For those operating Peer-to-Peer aka “P2P” lending platforms, the regulations can be daunting, if not onerous. Industry expert Kiran Lingam of LendTechAngels.com provides his guidance to RaiseMoney.com with regard to new guidance for marketplace online lending platforms recently published by the U.S. Securities and Exchange Commission (SEC) ..
Most investment and P2P/marketplace lending platforms have limited themselves to accredited investors due to securities regulations. After the JOBS Act, two options are available:
- Public fundraising under Rule 506(c) of Regulation D where platforms could advertising publicly, but would have to take greater steps to verify accredited investor status.
- Private fundraising under Rule 506(b) (i.e. the old way) where platforms can only market to those with whom they have a “substantive, pre-existing relationship.”
There has been some debate about what qualifies as a “substantive, pre-existing relationship” under Rule 506(b) with some platforms have even taking the step of requiring a 30 day “cooling off” period where a new user would have to wait 30 days after signing up in order to see any offerings. Despite this uncertainty, most platforms have stuck to Rule 506(b) due to the friction created by the heightened verification status (i.e. asking for personal tax documents) of Rule 506(c).
In the first real guidance from the SEC since 2001 and post-JOBS Act, the staff confirmed that an online platform may conduct offerings pursuant to Rule 506(b) of Regulation D without it being deemed general solicitation with proper procedures.
The guidance is a win for marketplace lending platforms in that it lays a clear path for complying with Rule 506(b) as an online platform. Of particular note:
- No 30 Day Cooling Period. The biggest development here is that the letter explicitly states that there is no required waiting period or cooling off period (i.e. no 30 day waiting period that many platforms had in place). One of the prior no action letters on this topic included a 30 day waiting period as a factor and that had been taken by some as a requirement. This is now explicitly not the case.
- New Members Can See Prior Offerings. Once a member is qualified, they can see ALL offerings, including those that started prior to that person becoming a member
- Reasonable Procedures. Sample procedures to establish a relationship include things that many platforms already do, including talking to the investor over the phone, gauging suitability, conducting identity (and potentially credit) checks. The list in the letter is not exclusive and platforms should think about structuring a defensible process for creating a relationship prior to qualifying an investor.
- No Deal Information Prior to Qualification. Importantly, in its response, the staff notes that “a prospective Member is not presented with any investment opportunity when being qualified to join the platform. Any investment opportunity would only be presented after the prospective investor becomes a Member.” This appears to be the core requirement.
While this is the view that most of us in the industry have taken, the certainty provided by this letter should alleviate the concerns held by many platforms that regulators might take another view.
Marketplace lending platforms should pay particular attention to this letter in determining how to structure the p2p side of the business (i.e. using Rule 506(b) vs. Rule 506(c)) and in designing their investor onboarding processes.
I suspect that the trend will continue towards using Rule 506(b) as a result of this new guidance.
To learn more about operating a P2P platform, join us for our Marketplace Lending Bootcamp: Building Your Regulatory and Operational Stack.