Subscriber Question Answered: Does This P2P Example Work Around SEC requirements?

Today I'm continuing my Subscriber Questions Answered segment and going international. Today's question is from Johnny, one of my Canadian subscribers, eh? Johnny has a great question. I LOVE answering questions from my subscribers so please feel free to comment here or email me any questions you have.

Today's Question from Johnny: Why haven't any of these p2p lending sites considered using a centralized currency or point system, instead of working all these legal loopholes to get around the SEC? Lenders can buy say 1000 points for $1000 and then borrowers can take 1000points and cash out for $1000.  When it comes to pay back, the borrower cashes in 1000points plus interest in points.  Exchanging electronic goods is not illegal, and it is very similar to BitCoin, I think it makes for a simpler loophole.  I would love your thoughts on this

There are a couple different ways to answer this. One answer is that Bitcoin, while decentralized, currently does the job here. The US currently considers BTC property rather than currency and that is how it is taxed and viewed by the IRS. The SEC has not gotten involved with Bitcoin yet based on these rulings but I expect that to change soon. The reason I expect that is a piece of a loan on a BTC based lending site is likely also considered a security the same way a piece of a USD loan on Prosper is considered one. This is something we have mentioned with our legal expert, securities atty Jonathan Wilson of Taylor English Duma on his What Is a Security? posts (two parts).

In your native Canada, Johnny, Bitcoin is treated like barter when used to purchase/sell a good or service and trading profits or losses are treated like a commodity per the Canadian CRA.

Another answer is that there is no way to get around the SEC. A piece of a peer based loan is a security plain and simple and the platforms will have to register in one way or another, whether it's the full S-1 that LC and Prosper do or the Regulation D that has limited registration and is only for accredited investors.

The structure of peer loans as a crowdfunding technique where multiple people buy (or sell or lend) a piece of the loan make it by definition a security in the eyes of the SEC so any altering of payments, points, electric goods or whatever that does not alter the crowdfunding structure of the loan will still make it a security regardless.

Great question Johnny. This was a question that seemed simple but really is quite complex in what it's asking and how the laws of the US apply to our industry. Keep the questions coming.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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