Prosper Announces the Creation of Bankruptcy Remote Entity

In their latest quarterly report (Form 10-Q) just filed with the SEC Prosper shared a fascinating tidbit of information. They announced the creation of a new entity called Prosper Funding LLC.

Here is the relevant piece from the 10-Q filing:

In February 2012, we formed Prosper Funding LLC, a Delaware limited liability company (“PFL”). We are the sole member of PFL and its accounts have been consolidated with the consolidated financial statements presented in this report. PFL has been organized and will be operated in a manner that is intended to minimize the likelihood that it will (i) become subject to bankruptcy proceedings or (ii) be substantively consolidated with the Company, and thus have its assets subject to claims by the Company’s creditors, in the event the Company becomes subject to a bankruptcy proceeding. We intended to restructure the platform so borrower loans are held by PFL and PFL issues and sells the borrower payment dependent notes tied to the loans. On March 7, 2012, PFL filed a registration statement on Form S-1 with the SEC for a continuous offering and sale of such notes. Prosper Funding LLC has not commenced operations as of the date of this report.

I called Prosper for comment and predictably they said there was nothing they could say about Prosper Funding LLC. It is currently under consideration by the SEC so nothing has been officially approved yet. But it is not difficult to make a guess as to the implication here.

Protection for All Prosper Investors

Prosper are working on a bankruptcy remote vehicle that will hold the notes for investors. Here is the S-1 filing for Prosper Funding LLC where it is pretty clear that Prosper Marketplace Inc. (PMI) will no longer be involved in the offering of notes to investors. When reading through the S-1 (and I admit I haven’t read the whole thing) it looks like this would mean that all Prosper investors would be protected by this bankruptcy remote vehicle, not just the larger investors as is the case now at Lending Club.

There will be a “Servicing Agreement” in place between Prosper Marketplace Inc. and Prosper Funding LLC as stated in the filing:

Prosper Funding LLC and PMI have executed a Servicing Agreement pursuant to which PMI has licensed to Prosper Funding LLC the right to operate the platform and Prosper Funding LLC has appointed PMI to provide certain administrative services and to service all borrower loans and Notes.  We refer to PMI in its capacity as the servicer as the “Servicer.”

So, it looks like they are splitting the company into two parts. Prosper Funding LLC will offer the notes to investors and Prosper Marketplace Inc. will service the notes and provide the technology platform.

This is big news. If everything gets approved by the SEC (and, of course, we have no way of knowing if and when that will happen) this could mean that all Prosper investors would be protected in the unlikely event of a bankruptcy proceeding against Prosper.

Any legal scholars or others care to comment?

  • Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.