicingAdministration Agreement, provided that, thein its capacity as Loan and Note Servicer, it may not engage a subservicer or other service provider to perform a substantial portion of the primary day-to-day servicing obligations of the Loan and Note Servicer without the prior written consent of Prosper Funding LLC. ThePFL. PMI, in its capacity as Loan and Note Servicer, will be solely responsible for the fees and expenses of any subservicer or service provider it engages. The ServicerPMI will be liable for the acts and omissions of any such subservicer or service provider to the same extent as if the Loan and Note Servicer had performed the servicesservicing directly.
Termination and Replacement of Servicer
The ServicingAdministration Agreement will terminate on May 31, 2023, unless Prosper Funding LLCPFL or the ServicerPMI declares an earlier termination pursuant to the termination rights described below or unless the parties agree to extend the term of the ServicingAdministration Agreement.
WePFL may terminate the ServicingAdministration Agreement if the Servicer: (i) failspartially or in its entirety at its discretion upon 180 calendar days' notice to arrange for the paymentPMI in any of amounts due on any Note from funds available for such purposeits capacities under the Indenture and such breach (if notAdministration Agreement. In addition, PFL may terminate the resultAdministration Agreement partially or in its entirety at any time without 180 calendar days' notice if PMI, in any of breach of duty or nonperformance byits capacities under the Trustee) is not cured by the Servicer within two Business Days from the date that we provide notice of such breach; (ii) fails to timely deliver to us any reports required by the ServicingAdministration Agreement, and such breach is not cured by the Servicer within ten Business Days from the date that we provide notice of such breach; or (iii) breaches any of its other duties under the ServicingAdministration Agreement and does not cure such breach within thirty days from the date that we providePFL provides notice of such breach. In addition, followingNotwithstanding the third anniversaryforegoing, PFL may not terminate PMI in any of its capacities under the Administration Agreement unless (i) PFL determines that it, either directly or through a successor service provider, is able to act in such capacity in accordance with the indenture governing the Notes and (ii) PFL's Board of Directors (including its independent directors) approve such determination and termination. If PFL partially terminates the Administration Agreement with respect to PMI in any of its capacities thereunder, PMI will continue to provide services under its other capacities pursuant to the terms of the effective date of the Servicing Agreement, weAdministration Agreement.
PMI may terminate the agreement upon 180 calendar days’ notice to the Servicer.
The Servicer may terminate the ServicingAdministration Agreement if we fail to pay the PMI Servicing Fee or any expense reimbursement to the Servicer when due, so long as we had funds available under the Indenture to make such payment, the failure did not result from the Servicer’s own failure to process a payment, and the Servicer notified us of such failure and we did not cure the failure within two business days. The Servicer also may terminate the Servicing Agreement if we breachPFL breaches any of our otherits obligations under the ServicingAdministration Agreement and such breach is not cured by usPFL within thirty days of the date the ServicerPMI provides notice of such breach. In addition, the Servicer may terminate the Servicing Agreement at any time in its sole discretion upon 180 calendar days’ notice to us; provided that no such termination by the Servicer will be effective unless we have appointed a successor servicer on terms acceptable to us.
The ServicerPMI is required in connection with any termination of the ServicingAdministration Agreement under any of its capacities thereunder to transfer the administrative services, marketplace management services or servicing of all borrower loansBorrower Loans and Notes that remain outstanding to Prosper Funding LLCPFL or a successor servicer designated by Prosper Funding LLCPFL as soon as reasonably practicable. Until such transfer is completed, the Servicer’sPMI's obligation to service the borrower loansBorrower Loans and otherwise provide services in accordance with the ServicingAdministration Agreement will remain in effect. All costs and fees incurred in connection with any termination of the ServicingAdministration Agreement will be payable by the party whose breach of obligation, or whose exercise of its voluntary termination right, resulted in the termination.
Any such amounts due from Prosper Funding LLCPFL will be payable only from funds not allocated to the payment of Notes under the Indenture.indenture. See "Summary of Indenture, Form of Notes, PMI Management Rights and Servicing Agreement—IndentureAdministration Agreement-Indenture and Form of Notes”. WeNotes." PFL also will be required upon any termination to pay the ServicerPMI all accrued but unpaid PMI Servicing Fees and to reimburse the Servicer for any outstanding expenses that the Servicer has incurred on our behalf.Fees. No termination fees will be payable by either party upon any termination of the ServicingAdministration Agreement. We and the Servicer have
PFL has entered into a back-up servicing agreement with First Associates Loan Servicing, LLC ("First Associates"), a third-party loan administrator, that is expectedpursuant to which First Associates would become the successor servicer to PMI. The back-up servicing agreement will facilitate the transfer of servicing responsibilities to such administratorFirst Associates if the ServicingAdministration Agreement terminates. See "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Indenture and Form of Notes-Servicing Covenant." First Associates is a financial services company that has entered into numerous successor loan servicing agreements. In the event that PFL must designate an additional or different successor servicer, it will seek to designate a servicer with experience and reputation comparable to First Associates. Indenture Trustee as Third-Party Beneficiary
The indenture trustee is a third-party beneficiary of (i) PMI's obligations as Loan and Note Servicer under the Administration Agreement (the "Servicing Obligations") for the benefit of the holders of the Notes offered hereby and the PMI Notes and (ii) all of PMI's other obligations under the Administration Agreement for the benefit of holders of the Notes offered hereby. 72
Pursuant to the Indenture, and subject to the conditions set forth therein, (i) holders of at least 25% in aggregate principal amount of the outstanding Notes offered hereby and the PMI Notes will have the right to cause the indenture trustee to enforce its rights under the Servicing Provisions of the Administration Agreement and (ii) holders of at least 25% in aggregate principal amount of the outstanding Notes offered hereby will have the right to cause the indenture trustee to enforce its rights under any other provisions of the Administration Agreement, in each case whether or not there is a default under the Indenture. PMI's obligations to provide services under the Administration Agreement may be terminated by PMI or by PFL under certain circumstances described in this prospectus.
MATERIALMATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forthconstitutes the full opinion of our tax counsel, Covington & Burling LLP, regarding the material U.S. federal income tax considerations generally applicable to lender membersinvestors who purchase Notes. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”"Code"), Treasury regulations promulgated thereunder (“("Treasury Regulations”Regulations"), administrative pronouncements of the U.S. Internal Revenue Service (“IRS”("IRS") and judicial decisions, all as currently in effect and all of which are subject to change and to different interpretations. Changes to any of the foregoing authorities could apply on a retroactive basis, and could affect the U.S. federal income tax consequences described below.
This discussion does not address all of the U.S. federal income tax considerations that may be relevant to a particular lender member’sinvestor's circumstances, and does not discuss any aspect of U.S. federal tax law other than income taxation or any state, local or non-U.S. tax consequences of the purchase, ownership and disposition of the Notes. This discussion applies only to lender membersinvestors who hold the Notes as capital assets within the meaning of the Code (generally, property held for investment). This discussion does not address U.S. federal income tax considerations applicable to lender membersinvestors that may be subject to special tax rules, such as:
| ·securities dealers or brokers, or traders in securities electing mark-to-market treatment;
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banks, thrifts or other financial institutions; | ·banks, thrifts or other financial institutions;
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insurance companies;regulated investment companies or real estate investment trusts; tax-exempt organizations; | ·regulated investment companies or real estate investment trusts;
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accrual-method taxpayers subject to special tax accounting rules under Section 451(b) of the Code;persons holding Notes as part of a "straddle," "hedge," "synthetic security" or "conversion transaction" for U.S. federal income tax purposes, or as part of some other integrated investment; | ·tax-exempt organizations;
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partnerships or other pass-through entities;persons subject to the alternative minimum tax; | ·persons holding Notes as part of a “straddle,” “hedge,” “synthetic security” or “conversion transaction” for U.S. federal income tax purposes, or as part of some other integrated investment;
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certain former citizens or residents of the United States;non-U.S. Holders (as defined below); or | ·partnerships or other pass-through entities;
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| ·persons subject to the alternative minimum tax;
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| ·certain former citizens or residents of the United States;
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| ·non-U.S. Holders (as defined below); or
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| · “U.S. Holders”"U.S. Holders" (as defined below) whose functional currency is not the U.S. dollar.
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As used herein, a “U.S. Holder”"U.S. Holder" is a beneficial owner of Notes that is, for U.S. federal income tax purposes, (i) an individual citizen or resident of the United States, (ii) a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate whose income is subject to U.S. federal income tax regardless of its source, or (iv) a trust if (A) a United States court has the authority to exercise primary supervision over the administration of the trust and one or more U.S. persons (as defined under the Code) are authorized to control all substantial decisions of the trust or (B) it has a valid election in place to be treated as a U.S. person. A “Non-U.S. Holder”"Non-U.S. Holder" is any beneficial owner of a Note that, for U.S. federal income tax purposes, is not a U.S. Holder and that is not a partnership (or other entity treated as a partnership for U.S. federal income tax purposes).
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds Notes, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership. A partnership holding Notes, and partners in such a partnership, should consult their own tax advisors with regard to the U.S. federal income tax consequences of the purchase, ownership and disposition of the Notes by the partnership.
THIS DISCUSSION OF THE MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR PERSON. ACCORDINGLY, ALL PROSPECTIVE LENDER MEMBERSINVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES BASED ON THEIR PARTICULAR CIRCUMSTANCES.
Taxation of the Notes
In General
There are no statutory provisions, regulations, published rulings, or judicial decisions that directly address the characterization of the Notes or instruments similar to the Notes for U.S. federal income tax purposes. However, although the matter is not free from doubt, we intend toPFL will treat the Notes as ourits debt instruments that have original issue discount (“OID”("OID") for U.S. federal income tax purposes. Where required, we intendPFL intends to file information returns with the 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 Notes.
You should be aware, however, that the U.S. Internal Revenue Service (“IRS”("IRS") is not bound by ourPFL's characterization of the Notes and the IRS or a court may take a different position with respect to the Notes’Notes' proper characterization. Any different characterization could significantly affect the amount, timing, and character of income, gain or loss recognized in respect of a Note. For example, because each series of Notes will correspond to a loan, and we havePFL has no obligation to make any payments on the Notes unless, and then only to the extent that, we haveit has received payments on the corresponding loan, the IRS could determine that, in substance, each lender memberinvestor owns a proportionate interest in the corresponding loan for U.S. federal income tax purposes. If the IRS took such a position, the tax treatment of the Notes may differ materially, including, but not limited to, the factfacts that (i) the notesNotes would no longer be considered to have OID.OID, and (ii) you would be treated as receiving the interest on your share of the corresponding loan and paying your share of the fees with respect to such loan. While the full amount of your share of interest
on the underlying loan would be includible by you, the amount of such fee may not be deductible if you are an individual. Alternatively, the IRS could instead treat the Notes as a different financial instrument (including an equity interest or a derivative financial instrument). If the Notes are treated as ourPFL's equity, (i) wePFL would be subject to U.S. federal income tax on income, including interest, accrued on the corresponding loans but would not be entitled to deduct interest or OID on the Notes, and (ii) payments on the Notes would be treated by the 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 ourPFL'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 NotesNotes. You are strongly advised to consult your own tax advisor regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership, and disposition of the Notes (including any possible differing treatments of the Notes).
TheAs the following discussion assumes thatindicates, the Notes will be treated as ourPFL's debt instruments that have OID for U.S. federal income tax purposes. Unless otherwise specified, the following discussion assumes that the Notes will not be subject to the rules governing contingent payment debt instruments.
Taxation of Payments on the Notes
You will generally be required to accrue OID in income as ordinary interest income for U.S. federal income tax purposes, regardless of your regular method of tax accounting. If you hold a Note that has a maturity date of more than one year, you will be required to accrue OID income as ordinary interest income under a “constant"constant yield method.”" Under this treatment, if a payment on a Note is not made in accordance with the payment schedule in respect of the corresponding loan (for example, because of a late payment on the corresponding loan), you will be required to include an amount of OID in taxable income as interest even if you have not received the actual payment from the corresponding loan.
The Treasury Regulations governing OID provide special rules for determining the amount and accrual of OID for debt instruments that provide for one or more alternative payment schedules applicable upon the occurrence of contingencies. If the timing and amounts of the payments that comprise each payment schedule are known as of the issue date, and based on all the facts and circumstances as of the issue date, a single payment schedule for a debt instrument, including the stated payment schedule, is significantly more likely than not to occur, the amount and accrual of OID is determined based on that payment schedule. In addition, under the applicable Treasury Regulations, remote and/or incidental contingencies may generally be ignored. A contingency relating to the amount of a payment is incidental if, under all reasonably expected market conditions, the potential amount of the payment is insignificant relative to the total expected amount of the remaining payments on the debt instrument. A contingency relating to the timing of a payment is incidental if, under all reasonably expected market conditions, the potential difference in the timing of the payment is insignificant. The determination of whether a single payment schedule is significantly more likely than not to occur, or whether a contingency is remote or incidental, is made for each Note.
Each Note provides for one or more alternative payment schedules because we arePFL is obligated to make payments on a Note only to the extent that we receiveit receives payments on the corresponding loan, less the service charge and less any charges we incurit incurs in connection with collection on the corresponding loan. The payment schedule for each Note provides for payments of principal and interest on the Note in accordance with the payment schedule for the corresponding loan. In addition to scheduled payments, wePFL will prepay a Note to the extent that a borrower prepays the loan corresponding to the Note, and wePFL will pay late fees collected on a corresponding borrower loanBorrower Loan to the holders of the corresponding Note. Notwithstanding such contingencies, we intendPFL intends to use the payment schedule of a Note to determine the amount and accrual of OID on the Note because we believeit believes that a Note is significantly more likely than not to be paid in accordance with such payment schedule and/or the likelihood of nonpayment, prepayment or late payment on the loan corresponding to such Note will be remote or incidental. If in the future, based on ourPFL's experience or for any other reason, we determinePFL determines that the previous sentence does not apply to a Note, we anticipatePFL anticipates that weit will be required to determine the amount and accrual of OID for such Note pursuant to the rules applicable to contingent payment debt instruments, which are described below, and wePFL shall so notify you. OID on a Note will equal the excess of the Note’s “statedNote's "stated redemption price at maturity”maturity" over its “issue"issue price.”" The stated redemption price at maturity of a Note includes all payments of principal and stated interest on the Note under the payment schedule of the Note. The issue price of a Note will generally equal the principal amount of a Note.
The amount of OID includible in income for a taxable year is the sum of the “daily portions”"daily portions" of OID with respect to the Note for each day during the taxable year in which the holder held the Note. The daily portion of OID is determined by allocating to each day of any accrual period within a taxable year a pro rata portion of an amount equal to the product of such Note’sNote's adjusted issue price at the beginning of the accrual period and its yield to maturity (properly adjusted for the length of the period). We intendPFL intends to use 30-day accrual periods. The adjusted issue price of a Note at the beginning of any accrual period should be its issue price, increased by the aggregate amount of OID previously accrued with respect to the Note, and decreased by any payments of principal and interest previously made on the Note. A Note’sNote's yield to maturity should be the discount rate that, when used to compute the present value of all payments of principal and interest to be made on the Note under the payment schedule of the Note, produces an amount equal to the issue price of such Note.
If a Note is paid in accordance with its payment schedule, the amount of OID includible in income is anticipated to be based on the stated interest rate of the Note. As a result, you will generally be required to include an amount of OID in income that is equal to the amount of stated interest paid on the Note.
Cash payments of interest and principal under the payment schedule on the Notes will not be separately included in income, but rather will be treated first as payments of previously accrued but unpaid OID and then as payments of principal.
Sale, Retirement or Other Taxable Disposition of Notes
Upon the sale, retirement or other taxable disposition of a Note, you generally will recognize gain or loss equal to the difference, if any, between the amount realized upon the sale, retirement or other taxable disposition and your adjusted tax basis in the Note. In general, your adjusted tax basis in the Note will equal your cost for the Note, increased by any OID and market discount previously included in gross income by you, as discussed below, and reduced by any payments previously received by you in respect of the Note.
Except as discussed below with respect to a Note subject to rules governing market discount, contingent payment debt instruments, or the special rules applicable to short-term obligations, your gain or loss on the taxable disposition of the Note generally will be long-term capital gain or loss if the Note has been held for more than one year and short-term otherwise. The deductibility of capital losses is subject to limitations.
Prepayments
If we prepayPFL prepays a note in full, the Note will be treated as retired and, as described above, you will generally have gain or loss equal to the difference, if any, between the amount realized upon the retirement and your adjusted tax basis in the Note. If we prepayPFL prepays a Note in part, a portion of the Note will be treated as retired. Generally, for purposes of determining (i) your gain or loss attributable to the portion of the Note retired and (ii) your OID accruals on the portion of the Note remaining outstanding, the adjusted issue price, your adjusted tax basis, and the accrued but unpaid OID of the Note, determined immediately before the prepayment, will be allocated between the two portions of the Note based on the portion of the Note that is treated as retired. The yield to maturity of a Note is not affected by a partial prepayment.
Market Discount
If you purchasepurchased a Note on the Note Trader platform for an amount that is less than the adjusted issue price of the Note at the time of purchase, the amount of the difference will be treated as “market discount”"market discount" for U.S. federal income tax purposes, unless that difference is less than a specified de minimisamount. The amount of any market discount will generally be treated as de minimisand disregarded if it is less than ¼ of 1 percent of the revised issue price (calculated as the sum of the issue price of the Note and the aggregate amount of OID previously includible in the gross income of any holder without regard to any acquisition premium), multiplied by the number of complete years to maturity. If you hold a Note that has de minimismarket discount, the rules described below do not apply to you.
Under the market discount rules, you generally will be required to treat any principal payments received in respect of the Note, and any gain derived from the sale, retirement or other disposition of the Note, as ordinary income to the extent of the market discount that has accrued on the Note but that has not previously been included in gross income by you. (While the matter is not free from doubt, the requirement of section 451(b) of the Code that a taxpayer that prepares financial statements accrue income
no later than the year in which such income is accrued on the financial statement should not affect the time when such taxpayer must include market discount.) Such market discount will accrue on the Note on a ratable basis over the remaining term of the Note unless you elect to accrue market discount on a constant yield basis. In addition, you may be required to defer until the maturity of the Note, or its earlier disposition in a taxable transaction, the deduction of all or a portion of any interest expense attributable to (i) any indebtedness incurred to purchase or carry such Note or (ii) any indebtedness continued to purchase or carry such Note. If you dispose of a Note in a nontaxable transaction (other than certain specified nonrecognition transactions), you will be required to include any accrued market discount as ordinary income as if you had sold the Note at its then fair market value.
You may elect to currently include market discount in gross income as it accrues, under either a ratable or constant yield method, in which case the rules described in the prior paragraph regarding characterization of payments and gain as ordinary income and the deferral of interest deductions will not apply. If you make an election to include market discount in income currently, your adjusted basis in a Note will be increased by any market discount that you include in income. An election to currently include market discount in gross income, once made, applies to all market discount obligations acquired by you on or after the first taxable year to which the election applies and may not be revoked without the consent of the IRS. You should consult your own tax advisor before making this election.
Acquisition Premium
If you purchasepurchased a Note on the Note Trader platform for an amount greater than the Note’sNote's adjusted issue price but less than the sum of all amounts payable on the Note after the purchase date, the Note will be treated as acquired at an acquisition premium. For a Note acquired with an acquisition premium, the amount of OID that you must include in gross income with respect to the Note for any taxable year will be reduced by the portion of the acquisition premium properly allocable to such taxable year.
If you purchase a Note on the Note Trader platform for an amount in excess of the sum of all amounts payable on the Note after the purchase date, you will not be required to include OID in income with respect to the Note.
Late Payments
As discussed above, late fees collected on borrower loansBorrower Loans corresponding to the Notes will generally be paid to you. We anticipatePFL anticipates that any late fees paid will be insignificant relative to the total expected amount of the remaining payments on the Note. In such case, any late fees paid to you should be taxable as ordinary income at the time such fees are paid or accrued in accordance with your regular method of accounting for U.S. federal income tax purposes.
Nonpayment of Borrower Loans Corresponding to Note — AutomaticNote-Automatic Extension
In the event that we doPFL does not make scheduled payments on a Note as a result of nonpayment by a borrower on the loanBorrower Loan corresponding to the Note, you must continue to accrue and include OID on a Note in taxable income until the initial maturity date or, in the case of an automatic extension, the final maturity date, except as described below. Solely for purposes of the OID rules, the Note may be treated as retired and reissued on the scheduled payment date for an amount equal to the Note’sNote's adjusted issue price on that date. As a result of such reissuance, the amount and accrual of OID on the Note may change. At the time of the deemed reissuance, due to nonpayment by the borrower, wePFL may not be able to conclude that it is significantly more likely than not that the Note will be paid in accordance with one payment schedule and/or that the likelihood of future nonpayment, prepayment, or late payment by the borrower on the loan corresponding to such Note will be remote or incidental. Accordingly, the Note may become subject to the contingent payment debt instrument rules (which are discussed in more detail below) even if not subject to these rules at the time of original issue. In addition, in the event that a Note’sNote's maturity date is automatically extended because amounts remain due and payable on the initial maturity date by the borrower on the loan corresponding to the Note, the Note likely will be treated as reissued and become subject to the contingent payment debt instrument rules. If we determinePFL determines that a Note is subject to the contingent payment debt instrument rules as a result of such a reissuance, weit will notify you and provide the projected payment schedule and comparable yield.
If collection on a Note becomes doubtful, you may be able to stop accruing OID on the Note. Under current IRS guidance, it is not clear whether you may stop accruing OID if scheduled payments on a Note are not made. You should consult your own tax advisor regarding the accrual and inclusion of OID in income when collection on a Note becomes doubtful.
Losses as a Result of Worthlessness
In the event that a Note becomes wholly worthless, if you are an individual, and you did not acquire the Note as part of your trade or business, youa U.S. Holder generally should generally be entitled to deduct your loss onthe holder’s adjusted tax basis in the Note as a short-term capital loss in the taxable year the Note becomes wholly worthless. The portion of your lossthe U.S. Holder’s adjusted tax basis attributable to accrued but unpaid OID may be deductible as an ordinary loss, although such treatment is not entirely free from doubt. Under Section 166 of the Code, if you are a corporation, or if you are an individual and you acquired your Notes as part of a trade or business, you should generally be entitled to deduct any loss sustained during the taxable year on account of a Note becoming wholly or partially worthless as an ordinary loss. YouU.S. Holders should consult yourtheir own tax advisoradvisors regarding the character and timing of losses attributable to Notes that become worthless in whole or in part.worthless.
Potential Characterization as Contingent Payment Debt Instruments
To the extent we determinePFL determines that a Note is not subject to the contingent payment debt instrument rules, ourits position is not binding on the IRS or a court of competent jurisdiction and weit cannot predict what the IRS or a court would ultimately decide with respect to the proper U.S. federal income tax treatment of the Note. Accordingly, there exists a risk that the IRS or a court could determine that the Notes are “contingent"contingent payment debt instruments”instruments" because payments on the Notes are linked to performance on the corresponding loan.
To the extent a Note is characterized as a contingent payment debt instrument, or in the future, we concludePFL concludes that a Note is subject to the contingent payment debt instrument rules, the Note would be subject to special rules applicable to contingent payment debt instruments. If these rules were to apply, you would generally be required to accrue interest income under the noncontingent bond method. Under this method, interest would be taken into account whether or not the amount of any payment is fixed or determinable in the taxable year. The amount of interest that would be taken into account would generally be determined by constructing a hypothetical noncontingent bond, which is based on a “comparable yield”"comparable yield" (generally, a hypothetical yield to be applied to determine interest accruals with respect to the Note, and which can be no less than the applicable federal rate) and a “projected"projected payment schedule”schedule" (generally, a series of projected payments, the amount and timing of which would produce a yield to maturity on that Note equal to the comparable yield). Based on the comparable yield and the projected payment schedule, you will generally be required to accrue as OID the sum of the daily portions of interest for each day in the taxable year that you held the Note, adjusted to reflect the difference, if any, between the actual and projected amount of any contingent payments on the Note. The daily portions of interest are determined by allocating to each day in an accrual period the ratable portion of interest that accrues in such accrual period. The amount of interest you may accrue under this method could be higher or lower than the stated interest rate on the Note. In addition, any gain recognized on the sale, exchange or retirement of your Note will generally be treated as ordinary interest income, and any loss will be treated as ordinary loss to the extent of prior OID inclusions, and then as capital loss thereafter.
Short-Term Notes
The following discussion applies to Notes that have a maturity of one year or less from the date of issue (“Short-Term Notes”). There are special rules that address the U.S. federal income taxation of Short-Term Notes that you should be aware of. These rules are not entirely clear in all situations. Accordingly, you are strongly advised to consult your own tax advisor with regard to the U.S. federal income tax consequences of the purchase, ownership and disposition of Short-Term Notes.
In general, the Treasury Regulations provide that, in the case of a debt instrument with a maturity date of one year or less, no payments of interest are considered qualified stated interest. This means that a Short-Term Note is treated as having OID equal to the excess of the total payments on the obligation over its issue price. In general, if you are a cash method taxpayer, you should not be required to recognize interest income until actual or constructive receipt of payment, unless you elect to accrue OID in income on a current basis under either a straight-line or a constant yield method. If you do not elect to currently include accrued OID in income, you will not be allowed to deduct any of the interest paid or accrued on any indebtedness incurred or maintained to purchase or carry the Note (in an amount not exceeding the deferred income), and instead you will be required to defer deductions for such interest until the deferred income is realized upon the maturity of the Note or its earlier disposition in a taxable transaction. Notwithstanding the foregoing, if you elect to include accrued OID in income on a current basis, the limitation on the deductibility of interest will not apply. Upon disposition of a Short-Term Note, you will be required to characterize some or all of the gain realized on a sale, exchange or retirement of the Note as ordinary income. The amount characterized as ordinary income upon such disposition will generally equal an amount of OID that would have accrued under a straight-line basis or, if you so elect, an amount of OID that would have accrued under a constant yield method. If you are an accrual method taxpayer, you will generally be required to accrue OID in income on a current basis on either a straight-line basis or, at your election, under the constant yield method based on daily compounding. It should also be noted that the market discount rules (discussed above) generally do not apply to short-term obligations. In addition, while there are special rules that address the U.S. federal income taxation of notes that have a maturity date of more than one year and that provide for one or more contingent payments, those rules generally do not apply to short-term obligations. Accordingly, the U.S. federal income taxation of short-term obligations that provide for contingent payments is not entirely clear. You should consult your own tax advisor regarding the U.S. federal income tax consequences if Short-Term Notes are considered short-term obligations that provide for contingent payments.
Backup Withholding and Reporting
WePFL will be required to report information to the IRS on certain payments on a Note (including interest and discount) and on proceeds of the sale of a Note if you are not an exempt recipient (such as a corporation). In addition, backup withholding (currently at a 28%24% rate) may apply to payments made to you if (a) you do not furnish or you have failed to provide your correct taxpayer identification number, (b) we havePFL has been instructed by the IRS to backup withhold because of underreporting (generally meaning that the IRS has determined and notified you that you have failed to report any reportable dividend and interest payments required to be shown on a tax return for a taxable year), or (c) in certain circumstances, you have failed to comply with applicable certification requirements or otherwise establish an exemption from backup withholding.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is furnished to the IRS on a timely basis. You should consult your tax advisor regarding the application of information reporting and backup withholding rules in your particular situation, the availability of an exemption, and the procedure for obtaining such an exemption, if applicable. INFORMATION ABOUT PROSPER FUNDING LLC
The following description of our business should be read in conjunction with the section titled "Business" in Item 1, Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
Overview
Prosper Funding LLCPFL owns and operates a peer-to-peer online credit platform,marketplace, which we referthis prospectus refers to as the “platform”,"marketplace," that enables its borrower membersborrowers to borrow money and its lender membersinvestors to purchase Borrower Payment Dependent Notes, or Notes, issued by Prosper Funding LLC,PFL, the proceeds of which facilitate the funding of the loans made to borrower members. Prosper Funding LLCborrowers. PFL is a wholly-owned subsidiary of Prosper Marketplace, Inc. We use the terms “we”, “us” and “our” to refer to Prosper Funding LLC, and we use the term “PMI” to refer to Prosper Marketplace, Inc.PMI.
PMI developed the platformmarketplace and ownsowned the proprietary technology that makes operation of the platformmarketplace possible. We haveOn February 1, 2013, PMI transferred the marketplace to PFL, giving PFL the right to operate the peer-to-peer online credit marketplace to originate and service Borrower Loans and Notes. PMI owns and did not transfer to PFL ownership of the computer hardware that PMI uses to develop, update, maintain and operate the marketplace (including the website), produce and record or register Borrower Loans and Notes, process and record the origination of Borrower Loans, the acquisition thereof by PFL, funds transfers in relation to Borrower Loans and collections on such Borrower Loans, the issuance and transfer of Notes, funds transfers in relation to purchases of and payments on Notes, and which PMI uses to store, backup and manage the information and data used and generated by the marketplace (such as in relation to the preparation of reports). PMI is 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 the marketplace and the provision of related customer support services, (ii) the backup, offsite storage and protection 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 marketplace and the performance by it of all related services, and (iii) maintenance of the integrity, functionality and security of the marketplace from cyber-attacks and similar threats, which agreements PMI is not assigning to PFL such that PFL will not be a party to or third party beneficiary of such agreements. PFL also has entered into a Servicingthe Administration Agreement, with PMI pursuant to which PMI has licensed to us the right to operate the platform, and we have appointed PMIagreed to provide certain administrative services relating to the platform (the “Servicing Agreement”). We havemarketplace. The Administration Agreement between PFL and PMI 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 duties and obligations under the Administration Agreement relating to corporate administration, loan marketplace services, loan and note servicing and marketing, and (ii) PMI's performance of its duties and obligations to WebBank in relation to Borrower 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.
PFL has been organized and will beis operated in a manner that is intended (i) to minimize the likelihood that weit will become subject to a voluntary or involuntary bankruptcy or similar proceeding, and (ii) to minimize the likelihood that weit would be substantively consolidated with PMI in the event of PMI’sPMI's bankruptcy and thus having ourhave its assets subjected to claims of PMI’sPMI's creditors. WePFL and PMI believe wethey have achieved this by imposing through ourPFL's organizational documents and covenants in the indenture certain restrictions on ourPFL's activities and certain formalities designed to reinforce ourPFL's status as a distinct entity from PMI. In particular:addition, in the Administration Agreement PMI has agreed, in its dealings with PFL and with third parties, to observe the "separateness covenants" described below as they relate to PFL.
· | Our permissible activities are limited to issuing and selling the Notes, purchasing the borrower loans, entering into the Servicing Agreement and certain related activities. |
Restrictions that PFL and PMI believe minimize the likelihood that PFL will become subject to a voluntary or involuntary bankruptcy or similar proceeding include the following:
PFL's permissible activities are limited to operating the marketplace, including entering into the related registration agreements with its users; purchasing, owning, financing and pledging the Borrower Loans; issuing and selling the Notes; entering into the Administration Agreement (or, if applicable, one or more similar agreements with another entity or entities providing similar services); entering into agreements with third parties (such as WebBank and a back-up servicer) regarding the purchase and servicing of the Borrower Loans and the Notes and transfers of Notes between users, its own management and operations, and the issuing, paying, sale and administration of the Notes and other obligations; making requisite filings with the SEC and other authorities, and issuing and furnishing prospectuses and other offering materials; and certain related activities. So long as any Note is outstanding, PFL is not permitted to engage in any other business.
So long as any Note is outstanding, PFL is prohibited from incurring any debt; guarantying the obligations of any other person, including PMI and PFL's other affiliates; acquiring any assets except in connection with the permitted activities described above; engaging, directly or indirectly, in any business other than the permitted activities described above; engaging in any dissolution, liquidation, consolidation, merger, asset sale or transfer of ownership interests; or forming, acquiring or holding any subsidiary. So long as any Note is outstanding, PFL is required to have at all times two independent directors whose consent is required for it to take certain extraordinary actions, including filing for bankruptcy. · | Our organizational documents prohibit us from incurring any debt or acquiring any assets except in connection with the permitted activities described above. We are also required to observe certain corporate formalities and refrain from comingling assets with PMI. |
Because PFL's activities are essentially limited to operating the marketplace, dealing with Borrower Loans and issuing Notes, and PFL is prohibited from incurring any debt for borrowed money other than the Notes, or liabilities to third parties other than those arising under the agreements it is permitted to enter into, as described above, it should not be subject to the claims of any creditors unrelated to its permissible activities. With the exception of its limited indemnification and repurchase obligations, the Note holders do not have recourse to PFL for payment of their Notes and must rely on the corresponding Borrower Loans for payment. PFL expects to be adequately capitalized, and that its capitalization, together with the fee income that it earns, will be sufficient to meet all of its monetary obligations to affiliates and the third parties with whom it contracts in order to operate the marketplace and conduct its permitted business activities. Accordingly, PFL does not expect to have creditors holding unsatisfied claims against it who could seek to place it into bankruptcy involuntarily. For the same reason, PFL believes it is unlikely that it would become insolvent. PFL does not believe that its independent directors would approve a voluntary bankruptcy filing, even if such a filing might be advantageous to PMI or PFL's other affiliates, if PFL is not insolvent in its own right, unless another basis for such a filing exists at the time consistent with their fiduciary duties.
Restrictions that PFL and PMI believe minimize the likelihood that PFL 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 include the following ("separateness covenants"):
PFL is required to maintain its own books and records and bank accounts separate from those of PMI or any other person; PFL is required at all times to hold itself out to the public and all other persons as a legal entity separate from PMI and any other person; PFL is required to have a board of directors separate from that of PMI and any other person; PFL is required to file its own tax returns, if any, as may be required under applicable law, to the extent it is (1) not part of a consolidated group filing a consolidated return or returns or (2) not treated as a division for tax purposes of another taxpayer, and it must pay any taxes so required to be paid under applicable law; Except as contemplated by the agreements it enters into in connection with its permissible activities, PFL may not commingle its assets with assets of PMI or any other person and maintain its funds and other assets such that they shall be separately identified and segregated from those of PMI and any other person; PFL is required to conduct its business in its own name so as not to mislead third parties as to the identity of the entity with which such third parties are dealing and to strictly comply with all organizational formalities to maintain its separate existence; PFL is required to maintain separate financial statements and ensure that such financial statements indicate (in the notes thereto or otherwise) the separate existence of PFL and PMI and their respective assets and liabilities and, to the extent the assets and liabilities of PFL are represented on the financial statements of PMI, ensure that such financial statements indicate (in the notes thereto or otherwise) the separate existence of PFL and PMI and their separate assets and liabilities; PFL is required to pay its operating expenses and its own liabilities only out of its own funds and not from the funds of any other person; PFL is required to maintain an arm's length relationship with PMI and its other affiliates and to ensure that all transactions between PFL and its affiliates are on terms and conditions that are not materially more favorable to the affiliate than the terms and conditions that would be expected to have been obtained under similar circumstances from a non-affiliate; PFL is required to pay the salaries of its own employees, if any;
PFL is prohibited from holding out its credit or assets as being available to satisfy the obligations of others; PFL is required to allocate fairly and reasonably any overhead for shared office space and pay for its share of such overhead; PFL is required, so as not to mislead third parties as to the identity of the entity with which such third parties are dealing, to maintain and utilize separate stationery, invoices and checks; Except as contemplated by the agreements it enters into in connection with its permissible activities, PFL is prohibited from pledging its assets for the benefit of any other person; PFL is required to correct any known misunderstanding regarding its separate identity; PFL is required to maintain adequate capital in light of its contemplated business purpose, transactions and liabilities; PFL is required to ensure that it does not enter into any agreement to be named, directly or indirectly, as a direct or contingent beneficiary or loss payee on any insurance policy covering the property of any other person; PFL is required to ensure that it will not conceal from creditors any of its assets or participate in concealing the assets of any other person or entity; PFL's board of directors is required to meet at least annually or act pursuant to written consent and keep minutes of such meetings and actions, and PFL is required to observe all other Delaware limited liability company formalities; PFL is prohibited from acquiring any securities of PMI (other than the purchase or other acquisition of certain borrower payment dependent notes issued by PMI and the related Borrower Loans); and PFL's directors, officers, agents and other representatives are required to act at all times with respect to PFL consistently and in furtherance of the foregoing and in PFL's best interests. · | We are required to have at all times two independent directors whose consent is required for us to take certain extraordinary actions, including filing forIn addition, as described below under "Information About Prosper Marketplace, Inc.-Relationship with Prosper Funding LLC," PMI has adopted resolutions limiting its own activities and interactions with PFL in order further to minimize the likelihood that PFL would be substantively consolidated with PMI in the event of PMI's bankruptcy. |
Substantive consolidation is a judicially developed equitable doctrine that permits a bankruptcy court, in appropriate circumstances, to disregard the legal separateness of a debtor and a related entity, which may or may not itself be a debtor in bankruptcy, and merge their respective assets and liabilities for bankruptcy purposes. Substantive consolidation typically results in the pooling of all assets and liabilities of the entities to be consolidated, the satisfaction of liabilities from the resulting common fund of assets, and the elimination of all duplicate and inter-entity claims. While the formulation for the standard to apply in determining whether two or more entities should be substantively consolidated in bankruptcy has varied somewhat as among the different courts that have considered such cases, the three most commonly cited tests are as follows:
The platform providesproponent seeking substantive consolidation must establish either (1) the entities pre-petition disregarded their separateness so significantly that their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (2) post-petition that the assets and liabilities of the entities are so entangled that separating them is prohibitive and hurts all creditors. The court must determine (1) whether all creditors dealt with the entities as a numbersingle economic unit and did not rely on their separate identity in extending credit or (2) whether the affairs of benefitsthe two entities are so entangled that consolidation will benefit all creditors. The proponent of consolidation must make a prima facie case demonstrating that (1) there is substantial identity between the entities to be consolidated and (2) consolidation is necessary to avoid some harm or to realize some benefit. Once the proponent for consolidation has made this showing, the burden shifts to an objecting creditor to show that (1) it has relied on the separate credit of one of the entities to be consolidated and (2) it will be prejudiced by substantive consolidation.
Adherence to the separateness covenants by both PFL and PMI should negate any argument that the respective assets of PFL and PMI are impermissibly entangled or impossible to separate. It should be neither difficult nor costly to ascertain the respective assets and liabilities of PFL and PMI.
Similarly, creditors of PMI should not be able to demonstrate that they dealt with PMI and PFL as a single economic unit, and creditors of PFL are not relying on PMI for either the payment of PFL's Notes or the performance of PFL's obligations under the agreements PFL enters into in connection with its permissible activities (other than PMI's performance, for PFL's benefit, of PMI's obligations under the Administration Agreement, and PMI's own indemnification obligations referred to below). Upon commencement of PFL's offering of the Notes, (1) the website through which PMI previously operated the marketplace was modified to clearly indicate that borrowers and investors are dealing with PFL and not PMI, (2) all new borrower members. Weregistration agreements and investor registration agreements are entered into with PFL and not PMI and clearly indicate that PFL is the party with whom borrower and investors are transacting, and (3) all agreements with third parties (such as WebBank and a back-up servicer) have been modified such that the rights and obligations of PMI under such agreements, formerly applicable to the period when PMI operated the marketplace, have been assigned to and assumed by PFL (other than certain indemnification obligations in favor of third parties that will be retained by PMI, and certain other miscellaneous provisions which should not expose PMI to financial liability).
Accordingly, all of PFL's creditors should clearly understand that they are looking to PFL for the payment and performance of PFL's obligations to them, and that PMI is not liable to them for PFL's obligations. PFL and PMI believe the key featurespurchasers of Notes will clearly be relying on PFL being a legal entity separate and distinct from PMI in making their investment decisions and would be materially prejudiced if PFL were substantively consolidated with PMI. Once PFL commences its offering of the Prosper experience areNotes, PMI will no longer be obligated to third parties under the following: · | better interest rates than those available from traditional banks; |
· | 24-hour online availability to initiate a loan listing; |
· | convenient, electronic payment processing; and |
· | amortizing, fixed rate loans, which represent a more responsible way for consumers to borrow than revolving credit facilities. |
Business Strengths
We believePMI who would be successful in arguing that the following business strengths differentiate usthey relied on PFL's assets and creditworthiness in extending credit to PMI. Finally, all relevant legal formalities required to support PFL's legal existence as a Delaware limited liability company separate and distinct from competitorsPMI will be strictly observed. Certain hardware and are key to our success:
Scalable Operating Infrastructure: The platform allows us to economically originate and service borrower loans and Notes. This platform is both flexible and highly scalable;
Proprietary Risk Management Capabilities: PMI is the only company that has developed a proprietary risk model based on P2P specific performance data. This model allows us to accurately gauge the riskiness of applicants and allows lender members to earn attractive risk adjusted returns;
Management Team: PMI has a management team with experience in broad set of areas that are essentialagreements relevant to the operationdevelopment, maintenance and use of the marketplace, including in relation to the origination, funding and servicing of Borrower Loans, and the issuance, funding and payment of the Notes, were not transferred or assigned to PFL by PMI as described above under "Information About Prosper Funding LLC- Overview." Although such retention of hardware and agreements should not bear on a P2P business. These areas include but are not limitedbankruptcy court's analysis of the legal separateness of PMI and PFL (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 PFL or a back-up servicer to risk management, fraud detection,retrieve data and information in the possession of PMI and to operate the marketplace or elements thereof relevant to loan servicing operations, technology development, data management, financial controls, securities regulation, compliance, customer management and website development;
Open access: We allow individuals with a wide range of credit characteristics to apply for loans; and
Transparency and data availability: By making all transactions on the platform visible and available electronically for analysis, we allow our customers to better understand our marketplace and make better decisions about their activity.Note servicing.
Corporate History
PMIPFL was incorporated in the State of Delaware in March 2005, and we were formed in the State of Delaware inon February 17, 2012. OurIts principal executive offices are located at 111 Sutter221 Main Street, 22nd3rd Floor, San Francisco, California 94104. Our94105. Its telephone number at that location is (415) 593-5400. OurIts website address is www.prosper.com.The information contained on our website, or ourits website is not incorporated by reference into this prospectus.
Marketing
Our marketing efforts are designed to attract individuals and institutions to our website, to enroll them as members and to have them understand and utilize our services for borrowing or investing in Notes on the platform. We believe there are significant opportunities to increase the number of members who use the platform through additional marketing initiatives. We employ a combination of paid and unpaid sources to market the platform. We also invest in public relations to build our brand and visibility. We are constantly seeking new methods to reach more potential members.
We attract members in a variety of ways, including advertising, search engine results and word-of-mouth referrals. In addition, PMI and the platform has been featured in a variety of media outlets, including television and print media.
We continuously measure website visitor-to-member conversion. We test graphics and layout alternatives in order to improve website conversion. We also seek to customize the website to our members’ needs whenever possible. We carefully analyze visitor website usage to understand and overcome barriers to conversion.
From time to time, we 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 or a borrower, 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, we could conduct a special promotion to attract customers who come to our site through a marketing partnership we have with another company.
For the nine months ended September 30, 2011 and 2010, PMI spent approximately $1.2 million and $487.3 thousand, respectively, on marketing.
Technology
Our system hardware is located in a hosting facility in San Francisco, California, owned and operated by Rincon 365 Borrower, LLC under an agreement that expires in August 2014. Generally, unless either party delivers a termination notice, the agreement is automatically renewable for three year terms. The facility provides around-the-clock security personnel, video surveillance and biometric access screening and is serviced by onsite electrical generators and fire detection and suppression systems. The facility has multiple interconnects to the Internet, and we use Internap Network Services Corporation as our Internet service provider. We also maintain off-site backups at a secure, Tier 1 data center in Las Vegas, Nevada. We back up all customer data daily and replicate this data offsite via an encrypted connection.
PMI owns all of the hardware deployed in support of the platform. We continuously monitor the performance and availability of the platform. We have a scalable infrastructure that utilizes standard techniques such as load-balancing and redundancies.
PMI has written its own accounting software to process electronic cash movements, record book entries and calculate cash balances in members’ funding accounts. We process electronic deposits and payments by originating ACH transactions. PMI’s 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.
We and PMI have entered into a back-up servicing agreement with a loan servicing company that is willing and able to transition servicing responsibilities in the event that we and/or PMI are no longer able to service the borrower loans. The third party is a financial services company that has extensive experience and knowledge entering into successor loan servicing agreements.
Scalability
The platform 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 platform 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.
Data integrity and security
We transmit all sensitive 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 128-bit enabled encryption certificates provided by VeriSign and Thawte, Inc. Communication of sensitive data with service providers is secured utilizing authenticated VPN, SSL 128-bit encryption and SSH protocols depending on the service providers’ requirements. Storage of sensitive data is encrypted utilizing AES 256-bit and 3DES 168-bit cryptographic ciphers, depending upon our service providers’ requirements and internal storage policies. Access to the data by PMI’s employees is restricted based upon a least-privilege principle such that employees have access only to the information and systems needed to perform their function. In the event of disaster, data is repeatedly stored securely at an offsite data center.
We protect 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 inspection devices. At the host level, the platform utilizes host based intrusion prevention, anti-virus, anti-spyware, and application control systems. Logging and monitoring for network security devices is done in real-time with notifications to the appropriate staff upon any suspicious event or action that requires attention. Logging and monitoring of host systems is done in real-time to a centralized database with web based reporting and additional notification to the appropriate staff for any remediation.
Fraud detection
We consider fraud detection to be of utmost importance to the successful operation of our business. We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. We employ techniques such as knowledge based authentication, or KBA, out-of-band authentication and notification, behavioral analytics and digital fingerprinting to prevent identity fraud. We 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, we use specialized third-party software to augment our identity fraud detection systems. In addition, we have a dedicated team which conducts additional investigations of cases flagged for high fraud risk. See “About the Platform—Borrower Identity and Financial Information Verification” for more information. We also enable our lender members to report suspicious activity to us, which we may then evaluate further.
Engineering
PMI has made substantial investment in software and website development and we expect PMI to continue or increase the level of this investment as part of its strategy to help us continually improve the platform. 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 September 30, 2011, PMI’s technology group consisted of eight developers, one quality assurance manager, four quality assurance contractors, two senior database administrators, one Vice President of Business Solutions, one network engineer, one business solutions manager, one senior business analyst, one business intelligence analyst, two product managers, one Director of Development and the Executive Vice President of Technology and Operations. PMI’s engineering expense totaled $2.1 million and $1.2 million for the nine months ended September 30, 2011 and 2010, respectively.
Competition
The market for peer-to-peer lending is competitive and rapidly evolving. We believe the following are the principal competitive factors in the peer-to-peer lending market:
·fee structure;
·website attractiveness;
·member experience, including borrower loan funding rates and lender returns;
·acceptance as a social network;
·branding; and
Our 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. We also face competition from other peer-to-peer platforms such as LendingClub.
We may also face future competition from new companies entering our market, which may include large, established companies, such as eBay Inc., Google Inc. or Yahoo! Inc. 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 our competitors were to merge or partner with another of our competitors or a new market entrant, the change in competitive landscape could adversely affect our ability to compete effectively.
Intellectual Property
PMI’s intellectual property rights are important to our business. PMI relies on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions to protect its 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, we believe that the following factors help us to maintain a competitive advantage:
·the technological skills of PMI’s software and website development personnel;
·frequent enhancements to the platform; and
·high levels of member satisfaction.
Our competitors may develop products that are similar to our technology. For example, our legal agreements may be copied directly from our website by others. PMI enters into confidentiality and other written agreements with its employees, consultants and service providers, and through these and other written agreements, attempts to control access to and distribution of its software, documentation and other proprietary technology and information. Despite these efforts to protect PMI’s proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute PMI’s intellectual property rights or technology or otherwise develop a product with the same functionality as PMI’s. Policing all unauthorized use of PMI’s intellectual property rights is nearly impossible. Therefore, we cannot be certain that the steps PMI has taken or will take in the future will prevent misappropriations of its technology or intellectual property rights.
PMI has developed its own software, and does not use software licensed by third parties, for processing electronic cash movements, recording book entries and calculating cash balances in lender members’ accounts.
Employees
We do not have any employees. As of September 30, 2011, PMI employed 53 full-time employees. Of these employees:
·20 were in network and engineering;
·10 were in customer services and operations, which includes the employees who conduct our collection activities;
·8 were in legal and finance;
·9 were in marketing and risk;
·4 were in institutional sales; and
·2 were in general and administration.
None of PMI’s employees are represented by labor unions. PMI has not experienced any work stoppages and we believe PMI’s relations with its employees are good.
Facilities
We do not lease or own any real property or equipment. Our and PMI’s headquarters, including PMI’s principal administrative, marketing, technical support and engineering functions,A description of our facilities is locatedprovided in San Francisco, California, where PMI leases workstations and conference rooms under a lease that will expireItem 2, Part I of our Annual Report on JulyForm 10-K for the fiscal year ended December 31, 2013. We believe that our existing facilities are adequate to meet our current needs, and that suitable additional alternative spaces will be available in the future on commercially reasonable terms.2017, which is incorporated by reference into this prospectus.
Legal Proceedings
We are notNeither PFL nor PMI is currently subject to any material legal proceedings. We arePFL is not aware of any litigation matters which have had, or are expected to have, a material adverse effect on us. it.
INFORMATION ABOUT PROSPER MARKETPLACE, INC.
The following description of our business should be read in conjunction with the section titled "Business" in Item 1, Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
PMI's Duties Under the Administration Agreement
PMI is a Delaware corporation whose principal office is located at 221 Main Street, 3rd Floor, San Francisco, CA 94105. PFL has entered into an Administration Agreement with PMI, pursuant to which PFL has engaged PMI to provide certain corporate administration services, marketplace administration services and to service all Borrower Loans and Notes. This prospectus refers to PMI in its separate capacities under the defendantAdministration Agreement as follows: (i) in its capacity as the party providing the corporate administration services, as the "Corporate Administrator," (ii) in its capacity as the party providing the marketplace administration services, as the "Loan Marketplace Administrator" and (iii) in its capacity as the party providing the servicing to all Borrower Loans and Notes, as the "Loan and Note Servicer."
In its capacity as Corporate Administrator, PMI oversees the daily business operations of PFL and provides a number of related administrative services. Among other matters, the Corporate Administrator's duties include:
administering PFL's day-to-day operations, including paying (solely from PFL's funds) Prosper Funding's fees and expenses, giving notices and communications in PFL's behalf as PFL may be required to give from time to time under its various agreements, maintaining PFL's general accounting records and preparing monthly, quarterly and annual financial statements as may be necessary or appropriate, retaining in PFL's behalf an accounting firm to audit PFL's year-end financial statements, preparing and filing PFL's income, franchise or other tax returns, causing to be paid (solely from PFL's funds) any taxes required to be paid by PFL, not knowingly causing PFL to engage in any activity that would cause PFL to be subject to income or franchise tax on a net income basis by any taxing jurisdiction outside of the United States, retaining on PFL's behalf outside counsel, reviewing and analyzing any agreements entered into by PFL and establishing, in consultation with PFL, operating procedures to enable PFL to comply with the terms of such agreements, providing recordkeeping and maintenance to maintain PFL's limited liability company existence, preparing resolutions for consideration by PFL's board of directors in accordance with its limited liability company agreement, preparing and having executed and filed all documents necessary to qualify PFL to do business in any jurisdiction in which such qualification is necessary or appropriate, in conjunction with PFL's counsel, monitoring compliance with licensing requirements and applicable laws, receiving notices on PFL's behalf, notifying PFL of the institution of any action, suit or proceeding against, or regulatory investigation of, PFL, establishing and maintaining all necessary bank accounts of PFL and managing PFL's cash in accordance with the terms and provisions of PFL's material contracts, notifying PFL, to the extent the Corporate Administrator has actual knowledge thereof, of any failure of a party to a material agreement to perform any of its obligations with respect to PFL, and from time to time taking at PFL's expense such actions as PFL may reasonably request, or as the Corporate Administrator deems appropriate. In its capacity as Loan Marketplace Administrator, PMI manages the marketplace and provides a number of related services. Among other matters, the Loan Marketplace Administrator's duties include: managing, maintaining and operating the marketplace, the issuance, sale and payment of the Notes,
PFL's purchase of Borrower Loans, the operation of www.prosper.com, and the payment (solely from PFL's funds) of related fees and expenses.
Among other things, the Loan Marketplace Administrator assists PFL with the issuance and sale of the Notes, the posting and funding of Borrower Loans (including reviewing the eligibility of applicants to participate on the marketplace and performing the applicant verification processes described herein) and manages the posting of listings on the website. The Loan Marketplace Administrator also assigns a Prosper Rating and an interest rate to each listing. See "About the Marketplace" for more information.
In its capacity as Loan and Note Servicer, PMI has agreed to service each Borrower Loan and the corresponding Notes. The Loan and Note Servicer is required at all times to use commercially reasonable efforts to service and collect the Borrower Loans in accordance with industry standards customary for loans of the same general type and character, in each case (i) in accordance with all applicable laws, and (ii) without regard to (A) any relationship that the Loan and Note Servicer or its affiliates may have with the applicable borrower or Note holder, or (B) the Loan and Note Servicer's right to receive compensation for its services. This standard of care applicable to the Loan and Note Servicer is called the "Servicing Standard." Subject to the Servicing Standard, the Loan and Note Servicer has full power and authority to take any actions in connection with the servicing and administration of the Borrower Loans that the Loan and Note Servicer deems to be necessary or desirable. The Loan and Note Servicer may act alone or through agents, but will remain responsible for the proper performance of its duties by any agents it appoints. PFL's ability to collect payments on the Borrower Loans, and therefore the amount of payments received by the holders of Notes, will be dependent upon the Loan and Note Servicer's performance of its duties under the Administration Agreement.
PMI will in no event be responsible to make payments from its own funds on any Notes or other obligations of the Company. See "Summary of Indenture, Form of Notes, PMI Management Rights and Administration Agreement-Administration Agreement" for more information. Relationship with PFL
PFL is a wholly-owned subsidiary of PMI. As PFL's sole member, PMI selects all of PFL's directors, subject to the requirement that PFL have two independent directors as long as any Note is outstanding. Two of PFL's directors - David Kimball and Usama Ashraf - are officers of PMI. All of PFL's officers are also officers of PMI.
PFL is required by the LLC Agreement to indemnify PMI and any employee, representative, agent or affiliate of PMI (collectively, the "Covered Persons"), for any Covered Loss incurred by such Covered Person by reason of any act or omission performed or omitted by such Covered Person in good faith on behalf of PFL and in a classmanner reasonably believed to be within the scope of the authority conferred on such Covered Person, except for any act or omission that constitutes gross negligence or willful misconduct. The term "Covered Loss" includes any loss, damage or claim incurred by (i) PMI solely in its capacity as PFL's sole member (and not in its capacity as Loan and Note Servicer or otherwise pursuant to the Administration Agreement) or (ii) any other Covered Person when acting on behalf of PMI in its capacity as PFL's sole member. Covered Losses do not include any loss, damage or claim for which PMI separately would be required to indemnify PFL under the Administration Agreement or any other contract. PFL is required to make indemnification payments only from funds that are not required to be applied to payments on the Notes and that are not needed to make current payments to third parties.
Moreover, PMI has adopted resolutions to govern its relationship with PFL. According to its resolutions, PMI shall:
Not commingle its assets with assets of PFL, and not utilize the assets of PFL as if they were assets of PMI, but instead maintain its funds and other assets separately identified and segregated from those of PFL; File its own tax returns and pay its own taxes, if any, as may be required under applicable law, except to the extent that applicable law requires PMI to file tax returns that include PFL in the consolidated tax returns of PMI; Produce and maintain separate financial statements and reports and ensure that such financial statements and reports appropriately indicate (in the notes thereto or otherwise) the separate existence of PMI and PFL and their respective assets and liabilities, and to the extent the assets and liabilities of PFL are represented in the consolidated
financial statements of PMI, ensure that such financial statements appropriately indicate (in the notes or otherwise) the separate existence of PMI and PFL and their separate assets and liabilities; Ensure that all agreements, contracts and transactions between PMI and PFL are on terms and conditions that are not materially more favorable to PMI or PFL than the terms and conditions that would be expected to have been obtained under similar circumstances, from a party not affiliated with PMI or PFL (particularly including terms and conditions relating to compensation or consideration payable by one to the other, indemnification, exclusivity, rights of first offer, term and termination); Not enter into any agreement to be named, directly or indirectly, as a direct or contingent beneficiary or loss payee on any insurance policy covering the property of PFL or to cause PFL to be named, directly or indirectly, as a direct or contingent beneficiary or loss payee on any insurance policy covering the property of PFL; and Not sell any of its securities to PFL (other than the transfer of certain direct loans originated through the marketplace prior to the transfer of the same to PFL).
The resolutions also provide that to avoid any confusion by third parties with respect to the separate existence, operation, assets and credit and other obligations and liabilities of PMI and PFL, PMI shall observe the following additional principles: PMI shall, at all times, in its public filings, press releases, websites and otherwise, hold itself out to the public and all other persons and entities as a legal entity separate from PFL and cause PFL to hold itself out to the public and all other persons and entities as a legal entity separate from PMI; PMI shall conduct its business in its own name so as not to mislead third parties as to the identity of the entity with which such third parties are dealing and strictly comply with all organizational formalities and the principles listed in these resolutions to maintain its separate existence; To the extent that PMI acts as an agent for or on behalf of PFL pursuant to any administrative services, servicing or other agreement or arrangement, PMI shall take reasonable steps to ensure that third parties understand that PMI is acting in such capacity for or on behalf of PFL and not for itself or its own account; and PMI shall take prompt and reasonable action lawsuitto correct any known misunderstanding regarding the separateness of its legal identity, assets, credit, obligations and liabilities from those of PFL. PMI Fees
PFL has agreed to compensate PMI with three fees for its various roles and related services under the Administration Agreement.
First, PFL owes PMI, in its capacity as Corporate Administrator, a monthly corporate administration fee for its administrative services in overseeing the daily business operations of PFL (the "PMI Corporate Administration Fee"). This monthly fee is equal to 50% of the compensation and benefits costs of the legal and accounting personnel of PMI; provided that, in the case of the last payment of the PMI Corporate Administration Fee due under the Administration Agreement, the amount due shall be pro-rated by the number of days from the last monthly fee payment date and the date on which the Corporate Administrator stopped providing the corporate administrative services specified in the Administration Agreement.
Second, PFL owes PMI, in PMI's capacity as Loan Marketplace Administrator, a monthly marketplace administration fee for its services in managing the marketplace (the "PMI Loan Marketplace Servicing Fee"). This fee is equal to the product of $112.50 and the number of Borrower Loans funded since the last monthly fee payment date.
Third, PFL owes PMI, in PMI's capacity as Loan and Note Servicer, a monthly fee for its services in servicing the Borrower Loans (such fee, together with the PMI Corporate Administration Fee and the PMI Loan Marketplace Servicing Fee, the "PMI Fees"). This fee is equal to 90% of all servicing fees collected from Note holders by or on behalf of PFL and 100% of all non-sufficient funds fees collected from Note holders by or on behalf of PFL since the last monthly fee payment date.
PMI's Historical Performance
See "About the Marketplace-Historical Performance of Borrower Loans" for information regarding PMI's historical performance.
PMI's Prior Operating Structure
From the launch of the marketplace in February 2006 until October 16, 2008, the operation of the marketplace differed from the structure described in this prospectus, and PMI did not offer borrower payment dependent notes. Instead, the marketplace allowed investors to purchase, and take assignment of, Borrower Loans directly. Borrower Loans resulting from listings posted prior to April 15, 2008 were made by PMI; loans resulting from listings posted on or after April 15, 2008 were made by WebBank and then sold and assigned to PMI. In each case, PMI then sold and assigned such loans to the investors who were winning bidders for the loans. Under this structure, a borrower executed a separate promissory note for each winning bid that was placed on the borrower's listing in the amount of that bid, which note was then sold and assigned by PMI to the investor who made the bid, subject to PMI's right to service the loans. In addition, the Prosper Rating system did not exist during this period. Instead, PMI assigned one of seven letter credit grades to listings based on the borrower's credit score.
In October 2008, due to legal uncertainties relating to the sales of notes offered through this prior marketplace structure, and as a result of discussions with the SEC and various state securities regulators, PMI decided to suspend note sales and restructure the marketplace. Shortly after that, PMI filed a registration statement with the SEC to cover its sale of loan notes under a revised marketplace structure, which is the structure that is still in place today.
From October 16, 2008 until July 13, 2009, PMI did not offer investors the opportunity to purchase notes on the marketplace and PMI did not accept new investor registrations. PMI continued to service all previously-funded Borrower Loans, and investors had the ability to access their accounts, monitor their Borrower Loans and withdraw available funds. During this period, borrowers could still request loans, but those loan requests were forwarded to companies that had a pre-existing relationship with PMI that could make or facilitate a loan to the borrower.
For a brief period between April 28, 2009 and May 8, 2009, PMI's wholly owned subsidiary Prosper Loans Marketplace, Inc. (which has subsequently been dissolved) conducted an intrastate offering under Section 3(a)(11) of the Securities Act to California residents only. PMI originated thirteen loans in connection with this offering, but did not sell any of the related notes. Prior to the sale of these notes, the SEC expressed concerns that the offering might violate provisions of the Securities Act. Upon learning of these concerns, PMI terminated the offering and informed the winning bidders on the thirteen loans that were made that the notes could not be sold to them. PMI's termination of these notes sales was based on its representation and warranty in the investor registration agreement that it had complied in all material respects with applicable law in connection with the offer and sale of all notes.
The SEC declared PMI's registration statement effective on July 10, 2009 and PMI commenced its offering of notes on July 13, 2009. PMI's historical financial results and much of the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflects the structure of the lending marketplace and PMI's operations prior to October 16, 2008.July 13, 2009. For more information, see “Risks Related "Management's Discussion and Analysis of Financial Condition and Results of Operations-Prosper Marketplace, Inc." located elsewhere in this prospectus. Securities Law Compliance
From PMI's commencement of operations in February 2006 through October 16, 2008, it sold approximately $178.0 million of loans to Us,its investors through an operating structure that involved the Platformsale and Our Abilityassignment of promissory notes directly to Serviceinvestors. PMI did not register the Notes—offer and sale of these promissory notes under the Securities Act or under the registration or qualification provisions of any state securities laws. In PMI's view, analyzing whether or not the operation of the marketplace involved an offer or sale of a "security" involved a complicated factual and legal analysis and was uncertain. If the sales of promissory notes offered through the marketplace were viewed as a securities offering, PMI facesmay have failed to comply with the registration and qualification requirements of federal and state law and PMI's investors who held 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. Due to the legal uncertainty regarding the sales of promissory notes offered through the marketplace under PMI's prior operating structure, and as a result of discussions with the SEC and various state securities law administrators, PMI decided to restructure its operations to resolve such uncertainty. PMI began implementation of this decision on October 16, 2008, when it ceased offering investors the opportunity to make loan purchases on the marketplace, ceased accepting new investor registrations and ceased allowing new loan purchase commitments from existing investors. Furthermore, pursuant to this decision, PMI filed a prospectus, and registration statement of which it formed a part, with the SEC, in which PMI described the restructuring of its operations and its new operating structure. PMI resumed transactions with investors starting July 13, 2009. PMI's decision to restructure its operations and cease sales of promissory notes offered through the marketplace effective October 16, 2008 limited this contingent liability, for securitiesunder federal law, violations in respect of PMI Borrower Loans soldso that it only related to our lender membersthe period from inceptionFebruary 2006 until October 16, 2008. This
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 it, under its initial platform structure, offered promissory notes for sale directly to investors prior to November 2008. The consent 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 our 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 June 30, 2018, PMI has entered into consent orders with 34 states and has paid an aggregate of $0.78 million in penalties to those states. As of June 30, 2018, PMI has accrued approximately $0.12 million in connection with the contingent liability may impair its abilityassociated with the states that have not entered into consent orders, in accordance with ASC Topic 450, Contingencies.
The change in the operation of PMI's marketplace, the resulting litigation, as well as PMI's adoption of new accounting pronouncements, have had a significant impact on PMI's financial statements and results of operations for periods following September 13, 2009. For more information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibit 99.1 to perform its obligations under the Servicing Agreement”.Registration Statement of which this prospectus is a part.
GOVERNMENT REGULATION Overview
The consumer loan industry islending and securities industries are highly regulated. We, the Notes and the borrower loans made through the platform,Borrower Loans are subject to extensive and complex rules and regulations, as well asregulations. We also are subject to licensing and examination by various federal, state and local government authorities. These authorities impose obligations and restrictions on our activities and the borrower loansBorrower Loans made and Notes issued through the platform.our marketplace. In particular, these rules limit the fees that may be assessed on the borrower loans,Borrower Loans, require extensive disclosure to, and consents from, applicantsborrowers 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, 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 our novel business model, we believe we 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 our compliance efforts and ability to operate. Regulation and Consumer Protection Laws
State and Federal Laws and Regulations State Licensing Requirements. PMI holds consumer lending licenses or similar authorizations in 16 states. PMI is subject to supervision and examination by the state regulatory authorities that administer the state lending laws. The licensing statutes vary from state to state and variously prescribe or impose recordkeeping requirements; 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 8 of the Utah Code and has its deposits insured by the Federal Deposit Insurance Corporation, or 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 allows FDIC-insured depository institutions, such as WebBank, to “export” the interest rates 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. WebBank is located in Utah, and Utah law does not limit the amount of interest that may be charged on loans of the type offered through the platform. A few jurisdictions have elected to opt out of the federal usury preemption available to state-chartered, FDIC-insured banks. To the extent that a WebBank borrower loan is deemed to be “made” in such a jurisdiction, the loan would be subject to the maximum interest rate limit of such jurisdiction.
Truth-in-Lending Act. The federal Truth-in-Lending Act (TILA), and the regulation issued by the Federal Reserve Board implementing the TILA, Regulation Z, requires disclosure of, among other things, the annual percentage rate, the finance charge, the amount financed, the number of payments, and the amount of the monthly payment on consumer loans. WebBank provides borrowers with a TILA disclosure form when borrower loans are originated and seeks to comply with TILA’s disclosure requirements relating to credit advertising.
Equal Credit Opportunity Act. The federal Equal Credit Opportunity Act (ECOA) and the regulation issued by the Federal Reserve Board implementing the ECOA, Regulation B, prohibit discrimination in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age (with certain limited exceptions), because all or part of the applicant’s income derives from any public assistance program, or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. We and WebBank comply with the ECOA’s nondiscrimination requirements, and the lender registration agreement requires lender members to comply with the ECOA in their bidding practices. We also require individual group leaders who form groups to comply with the ECOA in that they are prohibited from excluding individuals from membership in a group on a prohibited basis.
The ECOA also requires creditors to provide consumers with notice of adverse action taken on credit applications, giving the consumer the principal reasons why adverse action was taken. We and WebBank provides prospective borrowers who attempt but fail to obtain a borrower loan through the platform with an adverse action notice in compliance with the ECOA’s requirements.
Fair Credit Reporting Act. The federal Fair Credit Reporting Act (FCRA), administered by the Federal Trade Commission, 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 credit report on a consumer and that persons who furnish loan payment information to credit bureaus report such information accurately. The FCRA also has disclosure requirements for creditors who take adverse action on credit applications based on information contained in a credit report. Prosper Funding LLC and WebBank have a permissible purpose for obtaining credit reports on borrower members and we report loan payment and delinquency information to the credit bureaus in compliance with the FCRA. Our and WebBank’s adverse action notices contain the disclosures required by the FCRA.
Fair Debt Collection Practices Act. The federal Fair Debt Collection Practices Act (FDCPA) provides guidelines and limitations on the conduct of third 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 party debt collectors, debt collection laws of certain states, including California, impose similar requirements on creditors who collect their own debts. In order to ensure compliance with the FDCPA, we have contracted with professional third party debt collection agencies to engage in debt collection activities. Our agreements with lender members and group leaders prohibit registered lender members and group leaders from attempting to directly collect on the Notes, and we have established procedures to ensure that lender members and group leaders do not attempt to collect on the Notes themselves.
Servicemembers Civil Relief Act. The federal Servicemembers Civil Relief Act (SCRA) allows military members to suspend or postpone certain civil obligations so that military members can devote their full attention to military duties. In accordance with the SCRA, we must 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 borrower loan is called to active military duty, we will reduce the interest rate on the borrower loan to 6% for the duration of the borrower’s active duty. During this period, the holders of the corresponding Notes will not receive the difference between 6% and the interest rate on the Notes. For borrowers to obtain an interest rate reduction on a borrower loan due to military service, we require the borrowers to send us a written request and a copy of the borrower’s mobilization orders. We do not take military service into account in assigning Prosper Ratings to listings.
Other Lending Regulations. 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 collectionus and unfair, deceptive or abusive business practices. These laws and regulations may be enforcedour marketplace is provided in "Business - Government Regulation" in Item 1, Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by state consumer credit regulatory agencies, state attorneys general, the Federal Trade Commission, and private litigants, among others. Given our novel business model and the subjective nature of some of these laws and regulations, particularly laws regulating unfair or deceptive business practices, we may become subject to regulatory scrutiny or legal challenge with respect to our compliance with these requirements.reference into this prospectus.
Electronic Funds Transfer Act. The federal Electronic Funds Transfer Act (EFTA) and the regulation issued by the Federal Reserve Board implementing the EFTA, Regulation E, place guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts, including preauthorized electronic fund transfers from consumers’ accounts to make loan payments. Most transfers of funds in connection with the origination and repayment of Notes and bidding on the platform are done by Automated Clearing House (ACH) electronic transfers of funds subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (NACHA). Transfers of funds on the platform are done in conformity with the EFTA and its regulations, as well as NACHA guidelines.
Electronic Signatures in Global and National Commerce Act. The federal Electronic Signatures in Global and National Commerce Act (ESIGN) and similar state laws authorize the creation of legally binding and enforceable agreements, including electronic loan agreements, utilizing electronic records and electronic signatures. ESIGN imposes special requirements on businesses that want to use electronic records or signatures in consumer transactions, and requires businesses to obtain from consumers electronic consent or confirmation to receive information electronically that a law requires be in writing. When a platform participant registers on the platform, we obtain his or her consent to transact business electronically with Prosper and WebBank and maintain electronic records in compliance with ESIGN 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 affiliates and nonaffiliated third parties. A number of states have enacted privacy and data security laws requiring safeguards on the privacy and security of consumers’ personally identifiable information. Our privacy policy conforms to GLBA requirements, we have policies and procedures intended to maintain platform participants’ personal information securely, and we do not sell or rent such information to third parties for marketing purposes.
OFAC and Bank Secrecy Act. We check customer names against the list of Specially Designated Nationals maintained by the Office of Foreign Assets Control (OFAC). We have also instituted procedures to comply with the anti-money laundering requirements of the USA PATRIOT Act and the Bank Secrecy Act.
State Securities Laws. We are subject to the securities laws of each state in which our registration or qualification to offer and sell the Notes has been approved. Certain of these state laws require us to renew our registration or qualification on an annual basis. In August 2010 and October 2011, PMI was inadvertently late in filing applications to renew its registrations or qualifications in several states. Although all of these renewal applications were approved, PMI agreed to pay the following penalties in connection with the late filings: (i) $300 to the State of Washington; (ii) $25,000 to the State of California; (iii) $5,000 to the State of Connecticut; (iv) $500 to the State of Illinois; and (v) $5,000 to the State of Maine. In addition, the Florida Office of Financial Regulation required PMI to make a rescission offer to any Florida resident who purchased a note from PMI during the period in which PMI inadvertently allowed its registration in Florida to expire. PMI made this rescission offer on February 4, 2011. The offer expired on March 6, 2011, and on March 20, 2011, PMI repurchased $21,900 of Notes from persons who accepted the rescission offer.
Foreign Laws and Regulations
We do not permit non-U.S. residents to register as members on the platform and we do not operate outside the United States. Therefore, we are not subject to foreign laws or regulations.
States Wein Which PFL and PMI Currently Operate In
The platformmarketplace operates online only and is available to borrower membersborrowers in all states except Iowa Maine and North Dakota.West Virginia. We are seeking to registerhave registered or qualify ourqualified the offer and sale of the Notes and PMI Management Rights in each of the 5030 states as well as Washington D.C,D.C., and we will offer the Notes and PMI Management Rights in each jurisdiction where we obtain such qualification or where such registration is declared effective, subject to any applicable state suitability requirements.
MANAGEMENT
MANAGEMENTProsper Funding LLC
The following table sets forth information about ourPFL's executive officers and directors as of the date of this prospectus:
| | | | | | | Name | | Age | | Position(s) | Christian A. LarsenDavid Kimball | | 5148 | | Chief Executive Officer, President and Director | | Usama Ashraf | | 41 | | | Sachin D. Adarkar | | 45 | | Secretary and Director | | | | | | Kirk T. Inglis | | 45 | | Vice President,Chief Financial Officer, Treasurer and Director | | Julie Hwang | | 41 | | Secretary | | Bernard J. Angelo | | 4248 | | Director | | David V. DeAngelis | | | | | Kevin P. Burns | | 3648 | | Director |
Christian A. LarsenDavid Kimball is our President and one of our directors. Mr. Larsen co-founded PMI and has served as itsPFL's Chief Executive Officer and President, andas well as one of its directors,directors. Mr. Kimball has served as PFL's Chief Executive Officer since inception.December 2016 and President since August 2017. He has served as a director of PFL since November 2016. Additionally, Mr. Kimball previously served as PFL's Treasurer from March 2016 to August 2017. Mr. Kimball also currently serves as the Chief Executive Officer and a director of PMI, positions he has held since December 2016 and November 2016, respectively. He also previously served as the Chief Financial Officer of PMI from March 2016 to February 2017 and Treasurer of PFL from March 2016 to June 2017. Prior to joining PMI, he co-founded E-LOAN, Inc.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 1996,various finance roles at USAA, including Senior Vice President of Corporate Finance; Corporate Treasurer; 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.
Usama Ashraf has served as PFL's Chief Financial Officer and Treasurer, as well as one of its directors from 1996 until its acquisition in October 2005, and as its Chairman from March 2001 until October 2005. From 1999 to February 2005,director, since June 2017. Mr. Larsen servedAshraf also currently serves as Chief ExecutiveFinancial Officer of E-LOAN, and from 1996 to 1998 and from January 2004 to June 2004, Mr. Larsen served as President of E-LOAN. From 1992 to 1996, Mr. Larsen was the President of Palo Alto Funding Group,PMI, a mortgage brokerageposition he co-founded in 1992 and E-LOAN’s predecessor company. Prior to attending business school, Mr. Larsenhas held positions at Chevron Corporation and NASA Ames Research Center. Mr. Larsen holds an M.B.A. from Stanford University and a B.S. from San Francisco State University. We believe that Mr. Larsen’s financial and business expertise, including his diversified background of managing and directing public and start-up companies, his experience with financial services companies and lending companies, as well as his general operational and management experience, give him the qualifications and skills to serve as a director. Sachin D. Adarkar is our Secretary and one of our directors. Mr. Adarkar has served as PMI’s General Counsel since August 2009.February 2017. Prior to joining PMI, he wasfrom February 2016 to February 2017, Mr. Ashraf served as Deputy Chief Financial Officer and Treasurer at the law firm of Sonnenschein, NathAnnaly Capital Management, Inc., with responsibility for treasury, tax, management reporting and financial planning & Rosenthal LLP in Palo Alto, CA from 2007 until 2009.analysis. Prior to joining Sonnenschein,his time at Annaly, Mr. AdarkarAshraf worked at USAA, where he served as Vice PresidentCorporate 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. Mr. Ashraf received a B.S. in Economics, with concentrations in Finance and Accounting, from The Wharton School of the University of Pennsylvania.
Julie Hwang has served as PFL’s Secretary since April 2018. Ms. Hwang has also served as PMI’s Secretary and General Counsel since April 2018. Ms. Hwang previously served as PMI’s Deputy General Counsel of GreenPoint Mortgage Funding,from January 2017 to April 2018 and its Assistant General Counsel from August 2015 to January 2017. Before joining PMI in August 2015, Ms. Hwang served as Associate General Counsel at One Kings Lane, Inc., a wholesale mortgage lenderhome décor and luxury furniture retailer based in Novato, CA,New York from 2003 until 2007.May 2014 to August 2015. Prior to joining GreenPoint, Mr. Adarkar spent several years practicing withOne Kings Lane, Ms. Hwang worked as an attorney at the law firms of Gibson DunnOrrick, Herrington & CrutcherSutcliffe LLP for 7 years and Howard Rice Nemerovski Canady FalkWilson Sonsini Goodrich & Rabkin, both in San Francisco, and also served as Vice President and General Counsel of Valley Media, Inc., a music and video distributor. Mr. AdarkarRosati, P.C. for 3 years. Ms. Hwang has a J.D. from UCLA an M.A. from the University of California at Berkeley and a B.A., cum laude, in International Relations with a Concentration on Political Economy from GeorgetownStanford University. We believe that Mr. Adarkar’s financial and compliance expertise, including his experience with financial service companies and lending companies, as well as his general operational and management experience, give him the qualifications and skills to serve as a director.
Kirk T. Inglis is our Vice President and Treasurer and is one of our directors. Mr. Inglis has served as PMI’s Chief Financial Officer since November 2006 and as its Chief Operating Officer since June 2009. Prior to joining PMI in 2006, he worked as a consultant for Wells Fargo Bank, N.A., consulting on the effectiveness of their online marketing program. From 1994 to 2003, Mr. Inglis served in various positions with Providian Financial Corporation. At Providian, Mr. Inglis served as President of First Select Corporation, the largest purchaser of charged-off credit card debt in the United States, from 2000 to 2001. In addition, he served as Chief Financial Officer of GetSmart.com following its acquisition by Providian in 1999. Mr. Inglis also developed the financial planning and control infrastructure for Providian Financial Corporation following the spin-off from its parent company in 1996. Mr. Inglis holds an M.B.A. from Memphis State University and a B.A. from the University of Texas at Austin. We believe that Mr. Inglis’ financial and business expertise, including his experience with the consumer credit industry, as well as his general operational and management experience, give him the qualifications and skills to serve as a director.
Bernard J. Angelohas served on ourPFL's board of directors since March of 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, heMr. Angelo 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. HeMr. Angelo has a B.S. in Finance from Siena College. We believePFL believes that Mr. Angelo’sAngelo'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. DeAngelisKevin P. Burns has served on ourPFL's board of directors since March of 2012.May 2013. Mr. Burns is a co-founder ofDeAngelis joined Global Securitization Services, LLC ("Global Securitization") in March 2002 and has twentyover eighteen years of direct experience in managing special purpose vehicles. Mr. Burns’ broad experience in the sophisticated uses of SPV’s is a resource that benefits the firm’s clients and their advisors as they structure and launch finance programs.financial markets experience. Prior to co-foundingjoining Global Securitization, Mr. Burns spent over four years with LordDeAngelis was a Senior Accountant at Nomura Securities CorporationInternational, a Japanese investment firm, from October 1998 to February 2002 where he becamewas 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 Director and Vice President. He developed his expertise while managing all of the firm’s asset backed commercial paper administration efforts. Mr. Burns is a graduate of the University of Notre Dame with degreesB.S. in Philosophy, Finance and Business Economics. Mr. Burns currently also serves on the board of Chesapeake Finance Holdings LLC, Deutsche Alt-A Securities, Inc., Deutsche Mortgage Securities, Inc., Ford Credit Auto Receivables Two LLC, Volkswagen Auto Lease/Loan Underwriting Funding, LLC, Volkswagen Dealer Finance, LLC, and Volkswagen Public Auto Loan Securitization LLC. We believeAccounting from St. John's University. PFL believes that Mr. Burns’DeAngelis's financial markets experience, in structured finance as well as his general management experience, give him the qualifications and skills to serve as a director. Director AttributesBoard Composition and Election of Directors
OurPFL's board of directors currently consists of four members. PFL's goal is to assemble a board of directors that operates cohesively and works with management in a constructive way. We believePFL believes that ourits directors possess valuable experience and the knowledge necessary to guide ourits business. OurIts 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, our company,PFL, and its key constituents, including borrower members, lender members,borrowers, investors, stockholders and management.
Director Compensation
We doPFL does not compensate any of ourits directors for service on our board.the Board. On May 30, 2013, PFL, PMI, Global Securitization Services, LLC ("GSS"), and PFL's independent directors, David V. DeAngelis and Bernard 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 PFL's independent directors, and (ii) PFL agreed to pay GSS an annual fee of $5 thousand as compensation for providing such independent director services. The GSS Agreement amended and restated, in its entirety, the Services and Indemnity Agreement, dated March 1, 2012, entered into by PFL, PMI, GSS, Bernard J. Angelo and Kevin P. Burns. PFL does not consider the annual fee it pays to GSS to constitute director compensation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | Fees earned or paid in cash | | Stock awards | | Option awards($) | | Non-equity incentive plan compensation | | Nonqualified deferred compensation earnings | | All other compensation | | Total | | David Kimball | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Usama Ashraf | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Bernard J. Angelo | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | David V. DeAngelis | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Ronald Suber (1) | | — | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
(1) Mr. Suber resigned as a Director and the President of PFL, effective July 31, 2017.
Limitations on Officers’Officers' and Directors’Directors' Liability and Indemnification Agreements
Our limited liability company agreementPFL's Fifth Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”"LLC Agreement") provides that, to the fullest extent permitted by applicable law, ourPFL's directors and officers will not be liable to usPFL for, and shall be indemnified by usPFL 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 ourPFL'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’sofficer's or director’sdirector's gross negligence or willful misconduct;provided, provided, howeverhowever, that any such indemnity shall be provided out of and to the extent of ourPFL's assets only. In addition, the LLC Agreement provides that, to the fullest extent permitted by applicable law, wePFL may advance any expenses incurred by an officer or director defending any claim, demand, action, suit or proceeding prior to its final disposition, upon ourPFL'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. WePFL will not pay any such indemnification from any borrower loan collections that are allocable to the payment of NotesNotes.
PFL and PMI have entered into an Amended and Restated Services and Indemnity Agreement (the "GSS Agreement") with Global Securitization Services, LLC ("GSS") and PFL's independent directors, David V. DeAngelis and Bernard J. Angelo, who are employees of GSS and are described as the "GSS Representatives." Under the GSS Agreement, PMI has agreed to indemnify each of the GSS representativesRepresentatives and GSS (collectively, the "Indemnitees") against any loss, damage or claim incurred by himthe Indemnitees as a result of servingthe GSS Representatives' service as an independent directordirectors for us or by reason of any act or omission performed or omitted by himthe GSS Representatives as one of ourPFL's independent directors, except for any loss, damage or claim incurred by reason of the GSS representative’sRepresentative's gross negligence or willful misconduct. WeIf 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 payunreasonably 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 indemnification from borrower loan collectionsIndemnitee in connection with those matters as to which it has been determined that are allocablesuch Indemnitee is not entitled to the payment of Notes.indemnification.
We believePFL believes that these provisions are necessary to attract and retain qualified persons as directors and officers. To the extent these provisions permit usPFL to indemnify ourits officers and directors for liabilities arising under the Securities Act, however, we havePFL has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Prosper Marketplace, Inc.
The following table sets forth information about PMI's executive officers and directors as of the date of this prospectus: | | | | | | | Name | | Age | | Position(s) | | David Kimball | | 48 | | Chief Executive Officer and Director | | Usama Ashraf | | 41 | | Chief Financial Officer | | Julie Hwang | | 41 | | General Counsel and Secretary | | Kunal Kaul | | 41 | | Executive Vice President, Operations | | Nasos Topakas | | 53 | | Chief Technology Officer | | Rajeev V. Date | | 47 | | Director | | Patrick W. Grady | | 35 | | Director | | David R. Golob | | 50 | | Director | | Claire A. Huang | | 55 | | Director | | Nigel W. Morris | | 60 | | Director | | Mason D. Haupt | | 63 | | Director |
David Kimball has served as Chief Executive Officer 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; Corporate Treasurer; 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. Usama Ashraf has served as Chief Financial Officer of PMI since February 2017. He also currently serves as Treasurer and a director of PFL. 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. Julie Hwang has served as PMI’s Secretary and General Counsel since April 2018. Ms. Hwang previously served as PMI’s Deputy General Counsel from January 2017 to April 2018 and Assistant General Counsel from August 2015 to January 2017. Ms. Huang also currently serves as PFL’s Secretary, a position she has held since April 2018. Before joining PMI in August 2015, Ms. Hwang served as Associate General Counsel at One Kings Lane, Inc., a home décor and luxury furniture retailer based in New York from May 2014 to August 2015. Prior to One Kings Lane, Ms. Hwang worked as an attorney at the law firms of Orrick, Herrington & Sutcliffe LLP for 7 years and Wilson Sonsini Goodrich & Rosati, P.C. for 3 years. Ms. Hwang has a J.D. from UCLA and a B.A. in International Relations with a Concentration on Political Economy from Stanford University. 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. Nasos Topakas has served as Chief Technology Officer since April 2017. Prior to joining PMI, from June 2010 to February 2017, Mr. Topakas served as Chief Technology Officer at Art.com, Inc., an online wall art and contemporary decor retailer, where he was head of all technology and product departments, with responsibility for the overall technology vision, strategy, engineering execution, and architectural direction. Prior to his time at Art.com, Inc., Mr. Topakas worked at SendMe, Inc., where he served as Chief Technology Officer from November 2007 to May 2010. As Chief Technology Officer of SendMe, Inc., Mr. Topakas was head of all technology departments, including Engineering, Architecture, Technical Project Office, QA, Technical Ops and Corporate IT. Mr. Topakas participated at the M.B.A. executive program from Golden Gate University and holds a B.S. in Computer Science from San Francisco State University. 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. financial advisory and investment firm. 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 2007 to 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. He began his business career in the financial institutions practice of the consulting firm McKinsey & Company. He 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. Mr. Date qualifies as an "audit committee financial expert" under SEC guidelines. Patrick W. Grady has served as one of PMI’s directors since January 2013. Mr. Grady is a Partner of Sequoia Capital, a private investment partnership, which he joined in 2007. Prior to joining Sequoia Capital, Mr. Grady was an Associate at Summit Partners from 2004 to 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. Mr. Grady qualifies as an "audit committee financial expert" under SEC guidelines. David R. Golob has served as one of PMI’s directors since May 2014. Mr. Golob has been a Partner at Francisco Partners, a private equity firm, since 2001. Mr. Golob currently serves on the board of directors of Barracuda Networks. Mr. Golob holds an A.B. degree in chemistry from Harvard College and an M.B.A. degree from the Stanford Graduate School of Business. PMI believes that Mr. Golob’s financial and business expertise, including his experience in the private equity and venture capital industries analyzing, investing in and serving on the boards of directors of technology companies, give him the qualifications and skills to serve as a director. Claire A. Huang has served as a director of PMI since December 2017. Ms. Huang has also been a member of the board of directors of: PODS, a leading storage and moving company, since 2018; and Mirador Financial, Inc., a small business lending platform, since June 2017. Ms. Huang previously served on the board of directors of Scotttrade, a leading online brokerage firm, from 2015 to 2017. Ms. Huang has extensive experience in marketing and brand management. She served as the first global Chief Marketing Officer of JP Morgan Chase from 2012 to 2014, where she worked with the marketing teams across all Chase retail and JP Morgan wholesale businesses to build brands and businesses with a customer focus. Before joining JP Morgan Chase, from 2008 to 2012, Ms. Huang held global head of marketing positions at Bank of America Merrill Lynch, where she was responsible for a number of high profile marketing initiatives, including the integration of Merrill Lynch and Bank of America and the launch of Merrill Edge, the company’s brokerage platform. Prior to her time at Bank of America Merrill Lynch, Ms. Huang held marketing leadership positions at Fidelity Investments, American Express Company, Wise Foods, and The Haagen-Dazs Company. Ms. Huang received a B.A. in Economics from De La Salle University in Manilla, Philippines. PMI believes that Ms. Huang’s marketing and brand management expertise, as well as her experience at several leading financial institutions, give her the qualifications and skills to serve as a director. Nigel W. Morris has served as one of PMI’s directors since June 2014. Mr. Morris previously served as one of PMI’s directors from December 2009 to January 2013. Mr. Morris is the managing partner of QED Investors, an investment firm he founded in 2008. Mr. Morris was also the co-founder of Capital One Financial Services, where he served as President and Chief Operating Officer and Vice Chairman from 1994 until his retirement in 2004. Mr. Morris has a BSC in Psychology from East London University in London, England and an MBA with distinction from London Business School, where he is also a fellow. PMI believes that Mr. Morris’s financial and business expertise, including his diversified background of managing and directing public companies, his experience with financial services firms, as well as his general operational and management experience, give him the qualifications and skills to serve as a director. Mason D. Haupt has served as one of PMI’s directors since February 2018. He has more than 30 years of experience working in the investment management business. Mr. Haupt served as a Portfolio Manager at Soros Fund Management, LLC, a private investment management firm, from August 2008 to March 2014, and prior to that, from 2006 to 2008, he engaged in private investment activities. From June 2003 to March 2006, Mr. Haupt was a Partner at Five Mile Capital Partners, LLC, an alternative investment and asset management company. During his time at Five Mile Capital Partners, Mr. Haupt served as Portfolio Manager of the company’s Housatonic Fund, a relative value, fixed income hedge fund. Mr. Haupt served as Chairman and Chief Executive Officer of MortgageSight, an electronic platform for mortgage securities, from 2000 to 2001. Previously, he spent more than a decade with Salomon Brothers, culminating in the position of Managing Director of the Mortgage Securities Department. Mr. Haupt received an M.B.A. from Harvard Business School and a B.S. in Economics, with concentrations in Management and Accounting, from The Wharton School of the University of Pennsylvania. PMI believes that Mr. Haupt’s financial and business expertise, including his extensive investment management experience, give him the qualifications and skills to serve as a director.
89Board Composition and Election of Directors
TableA description of ContentsPMI's Board Composition and Election of Directors is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
Director Compensation
A description of PMI's Director Compensation is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus. Limitations on Officers' and Directors' Liability and Indemnification Agreements
A description of the limitations on PMI's Officers' and Directors' liability and Indemnification Agreements is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATIONPROSPER FUNDING LLC
We doPFL does not compensate any of ourits officers.
TPROSPER MARKETPLACE, INC.
A description of PMI's Executive Compensation is provided in Item 11, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
TRANSACTIONS WITH RELATED PARTIES
Prosper FundingPROSPER FUNDING LLC and
Agreements with PMI have
On January 22, 2013, PMI entered into a Servicingan Administration Agreement with PFL (the "PMI Administration Agreement"), pursuant to which PMI has licensed to Prosper Funding LLC the right to operate the platform and Prosper Funding LLC has appointed PMIagreed to provide certain administrative services relating to the marketplace. Under the PMI Administration Agreement, PFL is required to pay PMI (i) an amount equal to one-twelfth (1/12) of the specified annual Corporate Administration Fees (as defined in the PMI Administration Agreement) of $1.2 million, (ii) a fee for each Borrower Loan originated through the marketplace, (iii) 90% of all servicing fees collected by or on behalf of PFL, and (iv) all nonsufficient funds fees collected by or on behalf of PFL. As of the most recent amendment of the PMI Administration Agreement PFL is required to pay PMI (a) an Corporate Administration Fees of $500 thousand per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 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.
Also on January 22, 2013, PFL and PMI entered into an Asset Transfer Agreement (the "Asset Transfer Agreement") pursuant to which PMI, effective February 1, 2013 (i) transferred the marketplace and substantially all of PMI's assets and rights related to the operation of the marketplace to PFL, and (ii) made a capital contribution to PFL in excess of $3 million. Under the Asset Transfer Agreement, PMI also transferred substantially all of its remaining assets to PFL, including (i) all outstanding Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee ("the Indenture"), (ii) all Borrower Loans corresponding to such Notes, (iii) all lender/borrower/group leader registration agreements related to such Notes and 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 marketplace, including in relation to the origination, funding and servicing of
Borrower Loans, and the issuance, funding and payment of the Notes, were not transferred or assigned to PFL by PMI. In addition, PMI did not transfer to PFL (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 transferred Notes, and indemnify PFL for any other losses that arise out of any lender/borrower/group leader registration agreement related to the transferred Notes or 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 transferred Notes or 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. |
Holders of the transferred Notes are third party beneficiaries under the Asset Transfer Agreement and the Administration Agreement.
Under Section 4.1 of the Indenture, PMI could transfer substantially all of its assets to any person without the consent of the holders of the existing Notes, provided that the transferee expressly assumed all of PMI's obligations under the Indenture and the existing Notes. In that case, the transferee would succeed to and be substituted for PMI, and PMI would be discharged from all of its obligations and covenants, under the Indenture and the existing Notes. Accordingly, on January 22, 2013, PMI, PFL and Wells Fargo Bank, as trustee entered an 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 service all borrower loansmake certain other amendments to the Indenture as permitted therein. Following the Note Assumption, PFL became the obligor with respect to the transferred Notes and Notes. Prosper Funding LLCthe Amended and Restated Indenture, and PMI have alsono longer has any obligations with respect thereto.
Agreements with PAH
On November 22, 2013, PFL and PAH entered into a related back-up servicing agreement with a third-partyLoan Sale Agreement, pursuant to which PFL agreed to sell to PAH certain unsecured consumer loans. The terms of the Loan Sale Agreement were made on terms no less favorable to PFL than PFL has obtained from unaffiliated third parties.
Participation on our Marketplace
PFL's executive officers and directors have opened investor accounts and have made deposits to and withdrawals from their accounts, and funded portions of borrowers' loan administrator. See “Summary of Indenture, Formrequests from time to time in the past via purchases of Notes and Servicing Agreement— Servicing Agreement” forBorrower Loans, and may do so in the future. The Notes and Borrower Loans were obtained on terms and conditions that were not more information.favorable than those obtained by other investors.
We have not engaged in any other transactions with our directors, executive officers, holders of more than 5% of our voting securities, or immediate family members or other affiliates of our directors, executive officers or 5% stockholders.
Prosper Funding LLC
The following table sets forth information about PFL's executive officers and directors as of the date of this prospectus:
| | | | | | | Name | | Age | | Position(s) | | David Kimball | | 48 | | Chief Executive Officer, President and Director | | Usama Ashraf | | 41 | | Chief Financial Officer, Treasurer and Director | | Julie Hwang | | 41 | | Secretary | | Bernard J. Angelo | | 48 | | Director | | David V. DeAngelis | | 48 | | Director |
David Kimball is PFL's Chief Executive Officer and President, as well as one of its directors. Mr. Kimball has served as PFL's Chief Executive Officer since December 2016 and President since August 2017. He has served as a director of PFL since November 2016. Additionally, Mr. Kimball previously served as PFL's Treasurer from March 2016 to August 2017. Mr. Kimball also currently serves as the Chief Executive Officer and a director of PMI, positions he has held since December 2016 and November 2016, respectively. He also previously served as the Chief Financial Officer of PMI from March 2016 to February 2017 and Treasurer of PFL from March 2016 to June 2017. 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; Corporate Treasurer; 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.
Usama Ashraf has served as PFL's Chief Financial Officer and Treasurer, as well as one of its director, since June 2017. Mr. Ashraf also currently serves as Chief Financial Officer of PMI, a position he has held 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., with responsibility for treasury, tax, management reporting and financial planning & analysis. Prior to his time at Annaly, Mr. Ashraf worked at 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. Mr. Ashraf received a B.S. in Economics, with concentrations in Finance and Accounting, from The Wharton School of the University of Pennsylvania. Julie Hwang has served as PFL’s Secretary since April 2018. Ms. Hwang has also served as PMI’s Secretary and General Counsel since April 2018. Ms. Hwang previously served as PMI’s Deputy General Counsel from January 2017 to April 2018 and its Assistant General Counsel from August 2015 to January 2017. Before joining PMI in August 2015, Ms. Hwang served as Associate General Counsel at One Kings Lane, Inc., a home décor and luxury furniture retailer based in New York from May 2014 to August 2015. Prior to One Kings Lane, Ms. Hwang worked as an attorney at the law firms of Orrick, Herrington & Sutcliffe LLP for 7 years and Wilson Sonsini Goodrich & Rosati, P.C. for 3 years. Ms. Hwang has a J.D. from UCLA and a B.A. in International Relations with a Concentration on Political Economy from Stanford University.
Bernard J. Angelo has served on PFL'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, Mr. Angelo 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. Mr. Angelo has a B.S. in Finance from Siena College. PFL 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 PFL'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 B.S. in Accounting from St. John's University. PFL 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
PFL's board of directors currently consists of four members. PFL's goal is to assemble a board of directors that operates cohesively and works with management in a constructive way. PFL 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, PFL, and its key constituents, including borrowers, investors, stockholders and management. Director Compensation
PFL does not compensate its directors for service on the Board. On May 30, 2013, PFL, PMI, Global Securitization Services, LLC ("GSS"), and PFL's independent directors, David V. DeAngelis and Bernard 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 PFL's independent directors, and (ii) PFL agreed to pay GSS an annual fee of $5 thousand as compensation for providing such independent director services. The GSS Agreement amended and restated, in its entirety, the Services and Indemnity Agreement, dated March 1, 2012, entered into by PFL, PMI, GSS, Bernard J. Angelo and Kevin P. Burns. PFL does not consider the annual fee it pays to GSS to constitute director compensation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | Fees earned or paid in cash | | Stock awards | | Option awards($) | | Non-equity incentive plan compensation | | Nonqualified deferred compensation earnings | | All other compensation | | Total | | David Kimball | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Usama Ashraf | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Bernard J. Angelo | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | David V. DeAngelis | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | Ronald Suber (1) | | — | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
(1) Mr. Suber resigned as a Director and the President of PFL, effective July 31, 2017.
Limitations on Officers' and Directors' Liability and Indemnification Agreements
Under our organizational documents, we are requiredPFL's Fifth Amended and Restated Limited Liability Company Agreement (the "LLC Agreement") provides that, to indemnify ourthe fullest extent permitted by applicable law, PFL's directors and officers will not be liable to PFL for, and shall be indemnified by PFL against, any loss, damage or claim incurred by reason of any act or omission performed or omitted by such officer or director in certain instances. For more information, see “Management—Limitationsgood faith on Officers’PFL's behalf and Directors’ Liabilityin 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 Indemnification Agreements”.to the extent of PFL's assets only. In addition, the LLC Agreement provides that, to the fullest extent permitted by applicable law, PFL may advance any expenses incurred by an officer or director defending any claim, demand, action, suit or proceeding prior to its final disposition, upon PFL'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. PFL will not pay any such indemnification from any borrower loan collections that are allocable to the payment of Notes.
PFL and PMI have entered into an Amended and Restated Services and Indemnity Agreement (the "GSS Agreement") with Global Securitization Services, LLC ("GSS") and PFL's independent directors, David V. DeAngelis and Bernard J. 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 PFL'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. PRINCIPAL SECURITYHOLDERSPFL believes that these provisions are necessary to attract and retain qualified persons as directors and officers. To the extent these provisions permit PFL to indemnify its officers and directors for liabilities arising under the Securities Act, however, PFL has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. PMI isProsper Marketplace, Inc.
The following table sets forth information about PMI's executive officers and directors as of the sole memberdate of and holds a 100% equity interest in, Prosper Funding LLC.this prospectus: | | | | | | | Name | | Age | | Position(s) | | David Kimball | | 48 | | Chief Executive Officer and Director | | Usama Ashraf | | 41 | | Chief Financial Officer | | Julie Hwang | | 41 | | General Counsel and Secretary | | Kunal Kaul | | 41 | | Executive Vice President, Operations | | Nasos Topakas | | 53 | | Chief Technology Officer | | Rajeev V. Date | | 47 | | Director | | Patrick W. Grady | | 35 | | Director | | David R. Golob | | 50 | | Director | | Claire A. Huang | | 55 | | Director | | Nigel W. Morris | | 60 | | Director | | Mason D. Haupt | | 63 | | Director |
TableDavid Kimball has served as Chief Executive Officer and a director of ContentsPMI 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; Corporate Treasurer; 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSUsama Ashraf has served as Chief Financial Officer of PMI since February 2017. He also currently serves as Treasurer and a director of PFL. 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.Julie Hwang has served as PMI’s Secretary and General Counsel since April 2018. Ms. Hwang previously served as PMI’s Deputy General Counsel from January 2017 to April 2018 and Assistant General Counsel from August 2015 to January 2017. Ms. Huang also currently serves as PFL’s Secretary, a position she has held since April 2018. Before joining PMI in August 2015, Ms. Hwang served as Associate General Counsel at One Kings Lane, Inc., a home décor and luxury furniture retailer based in New York from May 2014 to August 2015. Prior to One Kings Lane, Ms. Hwang worked as an attorney at the law firms of Orrick, Herrington & Sutcliffe LLP for 7 years and Wilson Sonsini Goodrich & Rosati, P.C. for 3 years. Ms. Hwang has a J.D. from UCLA and a B.A. in International Relations with a Concentration on Political Economy from Stanford University. 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. Nasos Topakas has served as Chief Technology Officer since April 2017. Prior to joining PMI, from June 2010 to February 2017, Mr. Topakas served as Chief Technology Officer at Art.com, Inc., an online wall art and contemporary decor retailer, where he was head of all technology and product departments, with responsibility for the overall technology vision, strategy, engineering execution, and architectural direction. Prior to his time at Art.com, Inc., Mr. Topakas worked at SendMe, Inc., where he served as Chief Technology Officer from November 2007 to May 2010. As Chief Technology Officer of SendMe, Inc., Mr. Topakas was head of all technology departments, including Engineering, Architecture, Technical Project Office, QA, Technical Ops and Corporate IT. Mr. Topakas participated at the M.B.A. executive program from Golden Gate University and holds a B.S. in Computer Science from San Francisco State University. 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. financial advisory and investment firm. 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 2007 to 2009, Mr. Date served as a Managing Director in the Financial Institutions Group at Deutsche Bank Securities, where his
This management’s discussionkey responsibility was acting as a coverage officer for specialty finance firms and analysisregional 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. He began his business career in the financial institutions practice of the consulting firm McKinsey & Company. He 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, condition or MD&A, contains forward-looking statementsbusiness and regulatory expertise give him the qualifications and skills to serve as a director. Mr. Date qualifies as an "audit committee financial expert" under SEC guidelines.
Patrick W. Grady has served as one of PMI’s directors since January 2013. Mr. Grady is a Partner of Sequoia Capital, a private investment partnership, which he joined in 2007. Prior to joining Sequoia Capital, Mr. Grady was an Associate at Summit Partners from 2004 to 2007. Mr. Grady holds a B.S. in Economics and Finance from Boston College. PMI believes that involve risksMr. Grady’s experience as a venture capital investor with a focus on financial technologies and uncertainties. Please see “Forward-Looking Statements”his overall management experience, give him the qualifications and skills to serve as a director. Mr. Grady qualifies as an "audit committee financial expert" under SEC guidelines. David R. Golob has served as one of PMI’s directors since May 2014. Mr. Golob has been a Partner at Francisco Partners, a private equity firm, since 2001. Mr. Golob currently serves on the board of directors of Barracuda Networks. Mr. Golob holds an A.B. degree in chemistry from Harvard College and an M.B.A. degree from the Stanford Graduate School of Business. PMI believes that Mr. Golob’s financial and business expertise, including his experience in the private equity and venture capital industries analyzing, investing in and serving on the boards of directors of technology companies, give him the qualifications and skills to serve as a director. Claire A. Huang has served as a director of PMI since December 2017. Ms. Huang has also been a member of the board of directors of: PODS, a leading storage and moving company, since 2018; and Mirador Financial, Inc., a small business lending platform, since June 2017. Ms. Huang previously served on the board of directors of Scotttrade, a leading online brokerage firm, from 2015 to 2017. Ms. Huang has extensive experience in marketing and brand management. She served as the first global Chief Marketing Officer of JP Morgan Chase from 2012 to 2014, where she worked with the marketing teams across all Chase retail and JP Morgan wholesale businesses to build brands and businesses with a customer focus. Before joining JP Morgan Chase, from 2008 to 2012, Ms. Huang held global head of marketing positions at Bank of America Merrill Lynch, where she was responsible for a discussionnumber of high profile marketing initiatives, including the uncertainties, risksintegration of Merrill Lynch and assumptions associated with these statements. This discussion should be read in conjunction with our balance sheet and related notes theretoBank of America and the other disclosures contained elsewherelaunch of Merrill Edge, the company’s brokerage platform. Prior to her time at Bank of America Merrill Lynch, Ms. Huang held marketing leadership positions at Fidelity Investments, American Express Company, Wise Foods, and The Haagen-Dazs Company. Ms. Huang received a B.A. in this report.
Overview
Prosper Funding LLC (“the Company”, “we”, “us”, “our”) plans to operate a peer-to-peer online credit platform, which we refer to as the “platform,”Economics from De La Salle University in Manilla, Philippines. PMI believes that will enable its borrower members to borrow moneyMs. Huang’s marketing and its lender members to purchase Borrower Payment Dependent Notes (“Notes”), issued by Prosper Funding LLC, the proceeds of which facilitate the funding of borrower loans made to borrower members.
We were formed in the state of Delaware in February 2012 as a limited liability company with our sole equity member being Prosper Marketplace, Inc., which we refer to as “PMI.” We were formed by PMI to hold the borrower loans and issue the Notes. Although we will be consolidated with PMI for accounting and tax purposes, we have been organized and will be operated in a manner that is intended to minimize the likelihood that we would be substantively consolidated with PMI in a bankruptcy proceeding. Our intention is to minimize the likelihood that our assets would be subject to claims by PMI’s creditors if PMI were to file for bankruptcy,brand management expertise, as well as her experience at several leading financial institutions, give her the qualifications and skills to minimize the likelihood that we will become subject to bankruptcy proceedings directly. We achieve this by placing certain restrictions on our activities and implementing certain formal procedures designed to expressly reinforce our statusserve as a distinct corporate entitydirector.
Nigel W. Morris has served as one of PMI’s directors since June 2014. Mr. Morris previously served as one of PMI’s directors from PMI. December 2009 to January 2013. Mr. Morris is the managing partner of QED Investors, an investment firm he founded in 2008. Mr. Morris was also the co-founder of Capital One Financial Services, where he served as President and Chief Operating Officer and Vice Chairman from 1994 until his retirement in 2004. Mr. Morris has a BSC in Psychology from East London University in London, England and an MBA with distinction from London Business School, where he is also a fellow. PMI believes that Mr. Morris’s financial and business expertise, including his diversified background of managing and directing public companies, his experience with financial services firms, as well as his general operational and management experience, give him the qualifications and skills to serve as a director.PMI developedMason D. Haupt has served as one of PMI’s directors since February 2018. He has more than 30 years of experience working in the platforminvestment management business. Mr. Haupt served as a Portfolio Manager at Soros Fund Management, LLC, a private investment management firm, from August 2008 to March 2014, and owns the proprietary technologyprior to that, makes operationfrom 2006 to 2008, he engaged in private investment activities. From June 2003 to March 2006, Mr. Haupt was a Partner at Five Mile Capital Partners, LLC, an alternative investment and asset management company. During his time at Five Mile Capital Partners, Mr. Haupt served as Portfolio Manager of the company’s Housatonic Fund, a relative value, fixed income hedge fund. Mr. Haupt served as Chairman and Chief Executive Officer of MortgageSight, an electronic platform possible. We havefor mortgage securities, from 2000 to 2001. Previously, he spent more than a decade with Salomon Brothers, culminating in the position of Managing Director of the Mortgage Securities Department. Mr. Haupt received an M.B.A. from Harvard Business School and a B.S. in Economics, with concentrations in Management and Accounting, from The Wharton School of the University of Pennsylvania. PMI believes that Mr. Haupt’s financial and business expertise, including his extensive investment management experience, give him the qualifications and skills to serve as a director.
Board Composition and Election of Directors
A description of PMI's Board Composition and Election of Directors is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
Director Compensation
A description of PMI's Director Compensation is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus. Limitations on Officers' and Directors' Liability and Indemnification Agreements
A description of the limitations on PMI's Officers' and Directors' liability and Indemnification Agreements is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
EXECUTIVE COMPENSATION
PROSPER FUNDING LLC
PFL does not compensate any of its officers.
PROSPER MARKETPLACE, INC.
A description of PMI's Executive Compensation is provided in Item 11, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
TRANSACTIONS WITH RELATED PARTIES
PROSPER FUNDING LLC
Agreements with PMI
On January 22, 2013, PMI entered into a Servicingan Administration Agreement with PMIPFL (the "PMI Administration Agreement"), pursuant to which PMI has licensed to us the right to operate the platform, and we have appointed PMIagreed to provide certain administrative services relating to the platform (the “Servicing Agreement”). We have not commenced operations asmarketplace. Under the PMI Administration Agreement, PFL is required to pay PMI (i) an amount equal to one-twelfth (1/12) of the date of the financial statements included in this prospectus. Currently, PMI operates the platform facilitating the origination of loans by WebBank through the platform. Subsequently, these loans are purchased and held by PMI which issues and sells Notes corresponding to those loans. We refer to borrower loans originated and notes issued and sold through the platform prior to the commencement of our offering as “PMI Borrower Loans” and “PMI Notes”, respectively. Upon commencement of our operations we will facilitate the lending and borrowing activities and act as an agent to the lender members by maintaining the online marketplace licensed to us by PMI and holding those borrower loans and Notes.
Although we are newly formed and have no operating history, the platform will be operated in a manner that is substantially identical to how it was operated by PMI, and the Notes will be substantially identical to PMI Notes resulting in minimal impact to borrower and lender members. Shortly after this registration statement is declared effective, the Company will operate the platform pursuant to the license obtained from PMI and begin issuing the notes and suspend the offering of PMI Notes.
Trends and Uncertainties
PMI has originated peer-to-peer loans since 2005 and, upon commencement of operations, new origination activity will be assumed by the Company and the performance of loans may not be consistent with the historical trends demonstrated by PMI Borrower Loans. Through the first nine months of 2011, PMI increased its origination volume consistently month over month in terms of both units and total dollar amounts. Upon commencement of operations, we hope to continue a similar trend of growth as our borrower and lender bases continue to broaden. In addition, over time we expect our lender base to grow as we gain more exposure to potential lenders, and establish our Notes as a viable investment alternative.
Our operating plan calls for a strategy of increasing transaction volume to increase revenue. The Company will generate revenue from origination fees from borrower members and servicing fees from lender members, which are described more fullyspecified annual Corporate Administration Fees (as defined in the Notes to the Financial Statement included elsewhere in this registration statement.
The peer-to-peer lending industry remainsPMI Administration Agreement) of $1.2 million, (ii) a very innovative and unique industry, and the application of federal and state laws in areas such as securities and consumer finance to our business is still evolving. We will continue to monitor this evolution actively in order to identify and respond quickly to any legislative or regulatory developments that may impact our platform.
Results of Operations
Prosper Funding LLC is newly formed and has not commenced operations and has no operating history. We have not begun originating borrower loans and issuing related lender notes. We have not collected any servicing fees or any origination fees.
Future Critical Accounting Policies and Estimates
We have not commenced operations as of the date of the balance sheet included herein. In preparing our financial statements, we are required to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and the related disclosures. We have based these estimates on the historical experience of PMI and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our significant accounting policies which may include revenue recognition and fair value measurementfee for borrower loans and Notes are more fully described in the notes to our balance sheet included elsewhere in this prospectus.
Critical accounting policies are those policies that we believe present the most complex or subjective measurements and have the most potential to impact our financial position and operating results. While all decisions regarding accounting policies are important, we believe that the following policies could be considered critical.
Revenue Recognition
Upon commencement of operations, the Company’s revenue recognition policy will be 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, the price of the services is fixed and determinable and collectability is reasonably assured.
Origination Fees
Origination fees are a percentage of the amount borrowed varying by Prosper Rating and recognized when the borrower loan is funded to the borrower.
Loan servicing fees
Loan servicing revenue includes monthly loan servicing fees and non-sufficient funds (“NSF”) fees on 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. Our servicing fee is currently equal to 1.0% of the outstanding principal balance of the corresponding borrower loan. The Company charges a NSF fee to borrowers for the first failed payment of each billing period. NSF fees are charged to the borrower and collected and recognized immediately.
Interest income (expense) on Borrower Loans receivable and Payment Dependent Notes
We recognize interest income on our borrower loan receivable using the accrual method based on the stated interest rate to the extent that we believe it to be collectable. We record interest expense on the corresponding Note based on the contractual interest rate.
Fair Value Measurement
Under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820 Fair Value Measurements and Disclosures, we determine the fair values of our 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. We use 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, we may determine fair value using assumptions that we believe a market participant would use in pricing the asset or liability.
After we commence operations, our financial instruments will consist principally of cash and cash equivalents, restricted cash, borrower loans, accounts payable 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.
Upon commencement of our operations, we will begin to purchase borrower loansLoan originated through the platformmarketplace, (iii) 90% of all servicing fees collected by or on behalf of PFL, and issue(iv) all nonsufficient funds fees collected by or on behalf of PFL. As of the most recent amendment of the PMI Administration Agreement PFL is required to pay PMI (a) an Corporate Administration Fees of $500 thousand per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 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.
Also on January 22, 2013, PFL and PMI entered into an Asset Transfer Agreement (the "Asset Transfer Agreement") pursuant to which PMI, effective February 1, 2013 (i) transferred the marketplace and substantially all of PMI's assets and rights related to the operation of the marketplace to PFL, and (ii) made a capital contribution to PFL in excess of $3 million. Under the Asset Transfer Agreement, PMI also transferred substantially all of its remaining assets to PFL, including (i) all outstanding Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee ("the Indenture"), (ii) all Borrower Loans corresponding to such Notes, (iii) all lender/borrower/group leader registration agreements related to such Notes and we will account for borrower loansBorrower Loans, and Notes on a fair value basis.(iv) all documents and information related to the foregoing. Certain hardware and agreements relevant to the development, maintenance and use of the marketplace, including in relation to the origination, funding and servicing of
Borrower Loans, and Notes
Once we begin operations, we will purchase borrower loans from WebBankthe issuance, funding and except as may otherwise be determined in connection with the servicingpayment of any borrower loan, will hold the borrower loans until maturity. We will also issue Notes to the lender members to fund our purchase of borrower loans. Our obligation to repay the Notes, is conditioned upon the repayment of the associated borrower loan ownedwere not transferred or assigned to PFL by us. We will carry the borrower loansPMI. In addition, PMI did not transfer to PFL (i) agreements with PMI's directors, officers or employees and Notes on our balance sheet as assets and liabilities, respectively.
In conjunctionPMI's financial, legal or other advisors or consultants, (ii) certain agreements with our commencement of operations, we will adopt the provisions of ASC Topic 825, Financial Instruments. ASC Topic 825 permits companiesvendors 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. We apply the provisions of ASC Topic 825 to the borrower loans and Notes issued on an instrument by instrument basis. The aggregate fair value of the borrower loans and Notes will be reported as separate line itemsprovide PMI with goods or services in the assetsordinary course of business (including software licensed pursuant to any "shrink wrap" or "click wrap" license), and liabilities sections of the balance sheet using the methods described in ASC Topic 820.
We will determine the fair value of the borrower loans(iii) certain cash 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 will not be available for the borrower loans and Notes we will hold or for similar assets and liabilities, we believe that the borrower loans and Notes will 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. short-term investments.
In a hypothetical transactionthe Asset Transfer Agreement, PMI agreed, among other things, to:
| | | (i) | fund any repurchase obligation with respect to the transferred Notes, and indemnify PFL for any other losses that arise out of any lender/borrower/group leader registration agreement related to the transferred Notes or 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 transferred Notes or 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. |
Holders of the measurement date, we believe that differences intransferred Notes are third party beneficiaries under the principal marketplace in which the borrower loans are originatedAsset Transfer Agreement and the principal marketplace in which we might offer those borrower loans may result in differences between the originated amountAdministration Agreement.
Under Section 4.1 of the borrower loans and their fair value asIndenture, PMI could transfer substantially all of its assets to any person without the consent 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 origination or acquisition of borrower loans are recognized as incurred. We will estimate the fair valueholders of the borrower loansexisting Notes, provided that the transferee expressly assumed all of PMI's obligations under the Indenture and Notes using a discounted cash flow methodology based upon a set of valuation assumptions we believe market participantsthe existing Notes. In that case, the transferee would use for similar assetssucceed to and liabilities. The main assumptions used to value the borrower loans and Notes include default rates, discount rates applied to each credit tranche/grade, prepayment rates, and recovery rates based upon historical databe substituted for PMI, Loans and PMI Notes originated in prior periods.
Overall, ifits obligations and covenants, under the fair value of the borrower loans decrease or increase due to any changes in our assumptions, there will also be a corresponding decrease or increase in the fair value of the linked Notes. As a result, the effect on the Company’s earnings of adverse changes in key assumptions is mitigated. However, the impact of these changes in fair value could have a material adverse impact on lender members’ investments in the Notes.
As we receive scheduled payments of principal and interest on the borrower loans we will in turn make principal and interest payments on the Notes. These principal payments will reduce the carrying value of the borrower loans and Notes. If we do not receive payments on the borrower loans, we are not obligated to and will not make payments on the Notes. The fair value of a Note is approximately equal to the fair value of the corresponding borrower loan, less a 1.0% service fee charged to Note holders. If the fair value of the borrower loan decreases due to our expectation regarding both the likelihood of default of the loanIndenture and the amount of loss in the event of default, there will also be a corresponding decrease in the fair value of the Note (an unrealized gain related to the Note and an unrealized loss related to the borrower loan).
Repurchase Obligation
The Company is obligated to indemnify lender members and/or repurchase certain Notes sold to lender members in the event of our violation of applicable federal, state, or local lending laws, or verifiable identify theft. The Company will estimate a provision for the repurchase obligation when operations commence and the borrower loans are funded. Repurchased Notes and borrower loans associated with violations of federal, state, or local lending laws, or verifiable identity thefts will be written off at the time of repurchase.
Liquidity and Capital Resources
We will incur certain fees relating to registering or qualifying our offering and sale of Notes with federal and state securities regulators, as well as additional fees relating to obtaining any other licenses and permits that are necessary to the operation of our business. In addition, upon commencement of the offering, we will incur certain ongoing expenses related to collateral requirements under our agreements with WebBankexisting Notes. Accordingly, on January 22, 2013, PMI, PFL and Wells Fargo Bank. PriorBank, as trustee entered an 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 commencement ofIndenture as permitted therein. Following the offering, PMI will make one or more additional capital contributions to us in an aggregate amount that is sufficient to ensure that we are able to meet these expenses. We expectNote Assumption, PFL became the aggregate amount of these additional capital contributions to be between $1 million and $3 million. Upon commencement of the offering, we will also incur certain recurring expenses relating to fees under our Servicing Agreement with PMI, as well as our agreements with WebBank, Wells Fargo and Foliofn Investments, Inc. We will also incur additional expense to the extent we are required to repurchase any Notes or indemnify Note holdersobligor with respect to the transferred Notes and the Amended and Restated Indenture, and PMI no longer has any such Notes. We will pay these recurring expenses from origination and servicing fees that we earn in connectionobligations with the funding and servicing of borrower loans. We expect that the combination of additional capital contributions and ongoing fee revenue will be sufficient for us to meet ongoing cash requirements and sustain our operations.
Off-Balance Sheet Arrangementsrespect thereto.
As of March 1, 2012, we have not engaged in any off-balance sheet financing activities. Agreements with PAH
Tabular DisclosureOn November 22, 2013, PFL and PAH entered into a Loan Sale Agreement, pursuant to which PFL agreed to sell to PAH certain unsecured consumer loans. The terms of Contractual Obligationsthe Loan Sale Agreement were made on terms no less favorable to PFL than PFL has obtained from unaffiliated third parties.
As of March 1, 2012, we do not have any material amounts due under contractual obligation.Participation on our Marketplace
PFL's executive officers and directors have opened investor accounts and have made deposits to and withdrawals from their accounts, and funded portions of borrowers' loan requests from time to time in the past via purchases of Notes and Borrower Loans, and may do so in the future. The Notes and Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other investors.
The validity of the Notes offered by this prospectus has been passed upon by Covington & Burling LLP, Washington, DC.
The balance sheet of Prosper Funding LLC as of March 1, 2012 included in this Registration Statement has been audited by OUM & Co. LLP, independent registered public accounting firm, as set forth in their report herein. The balance sheet is included in reliance upon such report given on the authority of such firm as an expert in accounting and auditing.
Index to Financial Statement
Report of Independent Registered Public Accounting Firm | F-2 | Balance Sheet as of March 1, 2012 | F-3 | Notes to Balance Sheet | F-4 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Member of
Prosper Funding LLC We have audited the accompanying balance sheet of Prosper Funding LLC as of March 1, 2012. This financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes 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 balance sheet, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Prosper Funding LLC at March 1, 2012, in conformity with accounting principles generally accepted in the United States of America.
The Company was incorporated in the state of Delaware on February 17, 2012following table sets forth information about PFL's executive officers and has not commenced operations. /s/ OUM & Co. LLP
San Francisco, California
March 5, 2012
| | | Balance Sheet | | | March 1, 2012 | | | | | | | | ASSETS | | | | | Cash | | $ | 100 | | | Total assets | | $ | 100 | | | | | | | | | LIABILITIES AND MEMBERS' EQUITY | | | | | | | | | | | | Members' Equity | | | 100 | | | | | | | | | Total liabilities and member’s equity | | $ | 100 | | | | | | | | | See Notes to the Balance Sheet | |
1. | Organization and Business |
Prosper Funding LLC (“the Company”, “we”, “us”, “our”) was formed in the state of Delaware in February 2012 as a limited liability company with the sole equity member being Prosper Marketplace, Inc., which we refer to as “PMI.” Prosper Funding LLC was formed by PMI to hold the borrower loans and issue the Notes, so that, in the event of PMI’s bankruptcy, the interests of Note holders in the borrower loans should be shielded from claims by PMI’s creditors. Protecting our assets against PMI’s bankruptcy requires our being organized and operated in a manner (i) that minimizes the likelihood that we will become subject to bankruptcy proceedings, and (ii) that minimizes the likelihood that we would be substantively consolidated with PMI, and thus having our assets subject to claims by PMI’s creditors, if PMI files for bankruptcy. We achieve this by placing certain restrictions on our activities and implementing certain formal procedures designed to expressly reinforce our status as a distinct corporate entity from PMI.
We will operate a peer-to-peer online credit platform, which we refer to as the “platform,” that will enable the Company’s borrower members to borrow money and lender members to purchase Borrower Payment Dependent Notes (“Notes”), issued by us, the proceeds of which facilitate the funding of the loans (“Borrower Loans”) made to borrower members. PMI developed the platform and owns the proprietary technology that makes operation of the platform possible. We have entered into a Servicing Agreement pursuant to which PMI has licensed to us the right to operate the platform (the “Servicing Agreement”).
We have not commenced operationsdirectors as of the date of this balance sheet. Currently PMI operates the platform facilitating the origination of loans by WebBank through the platform and issues and sells notes corresponding to those loans which are held by PMI. Upon commencement of our operations we will facilitate the lending and borrowing activities and act as an agent to the lender members by maintaining the online marketplace licensed to us by PMI.prospectus:
2. | | Summary of Significant Accounting Policies | | | | | Name | | Age | | Position(s) | | David Kimball | | 48 | | Chief Executive Officer, President and Director | | Usama Ashraf | | 41 | | Chief Financial Officer, Treasurer and Director | | Julie Hwang | | 41 | | Secretary | | Bernard J. Angelo | | 48 | | Director | | David V. DeAngelis | | 48 | | Director |
BasisDavid Kimball is PFL's Chief Executive Officer and President, as well as one of Presentationits directors. Mr. Kimball has served as PFL's Chief Executive Officer since December 2016 and President since August 2017. He has served as a director of PFL since November 2016. Additionally, Mr. Kimball previously served as PFL's Treasurer from March 2016 to August 2017. Mr. Kimball also currently serves as the Chief Executive Officer and a director of PMI, positions he has held since December 2016 and November 2016, respectively. He also previously served as the Chief Financial Officer of PMI from March 2016 to February 2017 and Treasurer of PFL from March 2016 to June 2017. 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; Corporate Treasurer; 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.
Usama Ashraf has served as PFL's Chief Financial Officer and Treasurer, as well as one of its director, since June 2017. Mr. Ashraf also currently serves as Chief Financial Officer of PMI, a position he has held 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., with responsibility for treasury, tax, management reporting and financial planning & analysis. Prior to his time at Annaly, Mr. Ashraf worked at 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. Mr. Ashraf received a B.S. in Economics, with concentrations in Finance and Accounting, from The Wharton School of the University of Pennsylvania. Julie Hwang has served as PFL’s Secretary since April 2018. Ms. Hwang has also served as PMI’s Secretary and General Counsel since April 2018. Ms. Hwang previously served as PMI’s Deputy General Counsel from January 2017 to April 2018 and its Assistant General Counsel from August 2015 to January 2017. Before joining PMI in August 2015, Ms. Hwang served as Associate General Counsel at One Kings Lane, Inc., a home décor and luxury furniture retailer based in New York from May 2014 to August 2015. Prior to One Kings Lane, Ms. Hwang worked as an attorney at the law firms of Orrick, Herrington & Sutcliffe LLP for 7 years and Wilson Sonsini Goodrich & Rosati, P.C. for 3 years. Ms. Hwang has a J.D. from UCLA and a B.A. in International Relations with a Concentration on Political Economy from Stanford University.
Bernard J. Angelo has served on PFL'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, Mr. Angelo 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. Mr. Angelo has a B.S. in Finance from Siena College. PFL 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 PFL'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 B.S. in Accounting from St. John's University. PFL 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
PFL's board of directors currently consists of four members. PFL's goal is to assemble a board of directors that operates cohesively and works with management in a constructive way. PFL 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, PFL, and its key constituents, including borrowers, investors, stockholders and management. Director Compensation
PFL does not compensate its directors for service on the Board. On May 30, 2013, PFL, PMI, Global Securitization Services, LLC ("GSS"), and PFL's independent directors, David V. DeAngelis and Bernard 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 PFL's independent directors, and (ii) PFL agreed to pay GSS an annual fee of $5 thousand as compensation for providing such independent director services. The GSS Agreement amended and restated, in its entirety, the Services and Indemnity Agreement, dated March 1, 2012, entered into by PFL, PMI, GSS, Bernard J. Angelo and Kevin P. Burns. PFL does not consider the annual fee it pays to GSS to constitute director compensation.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Name | | Fees earned or paid in cash | | Stock awards | | Option awards($) | | Non-equity incentive plan compensation | | Nonqualified deferred compensation earnings | | All other compensation | | Total | | David Kimball | | $ | — |
| | $ | — |
| | $ | — |
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| | Usama Ashraf | | — |
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| | Bernard J. Angelo | | — |
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| | David V. DeAngelis | | — |
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| | Ronald Suber (1) | | — | | — |
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(1) Mr. Suber resigned as a Director and the President of PFL, effective July 31, 2017.
Limitations on Officers' and Directors' Liability and Indemnification Agreements
PFL's Fifth Amended and Restated Limited Liability Company Agreement (the "LLC Agreement") provides that, to the fullest extent permitted by applicable law, PFL's directors and officers will not be liable to PFL for, and shall be indemnified by PFL 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 PFL'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 PFL's assets only. In addition, the LLC Agreement provides that, to the fullest extent permitted by applicable law, PFL may advance any expenses incurred by an officer or director defending any claim, demand, action, suit or proceeding prior to its final disposition, upon PFL'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. PFL will not pay any such indemnification from any borrower loan collections that are allocable to the payment of Notes.
PFL and PMI have entered into an Amended and Restated Services and Indemnity Agreement (the "GSS Agreement") with Global Securitization Services, LLC ("GSS") and PFL's independent directors, David V. DeAngelis and Bernard J. 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 PFL'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.
PFL believes that these provisions are necessary to attract and retain qualified persons as directors and officers. To the extent these provisions permit PFL to indemnify its officers and directors for liabilities arising under the Securities Act, however, PFL has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Prosper Marketplace, Inc.
The preparation of the balance sheet was in conformity with accounting principles generally accepted in the United States.
The Company has not commenced operationsfollowing table sets forth information about PMI's executive officers and directors as of the date of the financials. Accordingly, statements of operations and statements of cash flows have not been presented.
Federal Income Taxesthis prospectus:
As a limited liability company, Prosper Funding LLC will be classified as a disregarded pass through entity for U.S. federal income tax purposes. Accordingly, the Company will not incur federal or state tax liabilities; rather, interest, gains and losses are “passed through” to the consolidated United States and applicable state information tax returns of PMI.
Cash
The Company maintains cash deposits in a bank which may exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the bank and believes that any potential credit loss is minimal.
3. | | Servicing Agreement | | | | | Name | | Age | | Position(s) | | David Kimball | | 48 | | Chief Executive Officer and Director | | Usama Ashraf | | 41 | | Chief Financial Officer | | Julie Hwang | | 41 | | General Counsel and Secretary | | Kunal Kaul | | 41 | | Executive Vice President, Operations | | Nasos Topakas | | 53 | | Chief Technology Officer | | Rajeev V. Date | | 47 | | Director | | Patrick W. Grady | | 35 | | Director | | David R. Golob | | 50 | | Director | | Claire A. Huang | | 55 | | Director | | Nigel W. Morris | | 60 | | Director | | Mason D. Haupt | | 63 | | Director |
Under
David Kimball has served as Chief Executive Officer 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 termsreal 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; Corporate Treasurer; 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. Usama Ashraf has served as Chief Financial Officer of PMI since February 2017. He also currently serves as Treasurer and a director of PFL. 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 Servicing Agreement,University of Pennsylvania. Julie Hwang has served as PMI’s Secretary and General Counsel since April 2018. Ms. Hwang previously served as PMI’s Deputy General Counsel from January 2017 to April 2018 and Assistant General Counsel from August 2015 to January 2017. Ms. Huang also currently serves as PFL’s Secretary, a position she has held since April 2018. Before joining PMI in August 2015, Ms. Hwang served as Associate General Counsel at One Kings Lane, Inc., a home décor and luxury furniture retailer based in New York from May 2014 to August 2015. Prior to One Kings Lane, Ms. Hwang worked as an attorney at the law firms of Orrick, Herrington & Sutcliffe LLP for 7 years and Wilson Sonsini Goodrich & Rosati, P.C. for 3 years. Ms. Hwang has licenseda J.D. from UCLA and a B.A. in International Relations with a Concentration on Political Economy from Stanford University. Kunal Kaul has served as PMI’s Executive Vice President, Operations since late December 2015. Prior to usjoining 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 rightIndian Institute of Management (Bangalore, India) and a degree in Chemical Engineering from Bombay University. Nasos Topakas has served as Chief Technology Officer since April 2017. Prior to operatejoining PMI, from June 2010 to February 2017, Mr. Topakas served as Chief Technology Officer at Art.com, Inc., an online wall art and contemporary decor retailer, where he was head of all technology and product departments, with responsibility for the peer-to-peeroverall technology vision, strategy, engineering execution, and architectural direction. Prior to his time at Art.com, Inc., Mr. Topakas worked at SendMe, Inc., where he served as Chief Technology Officer from November 2007 to May 2010. As Chief Technology Officer of SendMe, Inc., Mr. Topakas was head of all technology departments, including Engineering, Architecture, Technical Project Office, QA, Technical Ops and Corporate IT. Mr. Topakas participated at the M.B.A. executive program from Golden Gate University and holds a B.S. in Computer Science from San Francisco State University. 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. financial advisory and investment firm. 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 2007 to 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. He began his business career in the financial institutions practice of the consulting firm McKinsey & Company. He 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. Mr. Date qualifies as an "audit committee financial expert" under SEC guidelines. Patrick W. Grady has served as one of PMI’s directors since January 2013. Mr. Grady is a Partner of Sequoia Capital, a private investment partnership, which he joined in 2007. Prior to joining Sequoia Capital, Mr. Grady was an Associate at Summit Partners from 2004 to 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. Mr. Grady qualifies as an "audit committee financial expert" under SEC guidelines. David R. Golob has served as one of PMI’s directors since May 2014. Mr. Golob has been a Partner at Francisco Partners, a private equity firm, since 2001. Mr. Golob currently serves on the board of directors of Barracuda Networks. Mr. Golob holds an A.B. degree in chemistry from Harvard College and an M.B.A. degree from the Stanford Graduate School of Business. PMI believes that Mr. Golob’s financial and business expertise, including his experience in the private equity and venture capital industries analyzing, investing in and serving on the boards of directors of technology companies, give him the qualifications and skills to serve as a director. Claire A. Huang has served as a director of PMI since December 2017. Ms. Huang has also been a member of the board of directors of: PODS, a leading storage and moving company, since 2018; and Mirador Financial, Inc., a small business lending platform, since June 2017. Ms. Huang previously served on the board of directors of Scotttrade, a leading online credit platformbrokerage firm, from 2015 to originate2017. Ms. Huang has extensive experience in marketing and service borrower loansbrand management. She served as the first global Chief Marketing Officer of JP Morgan Chase from 2012 to 2014, where she worked with the marketing teams across all Chase retail and Notes. UnderJP Morgan wholesale businesses to build brands and businesses with a customer focus. Before joining JP Morgan Chase, from 2008 to 2012, Ms. Huang held global head of marketing positions at Bank of America Merrill Lynch, where she was responsible for a number of high profile marketing initiatives, including the Servicing Agreement, PMI has agreed to service each borrower loanintegration of Merrill Lynch and Bank of America and the corresponding Notes. Each Note holderlaunch of Merrill Edge, the company’s brokerage platform. Prior to her time at Bank of America Merrill Lynch, Ms. Huang held marketing leadership positions at Fidelity Investments, American Express Company, Wise Foods, and The Haagen-Dazs Company. Ms. Huang received a B.A. in Economics from De La Salle University in Manilla, Philippines. PMI believes that Ms. Huang’s marketing and brand management expertise, as well as her experience at several leading financial institutions, give her the qualifications and skills to serve as a director. Nigel W. Morris has served as one of PMI’s directors since June 2014. Mr. Morris previously served as one of PMI’s directors from December 2009 to January 2013. Mr. Morris is requiredthe managing partner of QED Investors, an investment firm he founded in 2008. Mr. Morris was also the co-founder of Capital One Financial Services, where he served as President and Chief Operating Officer and Vice Chairman from 1994 until his retirement in 2004. Mr. Morris has a BSC in Psychology from East London University in London, England and an MBA with distinction from London Business School, where he is also a fellow. PMI believes that Mr. Morris’s financial and business expertise, including his diversified background of managing and directing public companies, his experience with financial services firms, as well as his general operational and management experience, give him the qualifications and skills to pay Prosper Fundingserve as a director. Mason D. Haupt has served as one of PMI’s directors since February 2018. He has more than 30 years of experience working in the investment management business. Mr. Haupt served as a Portfolio Manager at Soros Fund Management, LLC, a servicing fee together with any non-sufficient funds fees for failed borrower payments. In addition, we receive paymentsprivate investment management firm, from WebBank equalAugust 2008 to the origination fees charged by WebBank on borrower loansMarch 2014, and prior to that, from 2006 to 2008, he engaged in private investment activities. From June 2003 to March 2006, Mr. Haupt was a Partner at Five Mile Capital Partners, LLC, an alternative investment and asset management company. During his time at Five Mile Capital Partners, Mr. Haupt served as compensation for our loan origination activities on WebBank’s behalf. The Company has agreed to compensate PMI for its services under the Servicing Agreement by paying PMI all such servicing, non-sufficient fund fees and origination fees that we receive, net of a specified portion that we will retain for our own account. The Company will also be obligated to reimburse PMI for any expenses that PMI advances on behalfPortfolio Manager of the Company.company’s Housatonic Fund, a relative value, fixed income hedge fund. Mr. Haupt served as Chairman and Chief Executive Officer of MortgageSight, an electronic platform for mortgage securities, from 2000 to 2001. Previously, he spent more than a decade with Salomon Brothers, culminating in the position of Managing Director of the Mortgage Securities Department. Mr. Haupt received an M.B.A. from Harvard Business School and a B.S. in Economics, with concentrations in Management and Accounting, from The Wharton School of the University of Pennsylvania. PMI believes that Mr. Haupt’s financial and business expertise, including his extensive investment management experience, give him the qualifications and skills to serve as a director.
The Company will repurchase a seriesBoard Composition and Election of Notes or indemnify lender membersDirectors
A description of PMI's Board Composition and Election of Directors is provided in certain circumstances where a material default occurs due to verifiable identity theft or in the event of a breachItem 10, Part III of our other representations and warranties underAnnual Report on Form 10-K for the lender registration agreement pertaining to the Note.fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
We are a wholly-owned subsidiaryA description of PMI. PMI developed our platform and owns the proprietary technology that makes operationPMI's Director Compensation is provided in Item 10, Part III of our platform possible. As noted above, we haveAnnual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
Limitations on Officers' and Directors' Liability and Indemnification Agreements
A description of the limitations on PMI's Officers' and Directors' liability and Indemnification Agreements is provided in Item 10, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
EXECUTIVE COMPENSATION
PROSPER FUNDING LLC
PFL does not compensate any of its officers.
PROSPER MARKETPLACE, INC.
A description of PMI's Executive Compensation is provided in Item 11, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
TRANSACTIONS WITH RELATED PARTIES
PROSPER FUNDING LLC
Agreements with PMI
On January 22, 2013, PMI entered into a Servicingan Administration Agreement with PMIPFL (the "PMI Administration Agreement"), pursuant to which PMI has licensed to us the right to operate the platform, and we have appointed PMIagreed to provide certain administrative services relating to the platform.marketplace. Under the PMI Administration Agreement, PFL is required to pay PMI (i) an amount equal to one-twelfth (1/12) of the specified annual Corporate Administration Fees (as defined in the PMI Administration Agreement) of $1.2 million, (ii) a fee for each Borrower Loan originated through the marketplace, (iii) 90% of all servicing fees collected by or on behalf of PFL, and (iv) all nonsufficient funds fees collected by or on behalf of PFL. As of the most recent amendment of the PMI Administration Agreement PFL is required to pay PMI (a) an Corporate Administration Fees of $500 thousand per month, (b) a fee for each Borrower Loan originated through the marketplace, (c) 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.
Also on January 22, 2013, PFL and PMI entered into an Asset Transfer Agreement (the "Asset Transfer Agreement") pursuant to which PMI, effective February 1, 2013 (i) transferred the marketplace and substantially all of PMI's assets and rights related to the operation of the marketplace to PFL, and (ii) made a capital contribution to PFL in excess of $3 million. Under the Asset Transfer Agreement, PMI also transferred substantially all of its remaining assets to PFL, including (i) all outstanding Notes issued by PMI under the Indenture dated June 15, 2009 between PMI and Wells Fargo Bank, as trustee ("the Indenture"), (ii) all Borrower Loans corresponding to such Notes, (iii) all lender/borrower/group leader registration agreements related to such Notes and 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 marketplace, including in relation to the origination, funding and servicing of
Borrower Loans, and the issuance, funding and payment of the Notes, were not transferred or assigned to PFL by PMI. In addition, PMI did not transfer to PFL (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 transferred Notes, and indemnify PFL for any other losses that arise out of any lender/borrower/group leader registration agreement related to the transferred Notes or 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 transferred Notes or 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. |
Holders of the transferred Notes are third party beneficiaries under the Asset Transfer Agreement and the Administration Agreement.
Under Section 4.1 of the Indenture, PMI could transfer substantially all of its assets to any person without the consent of the holders of the existing Notes, provided that the transferee expressly assumed all of PMI's obligations under the Indenture and the existing Notes. In that case, the transferee would succeed to and be substituted for PMI, and PMI would be discharged from all of its obligations and covenants, under the Indenture and the existing Notes. Accordingly, on January 22, 2013, PMI, PFL and Wells Fargo Bank, as trustee entered an 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, PFL became the obligor with respect to the transferred Notes and the Amended and Restated Indenture, and PMI no longer has any obligations with respect thereto.
Agreements with PAH
On November 22, 2013, PFL and PAH entered into a Loan Sale Agreement, pursuant to which PFL agreed to sell to PAH certain unsecured consumer loans. The terms of the Loan Sale Agreement were made on terms no less favorable to PFL than PFL has obtained from unaffiliated third parties.
Participation on our Marketplace
PFL's executive officers and directors have opened investor accounts and have made deposits to and withdrawals from their accounts, and funded portions of borrowers' loan requests from time to time in the past via purchases of Notes and Borrower Loans, and may do so in the future. The Notes and Borrower Loans were obtained on terms and conditions that were not more favorable than those obtained by other investors.
Indemnification Agreements
Under PFL's organizational documents, it is required to indemnify its directors and officers in certain instances. For more information, see "Management-Prosper Funding LLC-Limitations on Officers' and Directors' Liability and Indemnification Agreements." PROSPER MARKETPLACE, INC.
A description of PMI's transactions with related parties is provided in Item 13, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
PRINCIPAL SECURITY HOLDERS
A description of PFL's and PMI's principal security holders is provided in Item 12, Part III of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is incorporated by reference into this prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information contained in “Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Exhibit 99.1 to the Registration Statement of which this prospectus is a part has been revised solely for the purpose of adopting the cash flow presentation requirements imposed by Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). Specifically, we have revised the Liquidity and Capital Resources disclosure previously included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, originally filed on March 23, 2018 ("2017 Form 10-K") to reflect what those disclosures would have looked like if we had adopted ASU 2016-18 as of December 31, 2017. This revised Item 7 supersedes the disclosure included in Item 7 of the 2017 Form 10-K. There have been no other changes made since the filing of the 2017 Form 10-K. For significant developments since the filing of the 2017 Form 10-K, refer to other periodic reports filed with the Securities and Exchange Commission ("SEC") through the date of this Registration Statement on Form S-1. See Item 7 of Exhibit 99.1 to the Registration Statement of which this prospectus is a part, and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of PFL and PMI’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, pages 46 to 58, and June 30, 2018, pages 50 to 65, each of which are incorporated by reference into this prospectus.
The recast presentation of the financial statements contained in our 2017 Form 10-K, as included in Item 15 of Exhibit 99.1 of the Registration Statement of which this prospectus is a part, supersedes the financial statements contained in our 2017 Form 10-K and does not reflect events occurring after the filing of the 2017 Form 10-K, and does not modify or update the disclosures in the 2017 Form 10-K, other than as required to reflect the changes described above. All other information in the 2017 Form 10-K remains unchanged. Without limitation of the foregoing, this prospectus does not purport to update the MD&A contained in the 2017 Form 10-K for any forward-looking statements. For developments subsequent to the filing of the 2017 Form 10-K, refer to the PMI and PFL’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018. This prospectus should be read in conjunction with the 2017 Form 10-K, PMI and PFL’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018 and June 30, 2018 and their Current Reports on Form 8-K filed subsequent to the filing of the 2017 Form 10-K. Exhibit 99.1 of the Registration Statement of which this prospectus is a part shall be deemed to be “filed” for purposes of the Securities Exchange Act of 1934, as amended.
LEGAL MATTERS
The validity of the Notes and PMI Management Rights offered in this offering will managebe passed upon for us by Julie Hwang, the daily business operationsGeneral Counsel and Secretary of PMI and the Secretary of PFL.
EXPERTS
The consolidated financial statements of Prosper Funding LLC and providesubsidiaries as of December 31, 2017 and 2016, and for each of the three years in the period ended December 31, 2017, included in Exhibit 99.1 to the Registration Statement of which this prospectus is a numberpart and incorporated herein by reference have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the Registration Statement (which report expresses an unqualified opinion on the consolidated financial statements and includes an explanatory paragraph referring to certain related party transactions with its direct parent, Prosper Marketplace Inc., as well as an explanatory paragraph referring to a change in accounting principle). Such financial statements have been so included in reliance upon the report of related administrative services.such firm given upon their authority as experts in accounting and auditing.
5. | Commitments and Contingencies |
The consolidated financial statements of Prosper Marketplace Inc. and subsidiaries as of December 31, 2017 and 2016, and for each of the three years in the period ended December 31, 2017, included in Exhibit 99.1 to the Registration Statement of which this prospectus is a part and incorporated herein by reference have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein and elsewhere in the Registration Statement (which
Inreport expresses an unqualified opinion on the normal courseconsolidated financial statements and includes an explanatory paragraph referring to a change in accounting principle). Such financial statements have been so included in reliance upon the report of business, the Company enters into contractssuch firm given upon their authority as experts in accounting and agreements that contain a variety of representations and warranties which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects the risk of any future obligation under these indemnifications to be remote.auditing.
Exhibit 99.1 to the Registration Statement of which this prospectus is a part has been revised solely for the purpose of adopting the cash flow presentation requirements imposed by Accounting Standards Update 2016-18, Statement of Cash Flows: Restricted Cash ("ASU 2016-18"). These revised financial statements supersede the financial statements included in the 2017 Form 10-K. There have been no other changes made since the filing of the 2017 Form 10-K.
The audited historical financial statements of Billguard included in Exhibit 99.2 of Prosper Marketplace, Inc.'s Current Report on Form 8-K/A dated December 18, 2015, have been so incorporated in reliance on the report of Kesselman & Kesselman, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
See "Item 15. Exhibits and Financial Statement Schedule" Exhibit 99.1 to the Registration Statement of which this prospectus is a part, which is incorporated by reference in this prospectus:
Prosper Marketplace, Inc.: Report of Independent Registered Public Accounting Firm for Prosper Marketplace, Inc.; Consolidated Balance Sheets as of December 31, 2017 and 2016; Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015; Consolidated Statement of Other Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015; Consolidated Statements of Convertible Preferred Stock and Stockholders' Deficit for the years ended December 31, 2017, 2016 and 2015; Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015; Notes to the Consolidated Financial Statements.
Prosper Funding LLC: Report of Independent Registered Public Accounting Firm for Prosper Funding LLC; Consolidated Balance Sheets as of December 31, 2017 and 2016; Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015; Consolidated Statements of Member's Equity for the years ended December 31, 2017, 2016 and 2015; Consolidated Statements Cash Flows for the years ended December 31, 2017, 2016 and 2015; Notes to the Consolidated Financial Statements.
See Part I, Item 1, "Condensed Consolidated Financial Statements” of PFL and PMI’s Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2018, pages 6 to 45, and June 30, 2018, pages 6 to 49, each of which is incorporated by reference in this prospectus:
Prosper Marketplace, Inc.: PART II▪Consolidated Balance Sheet as of March 31, 2018 (unaudited) and June 30, 2018 (unaudited)▪Consolidated Statement of Operations for the fiscal quarters ended March 31, 2018 (unaudited) and June 30, 2018 (unaudited) ▪Consolidated Statement of Cash Flows for the fiscal quarters ended March 31, 2018 (unaudited) and June 30, 2018 (unaudited) ▪Notes to the Consolidated Financial Statements (unaudited)
Prosper Funding, LLC: ▪Consolidated Balance Sheet as of March 31, 2018 (unaudited) and June 30, 2018 (unaudited) ▪Consolidated Statement of Operations for the fiscal quarters ended March 31, 2018 (unaudited) and June 30, 2018 (unaudited) ▪Consolidated Statement of Cash Flows for the fiscal quarters ended March 31, 2018 (unaudited) and June 30, 2018 (unaudited) ▪Notes to the Consolidated Financial Statements (unaudited)
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution | | | | Item 13. | Other Expenses of Issuance and Distribution |
The following table (not in thousands) indicates the expenses to be incurred in connection with the offering described in this Registration Statement, all of which will be paid by Prosper Funding LLC.PMI. All amounts are estimated except the Securities and Exchange Commission registration fee.
| Securities and Exchange Commission registration fee | | $ | 57,300 | | | Accountants’ fees and expenses | | | 15,000 | | | Legal fees and expenses | | | 175,000 | | | Blue Sky fees and expenses | | | 72,000 | | | Miscellaneous | | | - | | | Total Expenses | | $ | 319,300 | |
| | | | | | | | Securities and Exchange Commission registration fee | | $ | 12,809 |
| | | Accountants’ fees, legal fees and expenses | | | 200,000 |
| | | Blue Sky fees and expenses | | | 56,000 |
| | | Miscellaneous | | | 0 |
| | | Total Expenses | | $ | 268,809 |
| |
| | | | Item 14. | Indemnification of Directors and Officers |
Prosper Funding LLC
Item 14. Indemnification of DirectorsPFL’s Fifth Amended and Officers
Our limited liability company agreementRestated Limited Liability Company Agreement (the “LLC Agreement”) provides that, to the fullest extent permitted by applicable law, ourPFL’s directors and officers will not be liable to PFL for, and shall be indemnified by usPFL 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 ourPFL’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, provided, howeverhowever, that any such indemnity shall be provided out of and to the extent of ourPFL’s assets only. In addition, the LLC Agreement provides that, to the fullest extent permitted by applicable law, wePFL may advance any expenses incurred by an officer or director defending any claim, demand, action, suit or proceeding prior to its final disposition, upon ourPFL’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. WePFL will not pay any such indemnification from any borrower loan collections that are allocable to the payment of Notes.
WePFL and PMI have entered into aan Amended and Restated Services and Indemnity Agreement (the “GSS Agreement”) with Global Securitization Services, LLC (“GSS”) and ourPFL’s independent directors, Kevin BurnsDavid V. DeAngelis and Bernard J. Angelo, whom we refer towho are employees of GSS and are described as the “GSS Representatives.” Under the GSS representatives. Under this agreement,Agreement, PMI has agreed to indemnify each of the GSS representativesRepresentatives and GSS (collectively, the “Indemnitees”) against any loss, damage or claim incurred by himthe Indemnitees as a result of servingthe GSS Representatives’ service as an independent directordirectors for us or by reason of any act or omission performed or omitted by himthe GSS Representatives as one of ourPFL’s independent directors, except for any loss, damage or claim incurred by reason of the GSS representative’sRepresentative’s gross negligence or willful misconduct. WeIf 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.
PFL believes that these provisions are necessary to attract and retain qualified persons as directors and officers. To the extent these provisions permit PFL to indemnify its officers and directors for liabilities arising under the Securities Act, however, PFL has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable
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 paybe 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 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 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: (i) such person’s service as a director or officer of 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 fromor advancement of expenses under the indemnification agreement or under any borrower loan collections that are allocabledirectors’ and officers’ liability insurance policies maintained by PMI to the paymentextent 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 Notes.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.
WeUnder 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, conviction or upon a plea of nolo 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; (ii) 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; (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 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). PMI also maintains an 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 usPMI to indemnify ourits officers and directors for liabilities arising under the Securities Act, of 1933, as amended, however, wePMI has been informed by the SEC that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Item 15. Recent Sales of Unregistered Securities | | | | Item 15. | Recent Sales of Unregistered Securities |
Prosper Funding LLC
Issuances of Equity Interest
PFL has not issued any equity interests in the past three years.
Prosper Marketplace Inc.
Set forth below is information regarding equity interestsshares of common and preferred stock issued, warrants exercisable for common and preferred stock issued, convertible notes issued and options granted by us since our inception.PMI within the past three years. Also included is the consideration, if any, received by usPMI for such securities and information relating to the section of the Securities Act, or rule of the SEC,Securities and Exchange Commission, under which exemption from registration was claimed. No underwriters were involved in the sale of any of the securities set forth below.
Issuances of Capital Stock, Warrants and Promissory Notes
In April 2015, PMI issued and sold an aggregate of 4,777,728 shares of new Series D convertible preferred stock in a private placement at a an aggregate purchase price of $165 million. During the year ended December 31, 2015, PMI issued 207,065 shares of common stock upon the exercise of warrants for an aggregate exercise price per share of $0.61. II-1
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.
On March 1, 2012, weAugust 29, 2017, in partial satisfaction of the obligations under the Settlement and Release Agreement between PMI and Colchis Capital Management, L.P. (“Colchis Capital”), Colchis Income Offshore Master Fund L.P., a Cayman Islands limited
partnership and an affiliate of Colchis Capital (“Colchis”) and PFL entered into a Loan Purchase Agreement and Loan Servicing Agreement, pursuant to which PFL will sell eligible consumer loans to Colchis in an aggregate amount of up to $500,000,000 (the “Purchasing Arrangement”). Any loans purchased by Colchis pursuant to the Purchasing Arrangement will reduce, dollar for dollar, the amount of eligible consumer loans that may be purchased pursuant to that certain Loan Purchase Agreement by and among PFL, PF LoanCo Funding LLC and Wilmington Savings Fund Society, FSB in its capacity as trustee of PF LoanCo Trust dated as of February 27, 2017 (the “Consortium Loan Purchase Agreement”). In connection with the Purchasing Arrangement, PMI and Colchis have entered into a Warrant Agreement (the “Warrant Agreement”). Pursuant to the Warrant Agreement, the Company will issue to Colchis, subject to the satisfaction of certain conditions by PFL and Colchis, a warrant to purchase up to 16,858,078 shares of Series E-2 Preferred Stock at a purchase price of $0.01 per share (the “Warrant”). If Colchis does not purchase eligible consumer loans under the Purchasing Agreement, the applicable portion of the Warrant will not become exercisable and will be forfeited. The number of shares which are not exercisable and forfeited under the Warrant may become exercisable under certain warrants to purchase Series F Preferred Stock issued in connection with the Consortium Loan Purchase Agreement (the “Consortium Warrants”). For the avoidance of doubt, the number of shares of Preferred Stock of the Company which will be exercisable pursuant to the Consortium Warrants and soldthe Warrant combined will never exceed 177,720,706. The shares of Series E-2 Preferred Stock to be issued upon exercise of the Warrant (the “Warrant Shares”) will have the right to convert into shares of common stock.
On September 20, 2017, PMI entered into a 100% equity interestStock Purchase Agreement (the “Purchase Agreement”) with LPG Capital GP Limited, a Cayman Islands exempted company with limited liability (the “Share Purchaser”), pursuant to which PMI agreed to issue and sell to such Share Purchaser 37,249,497 shares of PMI’s Series G Preferred Stock (the “Series G Shares”) for considerationan aggregate purchase price of $100. These$50 million. The Share Purchaser will have the right to convert the Series G Shares into common stock of PMI. All of these securities were sold in reliance on the exemption from the registration requirements of the Securities Act as 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.
Stock Grants
During the years ended December 31, 2017, 2016, and Financial Statements Schedules2015, PMI did not grant any fully vested common shares to employees. PMI did not grant any fully vested common shares to non-employees for services for the years ended December 31, 2017, 2016 and 2015. EXHIBIT INDEX
Exhibit Number | | Description | 3.1 | | Limited Liability Company Agreement of Prosper Funding LLC, dated March 1, 2012 | | | | 4.1 | | Form of Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.2) | | | | 4.2 | | Form of Indenture, dated ____________, 2012, between Prosper Funding LLC and Wells Fargo Bank, National Association | | | | 5.1 | | Opinion of Covington & Burling LLP (1) | | | | 8.1 | | Opinion of Covington & Burling LLP (1) | | | | 10.1 | | Form of Borrower Registration Agreement (1) | | | | 10.2 | | Form of Lender Registration Agreement (1) | | | | 10.3 | | Prosper-CSC Logic Processing Agreement, dated ____________, between CSC Logic, Prosper Marketplace, Inc. and Prosper Funding LLC (1) | | | | 10.4 | | Form of Servicing Agreement between Prosper Funding LLC and Prosper Marketplace, Inc., dated ___________, 2012 (2) | | | | 23.1 | | Consent of OUM & Co. LLP, an independent registered public accounting firm | | | | 23.3 | | Consent of Covington & Burling LLP (included in Exhibits 5.1 and 8.1) | | | | 24.1 | | Power of Attorney (see page S-1 of this prospectus) | | | | | | (1) | | To be filed subsequently. | (2) | | 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. |
(b) | Financial Statement Schedules. All financial statement schedules are omitted because they are not applicable or the information is included in the Registrant’s balance sheet
|
These securities were sold or granted in reliance on the exemption from the registration requirements of the Securities Act set forth in Section 4(2) of the Securities Act regarding sales by an issuer not involving a public offering.
| | | | Item 16. | Exhibits and Financial Statements Schedules |
Item 17. Undertakings(a) Exhibits
See the Index to Exhibits attached to this registration statement, which is incorporated by reference herein.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto.
The undersigned registrantregistrants hereby undertakes:undertake:
1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
i. To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement. iii. To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
4. That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the Registrant isRegistrants are subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
5. That, for the purpose of determining liability of the RegistrantRegistrants under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned Registrant undertakesRegistrants undertake that in a primary offering of securities of the undersigned RegistrantRegistrants pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned RegistrantRegistrants will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned RegistrantRegistrants relating to the offering required to be filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned RegistrantRegistrants or used or referred to by the undersigned Registrant;Registrants;
iii. The portion of any other free writing prospectus relating to the offering containing material information about the undersigned RegistrantRegistrants or itstheir securities provided by or on behalf of the undersigned Registrant;Registrants; and
iv. Any other communication that is an offer in the offering made by the undersigned RegistrantRegistrants to the purchaser. 6. Insofar as indemnification for liabilities arising under the Securities Act of 1933 as amended, may be permitted to directors, officers and controlling persons of the RegistrantRegistrants pursuant to the foregoing provisions, or otherwise, the Registrant hasRegistrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the RegistrantRegistrants of expenses incurred or paid by a director, officer or controlling person of the RegistrantRegistrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the RegistrantRegistrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
EXHIBIT INDEX
| | | | Exhibit
Number | | Description | | | | | | 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 PFL’s Current Report on Form 8-K, filed on January 28, 2013) | | | | | | Agreement 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) | | | | | | Agreement 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) | | | | | | 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 PFL and PMI) | | | | | | Amended and Restated Certificate of Incorporation of Prosper Marketplace, Inc. (incorporated by reference to Exhibit 3.2 of PMI and PFL's Quarterly Report on Form 10-Q, filed November 13, 2017) | | | | | | Prosper Funding LLC Certificate of Formation (incorporated by reference to Exhibit 3.2 of Pre-Effective Amendment No. 1 to PFL and PMI’s Registration Statement on Form S-1 (File No. 333-179941), filed on April 23, 2012) | | | | | | 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) | | | | | | Form of PFL Borrower Payment Dependent Note (included as Exhibit A in Exhibit 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) | | | | | | Form of PMI Borrower Payment Dependent Note (included as Exhibit A in Exhibit 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) | | | | | | 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 PFL’s Current Report on Form 8-K, filed on January 28, 2013) | | | | | | 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) | | | | | | 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 PFL’s Current Report on Form 8-K filed on January 28, 2013) | | | | | | Opinion of Julie Hwang, General Counsel of Prosper Marketplace, Inc. (2) | | | | | | Opinion of Covington & Burling LLP (2) | | | | | | Form of PFL Borrower Registration Agreement (incorporated by reference to Exhibit 10.1 of PMI and PFL's Annual Report on Form 10-K, filed March 26, 2018)
| | | | | | Form of PFL Investor Registration Agreement (incorporated by reference to Exhibit 10.2 of PMI and PFL's Annual Report on Form 10-K, filed March 17, 2017) | | | | | | 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) | | | | | | 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) | | | | | | 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 8-K, filed on January 28, 2013) | | | |
II-3 | | | | | | Amendment 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) | | | | | | Amendment 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) | | | | | | Amendment No. #3 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.8 of PMI and PFL's Annual Report on Form 10-K, filed March 17, 2017) | | | | | | Amendment No. #4 to Administration Agreement between Prosper Funding LLC and Prosper Marketplace, Inc. (incorporated by reference to Exhibit 10.32 of PMI and PFL's Annual Report on Form 10-K, filed March 26, 2018)
| | | | | | 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 PFL and PMI’s Registration Statement on Form S-1 (File Nos. 333-179941 and 333-179941-01), filed on November 21, 2012) | | | | | | 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 PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) | | | | | | 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 PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) | | | | | | 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 PFL’s Current Report on Form 8-K, filed on January 28, 2013) (1) | | | | | | 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) | | | | | | 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) | | | | | | Indemnification Agreement, dated January 15, 2013, between Prosper Marketplace, Inc. and Patrick Grady (incorporated by reference to Exhibit 10.20 of PMI and PFL’s Annual Report on Form 10-K, filed on March 31, 2014) | | | | | | Form of Indemnification Agreement for PMI’s directors (other than Patrick Grady), officers and key employees (incorporated by reference to Exhibit 10.21 of PMI and PFL's Annual Report on Form 10-K, filed on March 18, 2016) | | | | | | Form of PMI interim Borrower Registration Agreement (incorporated by reference to Exhibit 10.12 to Post-Effective Amendment No. 1 to PMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013) | | | | | | Form of PMI interim Lender Registration Agreement (incorporated by reference to Exhibit 10.13 to Post-Effective Amendment No. 1 to PMI's Registration Statement on Form S-1 (File No. 333-182599) filed on January 7, 2013) | | | | | | Backup Servicing Agreement, dated January 9, 2014, between Prosper Funding LLC and First Associates Loan Servicing, LLC (incorporated by reference to Exhibit 10.25 of PMI and PFL’s Annual Report on Form 10-K, filed on March 31, 2014) | | | | | | 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 PMI and PFL’s Current Report on Form 8-K, filed on June 5, 2013) | | | | | | Second 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) | | | |
Table of Contents | | | | | | Amended 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) | | | | | | 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 May 12, 2015) | | | | | | Amendment 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) | | | | | | 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) | | | | | | Amendment No. 3 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 March 26, 2018) | | | | | | Form 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) | | | | | | Form 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) | | | | | | Asset 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) | | | | | | Marketing 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) | | | | | | Stand 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) | | | | | | Subsidiaries of Prosper Marketplace, Inc. (incorporated by reference to Exhibit 21.1 of PMI and PFL's Annual Report on Form 10-K, filed March 26, 2018) | | | | | | Subsidiaries of Prosper Funding LLC (incorporated by reference to Exhibit 21.2 of PMI and PFL’s Annual Report on Form 10-K, filed March 26, 2018) | | | | | | PMI Consent of Deloitte & Touche LLP, an independent registered public accounting firm (3) | | | | | | PFL Consent of Deloitte & Touche LLP, an independent registered public accounting firm (3) | | | | | | Consent of Julie Hwang, General Counsel at Prosper Marketplace, Inc. (included in Exhibit 5.1) (2) | | | | | | Consent of Covington & Burling LLP (included in Exhibit 8.1) (2) | | | | | | Power of Attorney (see pages S-1 and S-2 of this prospectus) (3) | | | | | | Form T-1 Statement of Eligibility under Trust Indenture Act of 1939 of CSC Trust Company of Delaware as Trustee under the Indenture (2) | | | | | | Retrospective revisions to the following portions of Prosper Marketplace, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2017, as originally filed with the Securities and Exchange Commission on March 23, 2018: Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Part II, Item 15. Exhibits, Financial Statement Schedules (3)
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SIGNATURES | | | | (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) | Previously Filed. | | (3) | Filed Herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Act the Registrantof 1933, Prosper Funding LLC has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Francisco, State of California, on the 6th27th day of March, 2012.September, 2018.
| | | | | | | PROSPER FUNDING LLC.LLC | | | | | | | | By: | /s/ Christian A. LarsenDavid Kimball | | | | | Christian A. LarsenDavid Kimball | | | | | Chief Executive Officer (Principal Executive Officer), President and Director | |
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below, constitutes and appoints Christian A. LarsenDavid Kimball, Usama Ashraf and Kirk T. InglisJulie Hwang and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration statements pursuant to Rule 462 of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement 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/ David Kimball | | Chief Executive Officer (Principal Executive Officer), President and Director | | September 27, 2018 | | David Kimball | | | | | | | | | | | /s/ Usama Ashraf | | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer), Treasurer and Director | | September 27, 2018 | | Usama Ashraf | | | | | | | | | | | /s/ Bernard Angelo* | | Director | | September 27, 2018 | | Bernard Angelo | | | | | | | | | | | /s/ David V. DeAngelis* | | Director | | September 27, 2018 | | David V. DeAngelis | | | | | | | | | | | *By: /s/ Julie Hwang | | | | September 27, 2018 | | Julie Hwang | | | | | | Attorney-in-Fact | | | | |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Prosper Marketplace, Inc. has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Francisco, State of California, on the 27th day of September, 2018.
| | | | | | PROSPER MARKETPLACE, INC. | | | | | | By: | /s/ David Kimball | | | | David Kimball | | | | Chief Executive Officer (Principal Executive Officer); Director | |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below, constitutes and appoints David Kimball, Usama Ashraf and Julie Hwang and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration statements pursuant to Rule 462 of the Securities Act, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as she might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1933, this Amendment No. 2 to the Registration Statement 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/ David Kimball | | Chief Executive Officer (Principal Executive Officer); Director | | September 27, 2018 | | David Kimball | | | | | /s/ Christian A. LarsenUsama Ashraf | | President (principal executive officer); DirectorChief Financial Officer (Principal Financial and Accounting Officer) | | March 6, 2012September 27, 2018 | Christian A. Larsen | | | | | | Usama Ashraf | | | | | /s/ Kirk T. InglisClaire A Huang* | | Vice President and Treasurer (principal financial and accounting officer); Director | | March 6, 2012September 27, 2018 | Kirk T. Inglis | | | | | | Claire A Huang | | | | | /s/ Sachin D. AdarkarMason Haupt* | | Secretary; Director | | March 6, 2012September 27, 2018 | Sachin D. Adarkar | | | | | | Mason Haupt | | | | | /s/ Bernard J. AngeloRajeev V. Date* | | Director | | March 6, 2012September 27, 2018 | Bernard J. Angelo | | | | | | Rajeev V. Date | | | | | /s/ Kevin P. BurnsPatrick W. Grady* | | Director | | March 6, 2012September 27, 2018 | Kevin P. Burns | | | | |
EXHIBIT INDEX
Exhibit Number | | Description | 3.1 | | Limited Liability Company Agreement of Prosper Funding LLC, dated March 1, 2012 | | | | 4.1 | | Form of Borrower Payment Dependent Note (included as Exhibit A in Exhibit 4.2) | | | | 4.2 | | Form of Indenture, dated ____________, 2012, between Prosper Funding LLC and Wells Fargo Bank, National Association | | | | 5.1 | | Opinion of Covington & Burling LLP (1) | | | | 8.1 | | Opinion of Covington & Burling LLP (1) | | | | 10.1 | | Form of Borrower Registration Agreement (1) | | | | 10.2 | | Form of Lender Registration Agreement (1) | | | | 10.3 | | Prosper-CSC Logic Processing Agreement, dated ____________, between CSC Logic, Prosper Marketplace, Inc. and Prosper Funding LLC (1) | | | | 10.4 | | Form of Servicing Agreement between Prosper Funding LLC and Prosper Marketplace, Inc., dated ___________, 2012 (2) | | | | 23.1 | | Consent of OUM & Co. LLP, an independent registered public accounting firm | | | | 23.3 | | Consent of Covington & Burling LLP (included in Exhibits 5.1 and 8.1) | | | | 24.1 | | Power of Attorney (see page S-1 of this prospectus) | | Patrick W. Grady | | | | | (1)/s/ David R. Golob* | | To be filed subsequently. | (2)Director | | 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.September 27, 2018 | | David R. Golob | | | | | | /s/ Nigel W. Morris* | | Director | | September 27, 2018 | | Nigel W. Morris | | | | | | *By: /s/ Julie Hwang | | | | September 27, 2018 | | Julie Hwang | | Attorney-in-Fact | | |
E-1
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