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Prosper Marketplace Inc · IPO:  S-1/A · On 1/16/09

Filed On 1/16/09, 5:27pm ET   ·   Accession Number 1104659-9-2910   ·   SEC File 333-147019

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 1/16/09  Prosper Marketplace Inc           S-1/A                  6:4.1M                                   Merrill Corp-MD/FA

Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Pre-Effective Amendment to Registration Statement   HTML   2.13M 
                          (General Form)                                         
 2: EX-4.2      Instrument Defining the Rights of Security Holders  HTML    353K 
 3: EX-10.1     Material Contract                                   HTML     79K 
 4: EX-10.2     Material Contract                                   HTML     93K 
 5: EX-10.3     Material Contract                                   HTML    224K 
 6: EX-23.1     Consent of Experts or Counsel                       HTML      6K 


S-1/A   —   Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"About This Prospectus
"The Offering
"Where You Can Find More Information
"Prospectus Summary
"Questions and Answers
"Risk Factors
"Risks Related to Borrower Default
"Risks Inherent in Investing in the Notes
"Risks Related to Prosper, Our Platform and Our Ability to Service the Notes
"Risks Relating to Compliance and Regulation
"Forward-Looking Statements
"Use of Proceeds
"Plan of Distribution
"Financial Suitability Requirements
"About the Platform
"Summary of Material Agreements
"Material U.S. Federal Income Tax Considerations
"Business
"Government Regulation
"Management
"Executive Compensation
"Transactions With Related Persons
"Principal Securityholders
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Legal Matters
"Experts
"Index to Financial Statements
"Report of Independent Registered Public Accounting Firm
"Consolidated Balance Sheets as of December 31, 2007 and 2006
"Consolidated Statements of Operations for the Years Ended December 31, 2007 and 2006
"Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2007 and 2006
"Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006
"Notes to Consolidated Financial Statements at December 31, 2007 and 2006
"Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
"Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 (unaudited) and September 30, 2007 (unaudited)
"Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income for the Nine Months Ended September 30, 2008 and 2007 (unaudited)
"Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 (unaudited) and 2007 (unaudited)
"Notes to Consolidated Financial Statements at September 30, 2008 (unaudited) and December 31, 2007

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Table of Contents

 

As filed with the Securities and Exchange Commission on January 16, 2009

Registration No. 333-147019

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 2

to

 

Form S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

PROSPER MARKETPLACE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

6199

 

73-1733867

(State or other jurisdiction of

 

(Primary Standard Industrial

 

(I.R.S. Employer

incorporation or organization)

 

Classification Code Number

 

Identification Number)

 

111 Sutter Street, 22nd Floor

San Francisco, CA  94104

(415) 593-5400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Edward A. Giedgowd, Esq.

Chief Compliance Officer and General Counsel

111 Sutter Street, 22nd Floor

San Francisco, CA  94104

(415) 593-5400

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Whitney A. Holmes, Esq.

Brian D. Lewandowski, Esq.

Morrison & Foerster LLP

370 17th Street, Suite 5200

Denver, CO  80202

(303) 592-1500

 

Approximate date of commencement of proposed sale to the public:  From time to time 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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

x

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 



Table of Contents

 

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 JANUARY 16, 2009

 

 

$500,000,000 Borrower Payment Dependent Notes

 

This is a public offering to lender members of Prosper Marketplace, Inc., or Prosper, of up to $500,000,000 in principal amount of Borrower Payment Dependent Notes, or “Notes,” issued by Prosper.

 

We will issue the Notes in a series, with each series of Notes dependent for payment on payments we receive on a specific borrower loan described in a listing posted on our person-to-person online credit auction platform, which we refer to as our “platform.”  Two types of listings appear on our platform:  (1) listings posted by individual consumer members of Prosper requesting individual consumer loans, which we refer to as “Prosper borrower loans,” and (2) listings posted by financial institutions registered with Prosper setting forth the terms of existing loans and retail installment sale contracts owned by the financial institutions and offered for sale to Prosper, which we refer to collectively as “open market loans.”  We refer to Notes dependent for payment on Prosper borrower loans as “Prosper Borrower Notes” and Notes dependent for payment on open market loans as “Prosper Open Market Notes.”

 

Important terms of the Notes include the following, each of which is described in detail in this prospectus:

 

·Our obligation to make payments on a Note will be limited to an amount equal to the lender member’s pro rata share of amounts we receive with respect to the corresponding borrower loan for that Note, net of any servicing fees.  We do not guarantee payment of the Notes or the corresponding borrower loans.

 

·The Notes are not obligations of the borrower members, or of the borrowers on open market loans, or of the financial institutions offering to sell an open market loan on our platform.

 

·The Prosper Borrower Notes will bear interest from the date of issuance, have a fixed rate, be payable monthly and have an initial maturity of three years from issuance, which we may change from time to time.

 

·The Prosper Open Market Notes will bear interest from the date of issuance, have a fixed rate, be fully amortizing and have an initial maturity of at least three months.

 

We will offer Notes to our lender members 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 will be issued in electronic form only and will not be listed on any securities exchange.  The Notes will not be transferable except through our Note trading platform by a registered broker-dealer yet to be determined.  There can be no assurance, however, that a market for Notes will develop on our Note trading platform. Therefore, lender members must be prepared to hold their Notes to 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 21.

 

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                  , 2009

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

ABOUT THIS PROSPECTUS

ii

WHERE YOU CAN FIND MORE INFORMATION

ii

PROSPECTUS SUMMARY

1

THE OFFERING

4

QUESTIONS AND ANSWERS

9

RISK FACTORS

21

RISKS RELATED TO BORROWER DEFAULT

21

RISKS INHERENT IN INVESTING IN THE NOTES

28

RISKS RELATED TO PROSPER, OUR PLATFORM AND OUR ABILITY TO SERVICE THE NOTES

31

RISKS RELATING TO COMPLIANCE AND REGULATION

38

FORWARD-LOOKING STATEMENTS

41

USE OF PROCEEDS

42

PLAN OF DISTRIBUTION

42

FINANCIAL SUITABILITY REQUIREMENTS

42

ABOUT THE PLATFORM

43

SUMMARY OF MATERIAL AGREEMENTS

62

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

72

BUSINESS

77

GOVERNMENT REGULATION

83

MANAGEMENT

85

EXECUTIVE COMPENSATION

90

TRANSACTIONS WITH RELATED PERSONS

93

PRINCIPAL SECURITYHOLDERS

95

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

98

LEGAL MATTERS

107

EXPERTS

107

INDEX TO FINANCIAL STATEMENTS

F-1

 

i



Table of Contents

 

ABOUT THIS PROSPECTUS

 

This prospectus describes our offering of our Borrower Payment Dependent Notes, which we refer to in this prospectus as the “Notes.” This prospectus is part of a registration statement filed with the Securities and Exchange Commission, which we refer to as the “SEC.” This prospectus, and the registration statement of which it forms a part, speak only as of the date of this prospectus.  We will supplement this registration statement from time to time as described below.

 

Unless the context otherwise requires, we use the terms “Prosper,” the Company,” our company,” “we,” “us” and “our” in this prospectus to refer to Prosper Marketplace, Inc., a Delaware corporation.

 

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”).  Following the date of this prospectus, we plan to offer Notes continuously, and we expect that sales of Notes will occur on a daily basis through the operation of our platform.

 

We will prepare prospectus supplements to update this prospectus, such as to disclose changes to the terms of our offering of the Notes, provide quarterly updates of our financial and other information included in this prospectus and disclose other material developments.  We will file these prospectus supplements with the SEC pursuant to Rule 424(b) and post them on our website.  When required by SEC rules, such as when there is a “fundamental change” in our 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, we 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.  We currently anticipate that post-effective amendments will be required, among other times, when we change material terms of the Notes offered through our platform. We currently expect that these changes will be disclosed in prospectus supplements posted on our website at the time of filing of the post-effective amendment, rather than through complete revisions to this prospectus.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed a registration statement on Form S-1 with the SEC in connection with this offering.  In addition, upon the effectiveness of our registration statement, we will be 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 have filed at the SEC’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. Our SEC filings are also available to the public at the SEC’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 us and the Notes, we 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 our 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.

 

ii



Table of Contents

 

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 our financial statements and related notes, and the risk factors beginning on page 21, before deciding whether to purchase our Notes.

 

Overview

 

Prosper provides a person-to-person online credit auction platform, which we refer to as our “platform,” that enables its borrower members to borrow money, its financial institution members who own existing loans and retail installment sale contracts to list those loans and contracts for sale, and its lender members to purchase Notes issued by Prosper, the proceeds of which facilitate the funding or sale of specific loans made to borrowers.

 

About the Platform

 

Our platform is an online auction-style marketplace that permits our lender members to bid on listings and purchase from Prosper Notes that are dependent for payment on payments we receive on the corresponding borrower loans described in the listing.  Two types of listings appear on our platform: (1) listings posted by individual consumer members of Prosper requesting individual consumer loans, which we refer to as “Prosper borrower listings” and “Prosper borrower loans,” respectively; and (2) listings posted by financial institutions registered with Prosper setting forth the terms of existing loans and retail installment sale contracts owned by the financial institutions and offered for sale to Prosper, which we collectively refer to as “open market listings” and “open market loans,” respectively.  We refer to borrowers on Prosper borrower loans and open market loans as “borrowers.”  We refer to the financial institutions, which may include commercial banks, savings banks, consumer finance companies and other types of financing entities, registered with Prosper and eligible to list open market loans for sale on our platform, as “originators.”

 

Each listing sets forth the desired loan amount or sales price, offered interest rate or yield percentage, and other information including but not limited to the Prosper Rating for the borrower, debt-to-income ratio, and certain credit information from the borrower’s credit report. Prosper borrower listings include the borrower’s self-reported, unless otherwise indicated, annual income range, occupation and employment status, and the borrower’s group affiliation, if any. Open market listings set forth a description of the collateral, if any, securing the borrower loan, and contain as much of the foregoing borrower credit and employment data as the originator provides.  Prosper borrower members are identified by a Prosper screen name but are not able to disclose in listings their identity or contact information to lenders.  Listings are displayed publicly on our platform, although certain information is only viewable by registered lender members.

 

Each listing will be assigned a proprietary credit rating by Prosper, referred to as the “Prosper Rating.”  The Prosper Rating is a letter that indicates the borrower’s level of risk and corresponds to an estimated average annualized loss rate range.  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.  For Prosper borrower listings, the Prosper Rating will be derived from two scores:  a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous Prosper borrower loans with similar characteristics.  The use of these two scores will determine an estimated loss rate for each listing, which correlates to a Prosper Rating.  For open market listings, the originator will provide us with a loss rate on the type of loan being offered for sale, and we will translate the loss rate to a Prosper Rating.  This new rating system allows Prosper to maintain consistency when assigning a rating to the borrower regardless of originator, type of credit score used or type of loan being offered for sale.  See “About the Platform” for more information.

 

The Notes.  Our lender members will have the opportunity to buy Notes issued by Prosper.  We refer to Notes dependent for payment on payments we receive on a Prosper borrower loan as “Prosper Borrower Notes” and Notes dependent for payment on payments we receive on an open market loan as “Prosper Open Market Notes.”

 

Lender members access our platform and “bid” the amount they are willing to commit to the purchase of a Note that is dependent for payment on payments we receive on the corresponding borrower loan and the minimum interest rate or yield percentage they are willing to receive.  By making a bid on a listing, a lender member is committing to purchase from Prosper a Note in the principal amount of the lender’s winning bid.  The lender members who purchase the Notes will designate that the sale proceeds be applied to facilitate the funding or sale of a corresponding borrower loan listed on our platform. The Notes will be special, limited obligations of Prosper only and not obligations of any borrower.

 

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Table of Contents

 

The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding borrower loans or the proceeds of those corresponding borrower loans—even though, in the case of Prosper Open Market Loans, the corresponding open market loan may be secured by personal property.  If Prosper were to become subject to a bankruptcy or similar proceeding, the holder of a Note would generally have a general unsecured claim against Prosper that may or may not be limited in recovery to such borrower payments.  To alleviate this risk, Prosper intends to grant a security interest in all present and future rights of Prosper to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon to the trustee under the indenture for the Notes, referred to as the indenture trustee,” for the benefit of the trustee and the holders of the Notes.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture solely by reason of Prosper becoming subject to a bankruptcy or similar proceeding and not for any other reason.  See “Risk Factors—Risks Related to Prosper, Our Platform and Our Ability to Service the Notes.”

 

Prosper will pay principal and interest on each series of Notes in an amount equal to each such Note’s pro rata portion of the principal and interest payments, if any, Prosper receives on the corresponding borrower loan, net of Prosper’s servicing fee of 1% for Prosper Borrower Notes and 0.5% for Prosper Open Market Notes.  In addition, the originator of open market loans charges a servicing fee, which is deducted from principal and interest payments it receives on the open market loans.  Prosper will also pay to lender members any other amounts Prosper receives on each corresponding borrower loan, including late fees and prepayments, subject to the servicing fee, except that Prosper will not pay to lender members any non-sufficient funds fees for failed borrower payments or collection fees we, an originator or a third-party collection agency charge.  In addition, on Prosper Open Market Loans late fees may be retained by the originator servicing the open market loan.

 

Prosper Borrower Loans.  Our platform allows our borrower members to request loans by posting listings on the platform indicating a requested loan amount and the maximum interest rate they are willing to pay. All Prosper borrower loans are unsecured obligations of individual Prosper borrower members with a fixed interest rate and a loan term currently set at three years, which Prosper anticipates extending in the near future to between three months to seven years.  All Prosper borrower loans will have specified minimum and maximum principal amounts (currently between $1,000 to $25,000) and will be funded by WebBank, a Federal Deposit Insurance Corporation (“FDIC”) insured, Utah-chartered industrial bank.  After funding a loan, WebBank sells and assigns the loan to Prosper, without recourse to WebBank, in exchange for the principal amount of the borrower loan.  WebBank has no obligation to purchasers of the Notes.  For all Prosper borrower loans, except for our verification of the Prosper borrower member identity against data from consumer reporting agencies and other identity and anti-fraud verification databases, Prosper borrower listings are posted without our obtaining any documentation of the borrower’s ability to afford the loan.  In limited instances, we verify the income, employment, occupation or other information provided by Prosper borrower members in listings.  This verification is normally done after the listing has been created and bidding has ended, but before the loan is funded, and therefore the results of our verification are not reflected in the Prosper borrower listings.  Prosper borrower loans will be serviced by Prosper.  See “About the Platform.”

 

Open Market Loans.  Our platform permits originators to offer open market loans for sale by posting listings on the platform indicating an initial sale price of the loan and the yield percentage that corresponds to the sale price.  Open market loans have a fixed interest rate, maturities of at least three months and may be unsecured or secured by personal property.  Open market loans are existing loans that are owned by the originator that posted the listing, whether or not such originator originally made the loan.  Open market loans may include existing consumer loans or retail installment sale contracts as well as small business loans, where the borrower is a business entity, not an individual (although one or more individuals may be a guarantor of the loan).  Open market loans will be serviced, both before and after any default, by the originator.  In servicing open market loans the originator will use commercially reasonable efforts to service and collect the loans in accordance with industry standards customary for loans of the same general type and character as the open market loans.

 

Lender members access our platform and, by bidding, make purchase commitments for Notes that are dependent for payment on payments we receive on the corresponding open market loan for that series.  The actual bidding process for open market loans focuses on the projected “yield to maturity” of the remaining payments of the loan.  Lender members may bid by indicating a minimum yield percentage that they are willing to accept.  The initial sale price may be equal to, greater than or less than the outstanding balance of the open market loan listed for sale.  Similarly, the initial yield may be equal to, greater than or less than the interest rate the borrower is obligated to pay on the open market loan listed for sale.  The sale price and the yield are inversely proportionate.  As the yield is bid down, the sale price for the loan will increase.  Prosper’s bidding algorithm will take this into account, so if the current yield on a listing decreases as a result of bidding by lender members, the sale price will increase to an amount sufficient to produce the new yield, and additional bids will be allowed in to be applied toward the incremental increase in the sale price.

 

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At the close of the auction bidding period, if the listing receives bids totaling the sale price of the open market loan at the winning yield percentage, the originator sells and assigns the loan to Prosper, without recourse to the originator, in exchange for the sale price of the open market loan as determined by the auction bidding process.  Originators offering open market loans for sale on the platform have no obligation to purchasers of the Notes.  Prosper Open Market Notes are not obligations of the borrowers on the open market loans, or of the originators offering to sell open market loans on the platform.  We will not verify the information provided by originators in open market listings but will represent and warrant to the holders of Prosper Open Market Notes that the originator has made commercially reasonable efforts to authenticate and verify the identity of the borrower under the corresponding open market loan.  Prosper will also perform a due diligence review on each originator prior to permitting the originator to list open market loans for sale on the platform. — See “About the Platform.”

 

Lender Member Portfolio Plans.  Lender members may also use our proprietary search engine to bid by creating a “portfolio plan” indicating the aggregate amount of funds to be bid on listings that meet specified criteria, including the maximum amount that may be bid on one listing, the minimum interest rate or minimum yield percentage the lender member is willing to receive and other borrower-specific criteria such as the Prosper Rating of borrowers, credit characteristics, group affiliation or debt-to-income ratio.  Lender members may have more than one portfolio plan in place at once and may bid selectively while one or more portfolio plans are in place.  See “About the Platform How to Bid to Purchase Notes.”

 

Corporate Information

 

We were incorporated in the State of Delaware in March 2005, and our principal executive offices are located at 111 Sutter Street, 22nd Floor, San Francisco, California 94104.  Prosper’s telephone number at this location is (415) 593-5400.  Prosper’s website address is www.prosper.com. Information contained on our website is not incorporated by reference into this prospectus.

 

From the launch of our platform in February of 2006 until October 16, 2008, the operation of our platform differed from the structure described in this prospectus, and we did not offer Notes.  Instead, our platform allowed lender members to purchase, and take assignment of, borrower loans directly.  Under that structure the borrower loans were evidenced by individual promissory notes in the amount of each lender member’s winning bid, which notes were thereafter sold and assigned to each lender member with a winning bid, subject to our right to service the borrower loans.  In addition, we previously assigned one of seven letter credit grades based on the borrower’s credit score and displayed the borrower’s credit grade in the listing posted on our platform. On the effective date of this prospectus, however, each listing will be assigned a Prosper Rating.  For Prosper borrower listings, the Prosper Rating will be derived from two scores:  a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous Prosper borrower loans with similar characteristics. For open market listings, the originator will provide us with a loss rate on the type of loan being offered for sale, and we will translate the loss rate to a Prosper Rating.

 

From October 16, 2008 until the date of this prospectus, we did not offer lender members the opportunity to make any purchases on our platform. During this time, we also did not accept new lender registrations or allow new loan purchase commitments from existing lender members.  We continued to service all borrower loans originated on the platform on or before October 16, 2008, and lender members have been able to access their accounts, monitor their borrower loans and withdraw available funds without charges.  We also limited the borrowing side of our platform during this period.  Borrowers could still request loans, but those loan requests were forwarded to companies that had a pre-existing relationship with Prosper that could make or facilitate a loan to the borrower.

 

We have made significant changes to the operation of our lending platform that will become effective as of the date of this prospectus.  Our 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 our lending platform and our operations prior to the date of this prospectus.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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THE OFFERING

 

Issuer

 

Prosper Marketplace, Inc.

 

Securities offered

 

Borrower Payment Dependent Notes, or “Notes,” issued in series, with each series of Notes dependent for payment on payments Prosper receives on a specific borrower loan.  Notes dependent for payment on a Prosper borrower loan are referred to as “Prosper Borrower Notes” and Notes dependent for payment on an open market loan are referred to as “Prosper Open Market Notes.”

 

Offering price

 

100% of principal amount of each Note.

 

Initial maturity date

 

Prosper Borrower Notes.  Maturities currently are for three years and match the maturity date of the corresponding Prosper borrower loan.  Prosper anticipates in the near future extending available loan terms to between three months to seven years at which time the Prosper Borrower Notes will have terms between three months to seven years.

 

 

 

 

 

Prosper Open Market Notes.  Open market loans have maturities of at least three months and match the remaining term of the corresponding open market loan.

 

Final maturity date/
Extension of maturity date

 

One year after the initial maturity date.  Each Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding borrower loan remain due and payable to Prosper 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 after the final maturity date, we will have no further obligation to make payments on the Notes of the series even if we receive payments on the corresponding borrower loan after the final maturity date.

 

Interest rate

 

Prosper Borrower Notes.  Each series of Prosper Borrower Notes will have a stated, fixed interest rate, which is the interest rate for the corresponding borrower loan.

 

Prosper Open Market Notes.  Each series of Prosper Open Market Notes will have a stated, fixed interest rate equal to its yield percentage.

 

Setting interest rate for Prosper Borrower Notes

 

Interest rates vary among the Prosper Borrower Notes, but each series of Notes that corresponds to a single Prosper borrower loan will have the same interest rate.  Interest rates are determined in an auction format for Prosper borrower loans.  Prosper borrower members list the maximum interest rate they are willing to pay, and lender members bid the minimum interest rate they are willing to receive.  The interest rate is determined at the end of a seven-day auction bidding period.  If by the end of the listing period a listing receives purchase commitments in an aggregate amount equal to the corresponding Prosper borrower loan being requested, then the interest rate is fixed for the term of the Notes at the minimum interest rate acceptable to all lender members who are the winning bidders for the Prosper Borrower Notes.  To the extent there are multiple bids at the same interest rate in an aggregate amount in excess of the requested loan amount, the bids placed earliest in time take precedence over later bids.  Prosper borrower members may elect to forego the potential benefits of auction bidding and designate their listing for “automatic funding,” in which case the bidding period will end automatically as soon as the listing receives bids totaling the amount requested in the listing, and the interest rate will be fixed at the minimum interest rate acceptable to all lender members who are winning bidders. See “About the Platform—How to Bid to Purchase Notes.”

 

Setting Interest Rate for Prosper Open Market Loans

 

For open market loans, originators list the sale price for the open market loan and the yield percentage that corresponds to the sale price, the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan. The actual bidding process focuses on the projected “yield to maturity” of the remaining payments of the open market loan.  Lender members bid a minimum yield percentage that they are willing to accept through the auction format discussed above.  The final yield is the minimum

 

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yield for which there is sufficient participation among bidders to accommodate the final sale price at the end of the auction period. To the extent there are multiple bids at the same yield in an aggregate amount in excess of the sale price, the bids placed earliest in time take precedence over later bids.  As the yield is bid down, the sale price for the loan will increase.  Prosper’s bidding algorithm will take this into account, so as the current yield on a listing decreases, the sale price will increase to an amount sufficient to produce the new yield, and additional bids will be allowed in to be applied toward the incremental increase in the sale price.  Originators may also elect to designate their listing for “automatic funding,” in which case the bidding period will end automatically as soon as the listing receives bids totaling the amount requested in the listing, and the yield percentage will be fixed at the minimum yield percentage acceptable to all lender members who are winning bidders. See “About the Platform—How to Bid to Purchase Notes.”

 

Payments on the Notes

 

We will pay principal and interest on any Note a lender member purchases in an amount equal to the lender member’s pro rata portion of the principal and interest payments, if any, we receive on the corresponding borrower loan, net of our servicing fee of 1.0% for Prosper Borrower Notes and 0.5% for Prosper Open Market Notes.  We will also pay lender members any other amounts we receive on the corresponding borrower loan, including late fees and prepayments, subject to our servicing fee, except that we will not pay to lender members any non-sufficient funds fees or collection fees we, an originator or a third-party collection agency charge.  In addition, on Prosper Open Market Notes the orginator’s servicing fee (shown in the open market listing) will also be deducted from payments, if any, we receive on the open market loan, and late fees may be retained by the originator servicing the corresponding open market loan.  We will make any payments on the Notes when we receive the payments from the borrower or the originator with respect to the corresponding borrower loan.  See “Summary of Material Agreements—Indenture as Form of Notes” for more information.

 

Prosper borrower loans

 

Lender members will designate Prosper to apply the proceeds from the sale of each series of Prosper Borrower Notes to the purchase of a corresponding Prosper borrower loan of an individual consumer who is a Prosper borrower member.

 

Each Prosper borrower loan is a fully amortizing consumer loan made by WebBank to an individual Prosper borrower member.  Prosper borrower loans currently have a term of three years, but Prosper anticipates in the near future extending available loan terms to between three months to seven years.  Prosper borrower members may request loans within specified minimum and maximum principal amounts (currently between $1,000 and $25,000), which are subject to change from time to time.  WebBank subsequently assigns the borrower loan to Prosper without recourse to WebBank in exchange for the principal amount of the borrower loan.  Prosper borrower loans are repayable in monthly installments and are unsecured and unsubordinated.  Prosper borrower loans may be repaid at any time by Prosper borrower members without prepayment penalty.  Except for our verification of the Prosper borrower member’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases, Prosper borrower listings are posted without our obtaining any documentation of the borrower member’s ability to afford the loan.  In limited instances, we verify the income, employment, occupation or other information provided by Prosper borrower members in listings.  This verification is normally done after the listing has been created and bidding has ended, but before the loan has funded, and therefore the results of our verification are not reflected in the listings.  Prosper is responsible for servicing the Prosper borrower loans.  See “About the Platform” for more information.

 

Open market loans

 

Lender members will designate Prosper to apply the proceeds from the sale of each series of Prosper Open Market Notes to the purchase of a corresponding open market loan listed for sale on our platform.

 

Open market loans described in open market listings are existing loans that are owned by the originator that posted the listing, whether or not such originator originally made the loan, and may include secured or unsecured loans.  Open market loans may

 

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include existing consumer loans or retail installment sale contracts as well as small business loans, where the borrower is a business entity, not an individual (although one or more individuals may be a guarantor of the loan).  Once approved by Prosper, originators can offer to sell loans involving borrowers of any level of creditworthiness, including non-prime and sub-prime borrowers.  All open market loans listed on the platform must be current and a minimum number of payments, as specified by Prosper and subject to change from time to time, must have been made on the loan.  Open market loans may have outstanding principal amounts in excess of the maximum amount a borrower member may request on the platform, and may be repayable more or less frequently than monthly, and may or may not allow the borrower to prepay the loan without prepayment penalty.  Each open market loan will have a fixed interest rate and maturities of three months or more.  All open market loans are sold and assigned by the originator to Prosper, without recourse to the originator, at the end of the auction bidding period, if successful, at which time the proceeds of the sale of the open market loan from the originator to Prosper are paid to the originator.  Open market loans will be serviced, both before and after default, by the originator (although our loan purchase agreement with the originator may provide that we have the right, in our discretion, to take over servicing in the event of the originator’s default on its servicing obligations).  In servicing borrower loans the originator will 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 as the borrower loans.  The originator is obligated to forward to Prosper any amounts it receives from such activities in respect of the open market loan.  See “About the Platform” for more information.

 

Security Interest—Ranking

 

The Notes will not be contractually senior or contractually subordinated to any other indebtedness of Prosper.  All Notes will be unsecured special, limited obligations of Prosper.  The Notes do not restrict Prosper’s incurrence of other indebtedness or the grant or imposition of liens or security interests on the assets of Prosper and holders of the Notes do not directly have a security interest in the corresponding borrower loan or the proceeds of that loan.  In addition, Prosper Open Market Notes will not be secured by any collateral, even though the corresponding open market loan may be secured by personal property.  Although the originator is obligated to forward to Prosper any amounts it receives on the open market loans, including amounts received upon the sale of the collateral securing an open market loan, the holders of Prosper Open Market Notes do not have the right to foreclose on the collateral or to require that the originator take such action. See “About the Platform—Post-Funding Loan Servicing and Collection.”

 

In the event of a bankruptcy or similar proceeding of Prosper, the relative rights of a holder of a Note, as compared to the holders of unsecured indebtedness of Prosper are uncertain.  To provide additional certainty regarding this risk, Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in all present and future rights of Prosper to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture solely by reason of Prosper becoming subject to a bankruptcy or similar proceeding and not for any other reason.  In such case, the indenture trustee, but not the holders of the Notes for that series, would have a secured claim, limited in recovery, to the right to receive payments on, and to all payments previously received by Prosper with respect to, the corresponding borrower loan for that series of Notes, but not with respect to any other borrower loan.  See “Risk Factors—Risks Related to Prosper, Our Platform and Our Ability to Service the Notes” for more information.

 

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Servicing fee

 

We receive a servicing fee equal to an annualized rate of 1.0% for Prosper Borrower Notes, and 0.5% for Prosper Open Market Notes, of the outstanding principal balance of the corresponding borrower loan, which we deduct from each lender member’s share of the borrower loan payments.  In addition, the originator of open market loans charges a servicing fee (shown in the open market listing), which is deducted from principal and interest payments it receives on the open market loans and which will reduce the effective yield of the open market loan below the stated yield percentage.  This reduction will be automatically taken into account by our platform in calculating the yield percentage during bidding on an open market listing.  See “About the Loan Platform—Post-Funding Loan Servicing and Collection” for more information.  

 

Use of proceeds

 

We will use the proceeds of each series of Notes to purchase the corresponding borrower loan obtained by the Prosper borrower member or sold by an originator on our platform.

 

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 not be transferable except through the Note trading platform by a registered broker-dealer yet to be determined.  If Prosper establishes the trading platform on which the Notes may be resold, Prosper intends to charge all lender members who list their Notes for sale a nonrefundable administrative fee in a specified amount (currently $0.25) that is subject to change from time to time.  Listing fees will be charged and collected at the time the listing is posted on the trading platform by deducting the resale listing fee from the selling lender member’s funding account.

 

There can be no assurance, however, that a market for Notes will develop on the trading platform. Therefore, lender members must be prepared to hold their Notes to maturity.  See “About the Platform—Trading Platform” for more information.

 

U.S. federal income tax consequences

 

Although the matter is not free from doubt, Prosper intends to treat the Notes as debt instruments of Prosper that have original issue discount (OID) for U.S. federal income tax purposes.  Accordingly, a holder of a Note will be required to include OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest payments on the Note), regardless of such holder’s regular method of tax accounting.  Prospective purchasers of the Notes should consult their own tax advisors 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 U.S. Federal Income Tax Considerations” for more information.

 

Financial suitability

 

Lender members should be aware that we may apply financial suitability standards or maximum investment limits to residents of certain states.  If established, before purchasing Notes, each lender member will be required to represent and warrant that he or she meets these minimum financial suitability standards and maximum investment limits.  See “Financial Suitability Requirements” for more information.

 

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The following diagram illustrates the basic structure of our platform for a single series of Notes.  This graphic does not demonstrate many details of our platform, including the effect of pre-payments, late payments, late fees or collection fees.  See “About the Platform” for more information.

 

 

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QUESTIONS AND ANSWERS

 

Q:               Who is Prosper?

 

A:                Prosper provides a person-to-person online credit auction platform that enables its borrower members to borrow money, its originator members to sell open market loans, and its lender members to purchase Notes issued by Prosper, the proceeds of which facilitate the funding or sale of specific loans made to borrowers.

 

Q:               What is our platform?

 

A:                Our platform is an online auction-style marketplace that permits our lender members to bid on listings and purchase from Prosper Notes that are dependent for payment on payments we receive on the corresponding borrower loans described in the listings.  Two types of listings appear on our platform: (1) listings posted by individual consumer members of Prosper requesting individual consumer loans, which we refer to as “Prosper borrower listings” and “Prosper borrower loans,” respectively; and (2) listings posted by financial institutions registered with Prosper setting forth the terms of existing loans and retail installment sale contracts owned by the financial institutions and offered for sale to Prosper, which we collectively refer to as “open market listings” and “open market loans,” respectively.  We refer to the financial institutions, which may include commercial banks, savings banks, consumer finance companies and other types of financing entities, registered with Prosper and eligible to list open market loans for sale on our platform, as “originators.”  Each listing sets forth the desired loan amount or sales price, offered interest rate or yield percentage, and other information including but not limited to the Prosper Rating for the borrower, debt-to-income ratio, and certain credit information from the borrower’s credit report. Prosper borrower listings include the borrower’s self-reported, unless otherwise indicated, annual income range, occupation and employment status, and the borrower’s group affiliation, if any. Open market listings set forth a description of the collateral, if any, securing the borrower loan, and contain as much of the foregoing borrower credit and employment data as the originator provides.  Prosper borrower members are identified by a Prosper screen name but are not able to disclose in listings their identity or contact information to lenders.  Listings are displayed publicly on our platform, although certain information is only viewable by registered lender members.

 

Q:               Who is WebBank?

 

A:                WebBank is an FDIC-insured Utah-chartered industrial bank that is authorized or permitted to make loans in the states where Prosper borrower members reside, and makes all Prosper borrower loans originated through our platform.

 

Q:               Who are Originators?

 

A:                We refer to the financial institutions, which may include commercial banks, savings banks, consumer finance companies and other types of financing entities, registered with Prosper and eligible to list open market loans for sale on our platform, as “originators.”

 

Q:               What is a Prosper borrower listing?

 

A:                A Prosper borrower listing is a request by a Prosper borrower member for a Prosper borrower loan in a specified amount, at an interest rate equal to the maximum interest rate set forth in the listing.  In addition to the Prosper borrower’s requested loan amount and maximum interest rate, listings will show the Prosper borrower member’s Prosper Rating, and will also show the borrower’s numerical credit score range, as well as the debt-to-income ratio, summary information from the borrower’s credit report, and self-reported occupation, employment status and range of income, and may include photos or the borrower’s narrative description of (i) why the loan is being requested and (ii) the borrower’s financial situation.  Prosper borrower listings may only be created by individuals registered as borrowers on our platform. Prosper borrower listings are displayed publicly on our platform, although certain information is only viewable by registered lender members.  The specific numerical credit score received from the credit reporting agency is not displayed or disclosed to anyone (including the borrower).

 

Q:               What is an open market listing?

 

A:                An open market listing is a listing posted by an originator on our platform that describes an existing loan owned by the originator upon which a series of Prosper Open Market Notes will be dependent for payment.  Open market listings display the sale price for the open market loan, the yield percentage that corresponds to the sales price, the remaining principal balance of the loan and the interest rate the borrower is obligated  

 

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to pay on the loan.  The listing will describe the open market loan being offered for sale, including the name of the originator, the loan type, the origination date, the interest rate, remaining loan term, payment frequency and payment amount and projected loss rate and credit attributes of the borrower as of the time of the origination.  Listings in the open market will also show the Prosper Rating and the borrower’s credit score range at origination, as well as the current credit score range provided by the originator.  The Prosper Rating is determined, in part, based on the estimated loan loss rate as of the time the open market loan was originated as provided by the originator and does not consider historical performance of previous Prosper borrower loans.  In addition, open market listings set forth the servicing fee payable to the originator under the loan.  Finally, the open market listing will contain information regarding the status of the loan, including the current balance, a history of timeliness of payments to date, maturity date for the loan and a “starting price” for bidding.  Open market listings are formatted into a listing similar in design to Prosper borrower listings, but with additional information that will make these listings easily identifiable.

 

Q:               What are the principal differences between a Prosper borrower listing and open market listing?

 

A:                Open market loans have been underwritten by the credit standards of the originator and all borrower information set forth in the open market listing, including the expected loss rates, are supplied by the originator to Prosper.  We do not verify the information provided by originators in open market listings, including the identity of the borrower, but will represent and warrant to the holders of Prosper Open Market Notes that the originator has made commercially reasonable efforts to authenticate and verify the identity of the borrower under the corresponding open market loan.

 

On open market listings, the Prosper Rating and credit details of the borrower will be determined and will represent the borrower’s credit as of the time the open market loan was originated, not at the time the open market listing is posted on our platform.  Accordingly, much of the borrower’s credit information could be outdated.

 

In determining the Prosper Rating for open market loans, Prosper will rely on projected loss rates supplied by the originator.  Prosper believes that the originator will likely have a sufficient history to make meaningful projections involving credit risk.

 

Q:               What are Prosper borrower loans?

 

A:                Prosper borrower loans are unsecured obligations of individual borrower members with an interest rate determined in an auction format. Prosper borrower loans currently have a term of three years, but Prosper anticipates in the near future extending available loan terms to between three months to seven years.  Each Prosper borrower loan is originated through our website, funded by WebBank and sold and assigned to Prosper after it is made in exchange for the principal amount of the corresponding borrower loan.  Prosper borrower members may request loans within specified minimum and maximum principal amounts, currently between $1,000 and $25,000.  Prosper borrower loans are repayable in monthly installments and are unsecured and unsubordinated.  Prosper borrower loans may be repaid at any time by Prosper borrower members without prepayment penalty.  A Prosper borrower loan will be made to a borrower member only if the borrower’s listing has received bids totaling the full amount of the requested loan.

 

Q:               What are open market loans?

 

A:                Open market loans described in open market listings are existing loans that are owned by the originator that posted the listing, whether or not such originator originally made the loan, and may include secured or unsecured loans.  Open market loans may include existing consumer loans or retail installment sale contracts as well as small business loans, where the borrower is a business entity, not an individual (although one or more individuals may be a guarantor of the loan).  Once approved by Prosper, originators can offer to sell loans involving borrowers of any level of creditworthiness, including non-prime and sub-prime borrowers.  All open market loans listed on the platform must be current and a minimum number of payments, as specified by Prosper and subject to change from time to time, must have been made on the loan.  Open market loans may have outstanding principal amounts in excess of the maximum amount a borrower member may request on the platform, and may be repayable more or less frequently than monthly, and may or may not allow the borrower to prepay the loan without prepayment penalty.  Each open market loan will have a fixed interest rate and maturities of at least three months.  All open market loans are sold and assigned by the originator to Prosper, without recourse to the originator, at the end of the auction bidding period, if successful.  Open market loans will be serviced, both before and after default, by the originator.  Our loan purchase agreement with the originator may provide that we have the right, in our discretion, to take over servicing in the event of the originator’s default on its servicing obligations.

 

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Q:               Do lender members make loans directly to Prosper borrower members or purchase open market loans directly from originators?

 

A:                No.  Lender members do not make loans directly to Prosper borrower members or purchase open market loans directly from originators.  Instead, lender members purchase Notes issued by Prosper, the proceeds of which are designated by the lender members who purchase the Notes to facilitate the funding or sale of the borrower loan described in the listing. We use all proceeds we receive from issuances of the Notes to purchase the corresponding borrower loans.  Even though lender members do not make loans directly to Prosper borrower members, or purchase loans directly from originators, the lender members will nevertheless be wholly dependent on the borrowers for repayment of the Notes.  If a borrower defaults on the payment obligations under the borrower loan, Prosper will not have any obligation to make payments to the holders of Notes dependent for payment on that borrower loan.

 

Q:               Who are our lender members?

 

A:                Our lender members are individuals and organizations that have the opportunity to buy our Notes.  Lender members must register on our website.  During lender registration, potential lender members must agree to a credit profile authorization statement for identification purposes, a tax withholding statement and the terms and conditions of the Prosper website, and must enter into a lender member registration agreement with Prosper, which will govern the terms under which a lender member may purchase Notes from Prosper.

 

Q:               What is a bid?

 

A:                A bid is a lender member’s commitment to purchase a Note in the principal amount of the lender member’s bid.  A borrower loan will be made or purchased if the listing has received bids totaling the full amount of the requested loan or sale price.  Lender members “bid” the amount they are willing to commit to the purchase of a Note that is dependent for payment on payments we receive on the borrower loan described in the listing, and the minimum interest rate or yield percentage the lender member is to receive.  Lenders must have funds in the amount of the bid in the Lender member’s funding account at the time the bid is made.  Currently, a bid may be between $50 and the full amount of the listing.  Once a bid is placed, it is irrevocable, and during the time a bid is a “winning” bid on the listing, the amount of the bid is not permitted to be withdrawn from the lender member’s funding account.  Lender member bids become “winning” bids if such bids are in the group of bids for Notes that, in an aggregate, correspond to the requested loan amount or sale price of the corresponding borrower loan and are in the lowest interest rate or yield percentage among all bids placed against the listing.

 

To the extent there are multiple bids at the same interest rate or yield percentage in an aggregate amount in excess of the requested loan amount or sale price, the bids placed earliest in time take precedence over later bids. When the total amount of all bids placed in the auction equals or exceeds the initial sale price, further bids have to be placed at least 0.05% below the current winning interest rate or yield percentage.  It is possible that only a portion of a lender member’s bid is winning on a listing.  Depending on the amount of the winning bids at the end of the auction period, there may be a winning bidder on a listing with a winning bid of less than $50.  There may be only one partial winning bidder.

 

Q:               How are interest rates and payments calculated on Borrower Payment Dependent Notes?

 

A:                The interest rate on a Borrower Payment Dependent Note is the rate determined by our platform’s auction system for the borrower loan that corresponds to the Note.  The interest rate on a Prosper borrower loan is the minimum interest rate for which there is sufficient participation among bidders, at the end of the auction period, to accommodate the requested loan amount set forth in the listing.  The interest rate on a Prosper open market loan is the minimum yield for which there is sufficient participation among bidders to accommodate the final sale price at the end of the auction period.  Payments on Prosper Borrower Notes are the same as borrower payments on Prosper borrower loans. Payments on Prosper Open Market Notes are in an amount sufficient to amortize the sale price of the open market loan over the remaining term of the open market loan at the yield percentage determined at the end of the auction bidding period.

 

Q:               What is a Portfolio Plan?

 

A:                Lender members may bid by creating a “portfolio plan” indicating the aggregate amount of funds to be bid on listings that meet specified criteria, including the maximum amount that may be bid on one listing, the minimum interest rate the lender member is willing to receive and other borrower-specific criteria such as the Prosper Rating or credit score

 

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range of borrowers, credit, income and employment characteristics, group affiliations or debt-to-income ratio.  Lender members may have more than one portfolio plan in place at once and may bid selectively while one or more portfolio plans are in place.

 

Q:               How does the bidding process differ for open market listings?

 

A:                The bidding process for open market listings focuses on the projected “yield to maturity” of the remaining payments of the loan.  The originator offering the loan for sale sets an initial sale price and an initial yield. The yield is calculated as the internal rate of return of the anticipated cash flows assuming all loan payments are made as scheduled. The initial sale price may be equal to, greater than or less than the outstanding balance of the loan being offered for sale. Similarly, the initial yield may be equal to, greater than or less than the interest rate the borrower is obligated to pay on the open market loan being offered for sale. The sale price and the yield are inversely proportionate. An open market loan sold at a higher price than the outstanding balance will result in a yield lower than the borrower’s interest rate, and an open market loan sold at a lower price will result in a yield higher than the borrower’s interest rate.

 

If the initial sale price is equal to the outstanding principal balance of the loan being offered for sale, the initial yield shown in the listing will be equal to the borrower’s interest rate. If the initial sale price is greater than the outstanding principal balance of the loan being offered for sale, the initial yield shown in the listing will be lower than the borrower’s interest rate, and the loan will be offered at a premium. If the initial sale price is less than the outstanding principal balance of the loan being offered for sale, the initial yield shown will be higher than the borrower’s interest rate, and the loan will be offered at a discount.

 

Lender members bid at a minimum yield percentage that they are willing to accept.  The current yield as set forth in an open market listing at any given time during the duration of the listing is the minimum yield for which there is sufficient participation among bidders to accommodate any corresponding increase in the sale price. The final yield is the minimum yield for which there is sufficient participation among bidders to accommodate the final sale price at the end of the auction period. To the extent there are multiple bids at the same yield in an aggregate amount in excess of the sale price, the bids placed earliest in time take precedence over later bids.  As the yield is bid down, the sale price for the loan will increase.  Prosper’s bidding algorithm will take this into account, so as the current yield on a listing decreases, the sale price will increase to an amount sufficient to produce the new yield, and additional bids will be allowed in to be applied toward the incremental increase in the sale price.

 

When bidding commences on the listing, a lender member may place a bid by specifying an amount to invest and the lowest estimated yield the lender member is willing to receive.  If the total amount of all bids placed is less than the initial sale price, new bids can be placed at or below the initial yield.  If the listing receives sufficient bids to match the sale price of a loan at the winning yield percentage prior to the end of the auction, once ended, Prosper will purchase that loan from the listing originator.

 

Q:               What are our Borrower Payment Dependent Notes?

 

A:                Our lender members may purchase Borrower Payment Dependent Notes, or “Notes,” from Prosper.  We will issue the Notes in a series, with each series dependent for payment on payments we receives on a specific borrower loan.  Notes dependent for payment on a Prosper borrower loan are referred to as “Prosper Borrower Notes” and Notes dependent for payment on an open market loan are referred to as “Prosper Open Market Notes.”  The proceeds of each series of Notes will be designated by the lender members who purchase the Notes of the series to facilitate the funding or sale of a corresponding borrower loan obtained or sold through our platform.  Each series of Notes will have a stated interest rate.  For Prosper Borrower Notes, the interest rate will equal the interest rate for the corresponding Prosper borrower loan.  For Prosper Open Market Notes, the interest rate will equal the final yield percentage, which may be higher than or lower than the interest rate of the corresponding open market loan.  We will pay principal and interest on any Note you purchase in an amount equal to your pro rata portion of the principal and interest payments, if any, we receive on the corresponding borrower loan, net of our servicing fee of 1.0% for Prosper Borrower Notes and 0.5% for Prosper Open Market Notes.  In addition, the originator of open market loans charges a servicing fee, which is deducted from principal and interest payments it receives on the open market loans and which will reduce the effective yield of the open market loan below the stated yield percentage.  We will also pay you any other amounts we receive on the open market loans, including late fees and prepayments, subject to our servicing fee, if any, except that we will not pay you any non-sufficient funds fees or collection fees we or a third-party collection agency charge.  In addition, on Prosper open market loans late fees may be retained by the originator servicing the open market loan.  The servicing fee will reduce the effective yield on your Notes below their stated interest rate.  The Notes are special, limited

 

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obligations of Prosper only and not the borrowers.  The Notes will be unsecured and do not represent an ownership interest in the corresponding borrower loans.

 

Q:               What are the material differences between Prosper Borrower Notes and Prosper Open Market Notes?

 

A:                All open market loans must be current and a minimum number of payments, as specified by Prosper and subject to change from time to time, must have been made on the loan.  Accordingly, as compared to Prosper Borrower Notes, Prosper Open Market Notes may have a significantly lower risk of identity theft or first payment default.

 

Unlike Prosper borrower loans, open market loans listed on our platform may be secured.  Although the open market loan upon which a Prosper Open Market Note is dependent for payment may be secured by personal property, the Prosper Open Market Notes will still be an unsecured obligation of Prosper.  The originator is obligated to forward to Prosper any amounts it receives on the open market loan, including amounts received upon the sale of the collateral securing an open market loan.  The holders of the Prosper Open Market Notes, however, do not have any right to enforce the security interest themselves or to require that the originator do so.  Any recoveries based on the liquidation of the collateral by the originator, will likely limit your losses in the event of borrower default.

 

Open market loans will be serviced, both before and after default, by the originator, although our loan purchase agreement with the originator may provide that we have the right, in our discretion, to take over servicing in the event of the originator’s default on its servicing obligations.  Prosper borrower loans will be serviced, both before and after default, by Prosper.

 

In addition to the above information, the holders of Prosper Open Market Notes may be exposed to risks different than those experienced by holders of Prosper Borrower Notes.  See “Risk Factors—Additional Risks for Prosper Open Market Notes.” for more information.

 

Q:               How are the Notes being offered?

 

A:                We are offering the Notes directly to lender members only through our website for a purchase price of 100% of the principal amount of the Notes.  We are not using any underwriters, and there will be no underwriting discounts.

 

Q:               Will I receive a certificate for my Notes?

 

A:                No.  The Notes are issued only in electronic form. This means that each Note will be stored on our 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-protected webpage in the “My Account” section of our website.

 

Q:               Will the Notes be listed on an exchange?

 

A:                No.  The notes will not be listed on any securities exchange.

 

Q:               Will I be able to sell my Notes?

 

A:                The Notes will not be transferable except through the Note trading platform by a registered broker-dealer yet to be determinedThere can be no assurance, however, that a market for Notes will develop on the trading platform. Therefore, lender members must be prepared to hold their Notes to maturity.  See “About the Platform—Trading Platform” for more information.

 

Q:               Who are Prosper borrower members?

 

A:                Any natural person at least 18 years of age who is a U.S. resident in a state where loans through the platform are available, with a bank account and a social security number that has registered with Prosper and passed our anti-fraud and identity verification process.  Prosper currently allows Prosper borrower members to post listings on our platform regardless of their income.  Prosper reserves the right to restrict access to our platform by setting minimum credit or other guidelines for borrowers.  Currently, a borrower must have a credit score of at least 640 (before October 16, 2008, the minimum was 620) in order to post a listing on our platform, without any restrictions.  Prosper borrowers with a credit score below 640 may only

 

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post listings and obtain Prosper borrower loans through our platforms “open social” feature, where bids are made primarily from friends and family.

 

Q:               Does Prosper verify the listing information provided by Prosper borrower members?

 

A:                When a borrower registers on our platform, we obtain his or her social security number, state driver’s license or state identification card number and bank account information in an effort to verify the borrower’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  Except for our verification of the Prosper borrower member’s, Prosper borrower listings are posted without our obtaining any documentation of the borrower’s ability to afford the loan.  In limited instances, we verify the income, employment, occupation or other information provided by Prosper borrower members in listings.  This verification is normally done after the listing has been created and bidding has ended, but before the loan is funded, and therefore the results of our verification are not reflected in the Prosper borrower listings.

 

Q:               Does Prosper verify the listing information provided by originators for open market loans?

 

A:                The information in open market listings describing the borrower loan for sale is provided by the originator and is not verified by Prosper.  Prosper represents and warrants to the holders of each series of Notes, that the originator has made commercially reasonable efforts to authenticate and verify the identity of the borrower under corresponding open market loan upon which a series of Notes is dependent for payment.

 

Q:               Are the Notes secured by any collateral?

 

A:                No.  All Notes will be unsecured special, limited obligations of Prosper.  The Notes do not restrict Prosper’s incurrence of other indebtedness or the grant or imposition of liens or security interests on the assets of Prosper and holders of the Notes do not directly have a security interest in the corresponding borrower loan or the proceeds of that loan.  In addition, Prosper Open Market Notes will not be secured by any collateral, even if the corresponding open market loan is secured by personal property.  Although the originator is obligated to forward to Prosper any amounts it receives on the open market loans, including amounts received upon the sale of the collateral securing an open market loan, the holders of Prosper Open Market Notes do not have the right to foreclose on the collateral or to require that the originator take such action.

 

Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in all present and future rights of Prosper to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture solely by reason of Prosper becoming subject to a bankruptcy or similar proceeding and not for any other reason.  In such case, the indenture trustee, but not the holders of the Notes for

 

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that series, would have a secured claim, limited in recovery, to the right to receive payments on, and to all payments previously received by Prosper with respect to, the corresponding borrower loan for that series of Notes, but not with respect to any other borrower loan.

 

Q:               Who can be a lender member and place bids on our platform?

 

A:                Any natural person at least 18 years of age who is a U.S. resident with a bank account and a social security number or any institution with a taxpayer identification number can be a lender member and place bids on our platform. In order to bid on a listing, a lender member must have funds on deposit in a Prosper funding account in at least the amount of the lender member’s bid.

 

Q:               Can any person list open market loans for sale on our platform?

 

A:                No.  Prior to approving an originator to list loans for sale, Prosper undertakes a due diligence process of the candidate institution.  Our objective is to confirm that the information provided by the originator will accurately describe the loan being listed for sale, and to establish service level agreements and reports to monitor critical processes on an ongoing basis.  This monitoring process includes both monthly reports and periodic on-site audits.  During this process we review the credit quality, underwriting and loss expectation of the open market loans.  We also review the originator’s processes with respect to loan origination, chain of title, documentation, balance calculation, record keeping system, servicing and collections, dispute resolution and end-of-loan procedures.  A copy of the report summarizing the due diligence is posted on the Prosper website for lender members to review.  Additional status information will be posted on the Prosper website so that investors can monitor the performance of open market loans sold by particular originators.

 

Q:               Does Prosper or WebBank participate in the platform as a lender member?

 

A:                No, neither Prosper nor WebBank participates in our platform as a lender member.  The directors or executive officers of Prosper have in the past and may in the future participate in their individual capacities as lender members on our platform. WebBank is the originating lender on all Prosper borrower loans made through our platform, and then sells and assigns the borrower loans to Prosper.

 

Q:               Do lender members need to be licensed as a consumer lender or finance company?

 

A:                Our platform is designed and structured in a manner such that the activities performed by lender members on our platform do not trigger state lending or finance company licensing requirements.  States that have lending or finance company licensing laws normally require a lending license for persons who engage in the business of making loans.  All borrower loans originated on our platform are made by WebBank from WebBank’s own funds, and WebBank is the named lender on all promissory notes representing borrower loans.  Prosper performs its identity and anti-fraud verification process on all Prosper borrower loans and services the Prosper borrower loans.  WebBank is the originating lender and has authority to make borrower loans in all states where loans through the platform are available.  Persons who register as lender members do not lend money, but rather purchase Notes issued by Prosper.  The proceeds of the sale of Notes are not disbursed to borrowers.  See “Government Regulation—Regulation and Consumer Protection Laws” for more information and “Risk Factors—Risks Inherent in Investing in the Notes” for more information.

 

Q:               Can Prosper borrower members have more than one loan outstanding at any one time?

 

A:                Yes.  Prosper borrower members may have up to two Prosper borrower loans originated through the platform outstanding at any one time, provided that the aggregate outstanding principal balance of both Prosper borrower loans does not exceed the then-current maximum allowable loan amount for Prosper borrower loans (currently $25,000).  Currently, to be eligible to obtain a second Prosper borrower loan while an existing loan is outstanding,

 

·                  Prosper borrower members must be current on their existing Prosper borrower loan, and must not have been more than fifteen days past due in making their most recent monthly Prosper borrower loan payments for a specified number of months (between six and twelve, depending on the borrower’s credit score range),

 

·                  Prosper borrower members may not post a listing for a second Prosper borrower loan within six to twelve months (depending on the borrower’s credit score range) following the date of origination of their existing Prosper borrower loan, and

 

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·                  the Prosper borrower member’s Prosper Rating must not drop more than a specified number of points (currently twenty to forty points, depending on the borrower’s credit score range at time the existing loan was obtained) below what it was when the Prosper borrower member’s existing Prosper borrower loan was obtained.

 

Prosper borrower member eligibility requirements for second loans are subject to change from time to time.

 

Q:               How much money can lender members bid on our platform?

 

A:                Our platform currently allows lender members to bid as little as $50 and as much as the full amount of any particular listing, up to an aggregate amount of $5,000,000 for individuals and $50,000,000 for institutions.

 

Q:               What is a Prosper Rating?

 

A:                Each listing will be assigned a proprietary credit rating by Prosper, referred to as the Prosper Rating.  The Prosper Rating is a letter that indicates the borrower’s level of risk and corresponds to an estimated average annualized loss rate range.  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.  For Prosper borrower listings, the Prosper Rating will be derived from two scores:  a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous Prosper borrower loans with similar characteristics.  For open market listings, the originator will provide us with a loss rate on the type of loan being offered for sale, and we will translate the loss rate to a Prosper Rating.  The use of these two scores will determine an estimated loss rate for each listing, which correlates to a Prosper Rating.  This new rating system allows Prosper to maintain consistency when assigning a rating to the borrower regardless of originator, type of credit score used or type of loan being offered for sale.  See “About the Platform—Prosper Rating Assigned to Borrowers,” for more information..

 

Q:               Why did Prosper revise its credit grading system?

 

A:                The goal of the new credit grading system is to have our credit grades align with loss rate tiers, rather than simply with credit score tiers.  The new credit grading system places less emphasis on the borrower’s credit score because, under our prior method, at times we experienced variations in loss rates among Prosper borrower members within the same credit grade due to variations in the borrower’s credit characteristics within a credit score tier.  Now that Prosper borrower loans have a record of repayment, the observed loss rates are a more reliable measure of loan performance than a borrower’s credit score.  In addition, a new grading system based on loss rates allows Prosper to maintain consistency when assigning a Prosper Rating to the borrower regardless of originator, type of credit score used or type of loan.  This is particularly important because with the introduction of open market listings on our platform, originators will be using a number of different credit scores.

 

Q:               What is a debt-to-income ratio?

 

A:                Part of a borrower’s credit profile displayed in listings is a debt-to-income ratio (or DTI).  DTI is a measurement of the borrower’s ability to take on additional debt.  This number takes into consideration how much debt the borrower had prior to requesting a borrower loan in addition to what the borrower’s debt will be if the requested borrower loan is made.  The DTI is expressed as a percentage and is calculated by dividing the borrower’s monthly income (before taxes) into his or her monthly non-housing debt payments.  In some instances, open market listings will include housing payments in the DTI.  Borrower income is self-reported, and Prosper does not verify any borrower’s income when calculating DTI for the listings.

 

Q:               How do lender members receive payments on the Notes?

 

A:                All payments on the Notes are processed through our platform. If and when we make a payment on a Note, the payment will be deposited in the lender member’s Prosper account.  Lender members may elect to have available balances in their Prosper account transferred to their bank account at any time, subject to normal execution times for such transfers (generally 2-3 days).  For open market loans, we will transfer borrower payments to the funding account of the lender members who own Notes corresponding to the borrower loan upon receipt of such payments from the originator servicing the open market loan. Any delay between the time an originator receives a borrower payment and the time the payment is transferred to the lender member’s funding account may reduce the yield to maturity displayed in the open market listing relating to the open market loan.

 

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Q:               What happens if a borrower misses a payment or does not repay the borrower loan?

 

A:                Borrowers who miss payments face the same consequences as they would if they missed payments on any form of bank or other commercial credit obligation, including the reporting of late payments to consumer reporting agencies.  Borrowers also incur late fees for missed or delinquent payments, to the extent allowed by applicable law. Late fees collected by Prosper on Prosper borrower loans are passed on to the lender members who own the Notes dependent for payment on that borrower loan.  Late fees collected by originators on open market loans may be retained by the originator servicing the open market loan.

 

Prosper borrower loans.  When a borrower’s payment is late, we communicate directly with the borrower to encourage repayment.  After 30 days, we refer the borrower loan to a nationally-licensed collection agency, which makes further attempts to collect delinquent amounts and have the borrowers bring the account current.  Borrower loans that become 120 days past due are charged off.  Depending on market conditions, we either sell charged off loans to an unaffiliated third party debt purchaser or continue to collect on those accounts, and we may in our discretion institute legal proceedings to collect the debt.  We report loan delinquencies and charge-offs to consumer reporting agencies, which negatively impacts the borrower’s credit file.  Borrowers whose loans are charged off are not permitted to post any further listings on our platform. See “About the PlatformPost-Funding Loan Servicing and Collection” for more information.

 

Open market loans.  Open market loans will be serviced, both before and after default, by the originator (although our loan purchase agreement with the originator may provide that we have the right, in our discretion, to take over servicing in the event of the originator’s default on its servicing obligations).  The originator may, in its sole discretion and subject to the agreed-upon servicing standards, refer a borrower loan to a collection agency at any time, or elect to initiate legal action to collect a borrower loan, repossess or foreclose upon any collateral securing a borrower loan, or sell a borrower loan to a third party debt buyer at any time. Any amounts received from borrowers will be forwarded to Prosper by the originator. In servicing borrower loans the originator may, in its discretion, utilize affiliated or unaffiliated third party loan servicers, repossessors, collection agencies or other agents or contractors.

 

Q:               What guarantees do lender members have that a Note will be paid?

 

A:                There are no guarantees that a Note will be paid.  See “Risk Factors—Risks Related to Borrower Default” for more information.

 

Q:               Can lender members collect on late payments themselves?

 

A:                No.  Under the lender registration agreement and the terms of the indenture, each lender member agrees that under no circumstances may a lender member attempt collection of a late payment, or any amounts owing on a borrower loan corresponding to their Note, themselves.  Lender members must depend on Prosper, the originator or third-party collection agents to pursue collection on delinquent Prosper borrower loans or open market loans.  If collection action must be taken in respect of a borrower loan, we, the originator or the collection agency will charge a collection fee of between 15% and 30% of any amounts that are obtained.  These fees will correspondingly reduce the amounts of any payments lender members receive on the Notes.

 

Q:               What happens if a borrower repays early?

 

A:                Prosper borrower members are permitted to make extra payments on, or prepay, their Prosper borrower loans in part or in their entirety at any time without penalty.  In general, borrower under open market loans have similar rights.  Depending on the particular loan type in question, borrowers on open market loans may or may not be permitted to prepay the loan without penalty.  In the event of a prepayment of the entire remaining unpaid principal amount of a borrower loan on which Notes are dependent, lender members will receive their pro-rata share of such prepayment, net of servicing fees, and interest will stop accruing after the date on which such prepayment is received by us.  If a borrower partially prepays a borrower loan, we will pay lender members their share of the prepayment amount we receive, net of servicing fees, and the amount of the prepayment will reduce the principal amount on the Note.  See “Risk Factors—Risks Inherent in Investing in the Notes” for more information.

 

Q:               How are the Notes treated for United States federal income tax purposes?

 

A:                Although the matter is not free from doubt, Prosper intends to treat the Notes as debt instruments of Prosper that have original issue discount (OID) for U.S. federal income tax purposes.  Accordingly, a holder of a Note will be required to

 

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include OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest payments on the Note), regardless of such holder’s regular method of tax accounting.  Prospective purchasers of the Notes should consult their own tax advisors 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 U.S. Federal Income Tax Considerations” for more information.

 

Q:               What is a group?

 

A:                A group can be any collection of people with common interests, including social, cultural, ethnic, professional, educational, athletic, religious, or any other official or unofficial affiliation.  Groups may consist of Prosper borrower members, lender members or registered Prosper users who have not taken a role, or any combination of the above.  Groups allow people to join together for the common goal of borrowing money at better rates and give borrowers an additional incentive — the borrower’s reputation in the group — to meet their obligation to repay a borrower loan.  Prosper does not approve or verify the group membership criteria and any claims of group affiliation by Prosper borrower members or lender members may be erroneous.

 

Q:               What are the benefits of group membership?

 

A:                Prosper borrower listings identify the group, if any, to which the borrower belongs.  Prosper believes that a borrower’s identification with a group may attract bids from lender members with similar interests, resulting in borrower loans with potentially lower interest rates for the group’s borrowers, or a greater likelihood of loan funding.  As discussed above, Prosper does not verify the group membership criteria and any claims of group affiliation by Prosper borrower members or lender members may be erroneous.

 

Q:               Do groups or group leaders guarantee the Prosper borrower loans requested by their members?

 

A:                No.  Neither groups nor group leaders guarantee their members’ obligations under any borrower loan in any way, nor do group members guarantee the borrower loans of fellow group members.  Borrowers are fully responsible for their own credit obligations.

 

Q:               Do groups or group leaders make bidding decisions or set rates for Prosper borrower loans requested by their members?

 

A:                No.  Neither groups nor group leaders make bidding decisions or set interest rates, although members of groups who are lender members can affect rates by bidding on their fellow group members’ listings.

 

Q:               How is Prosper regulated?

 

A:                The servicing of Notes is subject to state and federal regulation.  Prosper and the Prosper borrower loans originated or sold on our platform must comply with applicable state laws, including licensing and disclosure requirements.  In addition, in connection with the origination, sale and servicing of borrower loans, we must comply with the federal Consumer Credit Protection Act, including, as applicable, the Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act and Electronic Fund Transfer Act, as well as the federal Electronic Signatures in Global and National Commerce Act (ESIGN) and other federal and state laws governing privacy and data security and prohibiting unfair or deceptive business practices.  We are subject to examination, supervision, and potential regulatory investigations and enforcement actions by state and federal agencies, such as the Federal Trade Commission, that administer the federal consumer protection laws.  See “Government Regulation—Regulation and Consumer Protection Laws” for more information.

 

Q:               How is WebBank regulated?

 

A:                WebBank’s lending activities are subject to state and federal regulation.  WebBank and the borrower loans it makes must comply with applicable state lending laws, to the extent such laws are not preempted by federal law applicable to state-chartered industrial banks.  In addition, WebBank must comply with the federal Consumer Credit Protection Act, including, as applicable, the Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act and Electronic Fund Transfer Act, as well as the federal Electronic Signatures in Global and National Commerce Act (ESIGN) and other federal and state laws governing privacy and data security and prohibiting unfair or deceptive business practices.  WebBank is subject to examination, supervision, and potential regulatory

 

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investigations and enforcement actions by state agencies that regulate Utah-chartered industrial banks, and federal agencies, such as the FDIC, that regulate industrial banks and administer the federal consumer protection laws.  See “Government Regulation—Regulation and Consumer Protection Laws” for more information.

 

Q:               How does Prosper make money from our platform?

 

A:    Each time a Prosper borrower loan is funded, the borrower is charged a transaction fee equal to a specified percentage (currently 2.5%) of the amount of the Prosper borrower loan, subject to a specified minimum fee (currently $75). Each time an open market loan is sold, the originator is charged a transaction fee equal to a specified percentage of the sale price of the open market loan, subject to a minimum transaction fee.  Transaction fees on Prosper borrower loans and open market loans are subject to change from time to time.  The transaction fee on Prosper borrower loans is paid by the borrower out of the proceeds of the Prosper borrower loan at the time the borrower loan is funded.  The transaction fee is paid to WebBank, and Prosper receives amounts equal to the transaction fees as compensation for loan origination activities.  The transaction fee on open market loans is paid out of the proceeds from the sale of the open market loans.  In addition, Prosper currently charges lender members a servicing fee equal to an annualized rate of 1.0% for Prosper Borrower Notes and 0.5% for Prosper Open Market Notes, of the outstanding principal balance of the corresponding borrower loan, which we deduct from each lender member’s share of the borrower loan payments.  If Prosper establishes the trading platform on which the Notes may be resold, Prosper intends to charge all lender members who post a listing for the sale of a Note a nonrefundable administrative fee in a specified amount (currently $0.25) that is subject to change from time to time.  Listing fees will be charged and collected at the time the listing is posted on the trading platform by deducting the resale listing fee from the selling lender member’s funding account.

 

Q:               Are there any risks associated with an investment in the Notes?

 

A:                Yes.  The Notes are highly risky and speculative.  Investing in the Notes should be considered only by persons who can afford the loss of their entire investment.  In addition, the holders of Prosper Open Market Notes may be exposed to risks different than those experienced by holders of Prosper Borrower Notes.  See “Risk Factors—Risks Inherent in Investing in the Notes” and “Risk Factors—Additional Risks for Prosper Open Market Notes” for more information.

 

Q:               Will lender members receive payments on the Notes in the event Prosper declares bankruptcy or otherwise experiences financial distress?

 

A:                If Prosper were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped even if the borrowers are making payments on the corresponding borrower loans.  The Notes are unsecured and holders of the Notes do not have a direct security interest in the corresponding borrower loans or the proceeds of those corresponding borrower loans.  The recovery, if any, of a holder on a Note may be substantially delayed.  Even funds held by Prosper in trust for the holders of Notes may potentially be at risk.  Prosper intends to grant the indenture trustee a first-priority security interest in Prosper’s right to receive payments and in all payments Prosper has received under the corresponding borrower loan for that series of Notes.  The indenture trustee may exercise its rights under the security interest only if an event of default has occurred under the indenture solely by reason of Prosper becoming subject to a bankruptcy or similar proceeding and not for any other reason.  Accordingly, if Prosper were to become subject to a bankruptcy or similar proceeding, the indenture trustee, but not the holders of a Note, would have a secured claim against Prosper limited in recovery to the corresponding borrower loan payments for that series of Notes.  See “Risk Factors—Risks Related to Prosper, Our Platform and Our Ability to Service the Notes” for more information.

 

Q:               What if Prosper were to go out of business?

 

A:                No new borrower loans would be created and, we would assign our servicing obligations to a suitable third party loan servicer.  All existing Notes would be serviced to completion by such third party loan servicer.  The third party loan servicer would take over the administrative responsibilities related to the Notes such as the collection and transfer of monthly payments, providing timely payment notices, monthly lender member statements and required tax documentation, overseeing the collection of delinquent Notes on behalf of the lender members, and reporting payment performance to consumer reporting agencies.  We have entered into a back-up servicing agreement with a loan servicing company who is willing and able to transition servicing responsibilities in the event we can no longer do so.  The third party is a financial services company who has extensive experience and knowledge entering into successor loan servicing agreements.  As well, they will provide monthly investor reports on our loan servicing activity that will be available to all registered users.  If Prosper is unable to assign its servicing obligations to a suitable third party loan servicer, borrowers would still be obligated to make payments on their Notes, but lender members’ ability to collect on

 

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the Notes may be substantially impaired.  See “Risk Factors—Risks Related to Prosper, Our Platform and Our Ability to Service the Notes” for more information.

 

Q:               What if WebBank were to go out of business?

 

A:                If Prosper were unable to identify and reach agreement with a suitable state-chartered or federally-chartered bank to take the place of WebBank, loans would be made by Prosper under the authority of its state lending licenses or other applicable state law. See “Risk Factors—Risks Relating to Compliance and Regulation—We rely on our agreement with WebBank to originate loans to qualified borrower members on a uniform basis throughout the United States” for more information.

 

Q:               What if an originator of an open market loan were to go out of business?

 

A:                Open market loans will be serviced by the originator of the loan and not by Prosper.  Should an originator suspend its operations, there could be delays in the receipt of funds as Prosper transfers servicing operations for the open market loans to a backup servicer, as required by the master loan purchase agreement between Prosper and the originator.  In addition, in the event of a bankruptcy or similar proceeding of an originator, the relative rights of Prosper to receive payments under open market loans, as compared to the holders of unsecured indebtedness of the originator are uncertain.  See “Risk Factors—Additional Risks for Prosper Open Market Notes” for more information.

 

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RISK FACTORS

 

Our Notes involve a high degree of risk.  You should carefully consider the risks described below before making a decision to invest in the Notes.  If any of the following risks actually occurs, you might lose all or part of your investment in the Notes.  You should also refer to the individual borrower profiles and borrower credit information provided on our platform.   

 

Risks Related to Borrower Default

 

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

 

You should be aware that the Notes offered through our platform are risky and speculative investments.  The Notes are special, limited obligations of Prosper and are depend entirely on payments to Prosper of obligations of borrowers under the corresponding borrower loans.  Prosper borrower loans are obligations of individual consumers, and open market loans may include existing consumer loans or retail installment sale contracts as well as small business loans, where the borrower is a business entity, not an individual (although one or more individuals may be a guarantor of the loan).  Notes are suitable only for investors of adequate financial means.  If you cannot afford to lose the entire amount of money you plan to bid and commit to purchase on Notes corresponding to borrower loans on our platform, you should not attempt to invest in the Notes.  You should not assume that a Note is an appropriate investment for you because it corresponds to a borrower loan listed on our platform.  

 

Payments on the Notes depend entirely on payments we receive on corresponding borrower loans.  If a borrower fails to make any payments on the corresponding borrower loan related to your Note, you will not receive any payments on your Note.

 

We will only make payments pro rata on the Notes of a series after we receive a borrower’s payment on the corresponding borrower loan, net of servicing fees.  We will not pay to lender members any non-sufficient funds fees or collection fees we, an originator or a third-party collection agency charge, and on open market loans late fees may be retained by the originator servicing the open market loan.  If we do not receive payments on the corresponding borrower loan related to your Note, you will not be entitled to any payments under the terms of the Notes, and you will not receive any payments.  

 

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

 

The Notes will not represent an obligation of borrowers or any other party except Prosper, and are special, limited obligations of Prosper.  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 Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in all present and future rights of Prosper to payment under the corresponding borrower loan for each series of Notes and all money and property received by Prosper, the holders of the Notes do not directly have a security interest in the corresponding borrower loans for that Series or in the proceeds thereof.  In addition, Prosper Open Market Notes will not be secured by any collateral, even though the corresponding open market loan may be secured by personal property.  Although the originator is obligated to forward to Prosper any amounts it receives on the open market loans, including amounts received upon the sale of the collateral securing an open market loan, the holders of Prosper Open Market Notes do not have the right to take any legal action under the security interest or to require that the originator take such action.

 

The Prosper borrower loans are not secured by any collateral or guaranteed or insured by any third party, and you must rely on Prosper, an originator, or a third-party collection agency to pursue collection against any borrower.

 

Prosper borrower loans are unsecured obligations of borrower members.  They are not secured by any collateral, and they are not guaranteed or insured by any third party or backed by any governmental authority in any way.  Prosper and its designated third-party collection agency will, therefore, be limited in their ability to collect on Prosper borrower loans.  In addition, while open market loans may be secured, the corresponding Prosper Open Market Note is not. Although the originator is obligated to forward to Prosper any amounts it receives on the open market loans, including amounts received upon the sale of the collateral securing an open market loan, the holders of Prosper Open Market Notes do not have the right to foreclose on the collateral or to require that the originator take such action.

 

Moreover, borrower loans are obligations of borrowers to Prosper as successor to WebBank, not obligations to holders of Notes.  Holders of Notes will have no recourse to borrower and no ability to pursue borrowers to collect payments under borrower loans.  Holders of Notes may look only to Prosper for payment of the Notes, and Prosper’s obligation to pay the Notes is limited as described in this prospectus.  Furthermore, if a borrower fails to make any payments on the borrower loan corresponding to a Note, the holder of that Note will not receive any payments on that Note.  The holder of that Note will not be able to pursue collection against any borrower and will not be able to obtain the identity of the borrower in order to contact the borrower about the defaulted borrower loan.  In addition, as described in this prospectus, in the unlikely event that we receive payments on the corresponding borrower loan relating to your Notes after the final maturity date, you will not receive payments on your Notes after maturity.  See “Summary of Material Agreements Indenture and Form of Notes.” for more information.

 

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Some of the borrowers on our 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 our platform are people who have had difficulty obtaining loans from 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 dependent for payment on payments on the corresponding borrower loans to such borrowers may present a high risk of loan delinquency or default.  Since our inception in November 2005 through October 16, 2008, we have facilitated 28,940 borrower loans with an average original principal amount of $6,172 and an aggregate original principal amount of $178,622,722 on our platform.  As of December 31, 2008, of these outstanding loans, 61.1% were current, 16.5% were paid in full, 1.2% were 15 to 30 days late, and 4.8% were more than 30 days late.  In addition, of these outstanding loans:

 

·                  7,959 loans, or 27.5%, have ever been more than 15 days past due on at least one occasion;

 

·                  6,814 loans, or 23.5%, have been more than 30 days past due on at least one occasion at one time; and

 

·                  16.5% had defaulted (a borrower loan is considered to have defaulted when it is more than 120 days past due or has filed a bankruptcy which has been discharged).

 

Selected historical loss rates on the Notes can be found in this prospectus under the heading “About the PlatformHistorical Information About Our Borrowers and Outstanding Borrower Loans.”  There can be no assurance that such historical loss rates will be indicative of future loss rates or the likelihood of the delinquency or default on any Note of a particular borrower.

 

Borrowers’ credit information may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may cause you to lose all or part of the price you paid for a Note.

 

We obtain borrower credit information from consumer reporting agencies, and assign loan requests a Prosper Rating based in part on the borrower’s credit score.  On open market loans offered for sale on the platform, we obtain credit information on the borrower from the originator, and such credit information is normally based on a consumer report obtained by the originator from a consumer reporting agency.  A credit score that forms a part of the Prosper Rating, assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we generally do not verify the information obtained from the borrower’s credit report or information provided to us with respect to open market listings.  Similarly, the borrower credit data displayed in Prosper borrower listings may be based on outdated, incomplete or inaccurate consumer reporting data from the consumer report obtained on the borrower.  Moreover, lender members do not, and will not, have access to financial statements of borrower members or to other detailed financial information about borrower members.  In addition, we currently retrieve a subsequent consumer report and credit score for a Prosper borrower member after the previous consumer report is more than 30 days old.  Therefore, there is a risk that a borrower may have become delinquent in a payment, defaulted on a debt obligation, taken on more personal debt, or sustained other adverse financial events after the date the last consumer report was retrieved, and the Prosper Rating assigned to the borrower may not accurately reflect the borrower’s actual current creditworthiness.

 

As the Prosper Rating to be assigned to listings after the date of this prospectus is the result of a new credit grading system developed by Prosper, you should not look at the performance history of our borrower loans with the same letter grade as the Prosper Rating as a valid indication of how the borrower loan upon which a Note is dependent for payment will perform in the future.

 

Prosper will implement a new credit grading system on the effective date of this prospectus.  Each listing will be assigned a Prosper Rating that indicates the borrower’s level of risk and corresponds to an estimated average annualized loss rate range.  Initially, the Prosper Rating will be indicated by the same seven letter credit grades previously used to indicate the borrower’s credit grade for each borrower loan listed on our platform.  The Prosper Rating allows Prosper to maintain consistency when assigning a rating to the borrower regardless of originator, type of credit score used or type of loan being offered for sale. For Prosper borrower listings, the Prosper Rating will be derived from two scores:  a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous Prosper borrower loans with similar characteristics. For open market listings, the originator will provide us with a loss rate on the type of loan being offered for sale, and we will translate the loss rate to a Prosper Rating.  Although the same seven letter credit grades will be used to represent the Prosper Rating, the letter credit grades will not be comparable as they are computed in a different  

 

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manner and represents a different risk profile.  Moreover, Prosper adopted the new credit rating system, in part, due to variations in loss rates among Prosper borrowers with the same credit grade due to variations in the borrower’s credit characteristics within a credit score tier.  Accordingly, you should not look at the performance history of our borrower loans with a letter grade the same as the Prosper Rating as a valid indication of how the borrower loan upon which a Note is dependent for payment will perform in the future.

 

Information supplied by borrowers may be inaccurate or intentionally false.

 

Originators and Prosper borrowers supply a variety of unverified information that is included in the borrower loan listings on our website.  We do not verify this information, and this information may be inaccurate.  We do not verify the borrower information provided to us by originators on open market loans.  In addition, we generally do not verify a borrower’s stated income, employment status or occupation, and the information borrowers supply may be inaccurate or intentionally false.  Prosper borrowers may misrepresent their intentions for the use of borrower loan proceeds.  Prosper and WebBank do not verify any statements by Prosper borrowers as to how loan proceeds are to be used and do not confirm after loan funding how loan proceeds were used.  All listings are posted on our platform without our verifying the borrower’s stated income or employment status that appears in the listing.  In the limited cases in which we have selected Prosper borrower members for income and employment verification, the verification is normally done after the listing has been created and bidding has ended but prior to the time the Prosper borrower loan is funded.  From the period from September 1, 2007 to August 31, 2008, when we have conducted pre-funding income and employment verification approximately 56.4% of these borrowers have provided us with satisfactory responses and received a borrower loan; approximately 37.7% of these borrowers either did not provide satisfactory responses or did not respond, and their listings were cancelled; and approximately 5.9% of these borrowers either withdrew their listing or failed to receive bids totaling the amount of their requested loan.  The identity of borrowers is not revealed to lender members, and lender members also have no ability to obtain or verify borrower information either before or after they purchase a Note.  Potential lender members may only communicate with Prosper borrower members through Prosper website postings, and then only on an anonymous and unverified basis.  Lender members will not be able to communicate with the borrowers on open market loans.

 

If you rely on false, misleading or unverified information supplied by borrowers in deciding to purchase Notes, you may lose part or all of the purchase price you pay for a Note.  Borrower loan posting and borrower information available on the Prosper website will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Notes Exchange Act of 1934, as amended (the “Exchange Act”).  Borrower loan posting and borrower information filed in prospectus supplements will be subject to the liability provisions of the Securities Act.  In general, Section 10b-5 and the liability 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 in this prospectus or any omission of a material fact made in connection with the sale of securities.  In this prospectus, we advise potential investors as to the limitations on the reliability of this information, and a lender member’s recourse in the event this information is false will be extremely limited. 

 

While we take many precautions to prevent borrower fraud, it is possible that fraud may occur and adversely affect a lender member’s ability to collect upon the Notes or delay the recoupment of a lender member’s investment.

 

We use identity and fraud checks with external databases to authenticate each Prosper borrower member’s identity.  No verification is made with respect to borrowers on open market loans offered for sale on the platform.  Although we use diligent efforts in this regard, there is a risk that our fraud checks could fail and fraud may occur.  Additionally, Prosper borrower members may misrepresent their intentions for the Prosper borrower loan proceeds or other information that we do not attempt to verify.  While we will repurchase Notes in limited circumstances, such as material default on the corresponding borrower loan resulting from verifiable theft of a borrower’s identity, or resulting from the failure of the corresponding borrower loan to comply at origination in material respects with applicable federal and state law, and the originator of the open market loans is under a similar obligation to repurchase open market loans from us, we are not obligated to repurchase a Note from you if your investment is not realized in whole or in part due to fraud (other than verifiable identity theft) in connection with a listing for the underlying borrower loan, or due to false or inaccurate statements or omissions of fact in a borrower’s listing, whether in credit data, borrower’s representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the borrower loan.  If Prosper repurchases a Note, only the outstanding principal balance will be returned to the lender member.  See “About the PlatformIndentity Fraud Reimbursement” for more information.

 

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We do not have significant historical performance data about borrower performance on the borrower loans.  Loss rates on the borrower loans may increase and prior to investing you should consider the risk of non-payment and default under our outstanding borrower loans.

 

We are in the early stages of our development and have a limited operating history.  We began offering loans publicly through the platform in February of 2006.  Due to our limited operational history, we do not have significant historical performance data regarding Prosper borrower member performance on Prosper borrower loans, and we do not yet know what the long-term loan loss experience will be.  The estimated loss rates we display on the website and use to determine the Prosper Rating have been developed from our loss histories.  With respect to open market loans, the open market loan loss performance is provided to us by the originator and we do not verify this information.  Moreover, these loss rates occurred prior to the recent contraction in the global financial and credit markets and significant downturn in the United States economy and borrower loans originated or sold on our platform may default more often than similar loans have defaulted in the past.

 

If payments on the corresponding borrower loans relating to your Notes become more than 30 days overdue, it is likely you will not receive the full principal and interest payments that you expect to receive on your Notes due to collection fees, and you may not recover any of your original purchase price.

 

If a borrower fails to make a required payment on a borrower loan within 30 days of the due date, we will pursue reasonable collection efforts in respect of the borrower loan.  Referral of a delinquent borrower loan to a collection agency on the 31st day of its delinquency will be considered reasonable collection efforts.  Since our inception in November 2005 through October 16, 2008, we have facilitated 28,940 borrower loans.  With respect to our outstanding loans as of December 31, 2008:

 

·                  1.2% were 15 to 30 days late and 27.5% had been more than 15 days past due on at least one occasion; and

 

·                  4.8% were more than 30 days late and 23.5%, have been more than 30 days past due on at least one occasion.

 

If Prosper or an originator refers a loan to a collection agency, neither Prosper nor the originator will have any other obligation to attempt to collect that borrower loan.  We or an originator may also handle collection efforts in respect of a delinquent borrower loan directly.  If payment amounts on a delinquent borrower loan are received from a borrower more than 30 days after their due date, then we, the originator or, if the delinquent loan is referred to an outside collection agency, that collection agency, will retain a percentage of any funds recovered from such borrower as a servicing fee before any principal or interest becomes payable to you from recovered amounts in respect of Notes related to the corresponding borrower loan.  Collection fees range from 15% to 30% of recovered amounts.  See “About the PlatformPost-Funding Loan Servicing and Collection” for more information.

 

Prosper, the originator or the collection agency may not be able to recover some or all of the unpaid balance of a non-performing borrower loan, and a lender member who has purchased a Note dependent on the non-performing borrower loan would then receive nothing or a small fraction of the unpaid principal and interest of the Note.  In addition, although certain open market loans are secured by personal property, there is no guarantee the collateral securing the loan will be available or sufficient to cover the outstanding balance under the open market loan.  You must rely on the collection efforts of Prosper on Prosper borrower loans, the originator on open market loans or the collection agencies to which such borrower loans are referred. You are not permitted to attempt to collect payments on the borrower loans in any manner.

 

Loss rates on the borrower loans may increase as a result of economic conditions beyond our control and beyond the control of the borrower.

 

Borrower loan 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 loans on which the Notes are dependent 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.  The recent contraction in the global financial and credit markets and significant downturn in the United States economy will likely result in an increased rate of default under the borrower loans in the future.  Accordingly, no reliance should be made on the historical loss rates on borrower loans in determining whether to purchase your Notes.  As the current economic crisis is largely unprecedented in recent history, we cannot predict the impact these events will have on a borrower’s ability to repay future borrower loans  

 

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originated or offered for sale on our platform, although we do not expect the loss rate for borrower loans to decrease in the immediate future.

 

In the unlikely event that we receive payments on the corresponding borrower loans relating to your Notes after the final maturity date, you will not receive payments on your Notes after maturity.

 

Each Note will mature on the initial maturity date, unless any principal or interest payments in respect of the corresponding borrower loan remain due and payable to Prosper 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 Prosper after the final maturity, Prosper will have no further obligation to make payments on the Notes of the series even if Prosper receives payments on the corresponding borrower loan after the final maturity.

 

In general, the borrower loans on which the Notes are dependent 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, which may impair your ability to receive the full principal and interest payments that you expect to receive on a Note.

 

If a borrower incurs additional debt after the date of the borrower loan, the additional debt may impair the ability of that borrower to make payments on his or her borrower loan and your ability to receive the principal and interest payments that you expect to receive on Notes dependent for payment on payments we receive on the corresponding borrower loans.  In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower.  To the extent that the borrower has or incurs other indebtedness and cannot pay all of his or her indebtedness, the borrower may choose to make payments to other creditors, rather than Prosper, on the borrower loan.

 

To the extent borrowers incur other indebtedness that is secured, such as mortgage, home equity or auto loans, the ability of the secured creditors to exercise remedies against the assets of the borrower may impair the borrower’s ability to repay the borrower loan on which your Note is dependent for payment.  Borrowers on Prosper borrower loans may also choose to repay obligations under secured indebtedness before repaying Prosper borrower loans originated through our platform because there is no collateral securing Prosper borrower loans.  A lender member will not be made aware of any additional debt incurred by a borrower, or whether such debt is secured, including with respect to open market loans.  In addition, the credit detail for borrowers under open market loans is shown as of the open market loan origination date and is not updated when an open market listing is posted on our platform.

 

Because the interest rate and yield payable on the Notes is determined through an auction process and is not tied directly to the creditworthiness of the borrower, the interest rate of the Notes may not be adequate to compensate you for the risks associated with the particular Note.

 

The interest rate and yield on a Note is the rate determined by our platform’s auction system and is fixed at the minimum interest rate or yield acceptable to all lender members who are the winning bidders at the expiration of the auction bidding period for Notes that are dependent for payment on payments we receive on the corresponding borrower loan described in the listing.  Because the interest rate and yield is not tied directly to the creditworthiness of the borrower, the interest rate and yield of the Notes may not be adequate to compensate you for the risks associated with the borrower loan upon which the Note is dependent for payment.

 

A borrower may request that his or her bank “chargeback” a payment on a borrower 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 funding account.

 

A borrower chargeback is a process by which a borrower who has made a payment on a borrower loan has his or her bank cancel the payment or request a refund of that payment.  We avoid chargebacks by withholding payments to lender members until four business days after the payment was initiated.  If the chargeback occurs between four and 60 days after the initiation of payment, you must rely on us to contest the chargeback if we deem it appropriate.  If a borrower successfully processes a chargeback between four and 60 days after initiation of payment, such payment will be deducted from your Prosper account, and if you have withdrawn funds in the interim, a negative cash balance may result.

 

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Peer-to-peer lending is a new lending method and our platform has a limited operating history.  Borrowers may not view or treat their obligations as having the same significance as traditional lending sources, such as bank loans and Prosper borrower loans may have a higher risk of default that loans with a similar credit score.

 

The investment return on the Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding borrower loan.  Because our platform is a new concept, we do not have significant historical performance data regarding borrower performance on the borrower loans.  Borrowers may not view person-to-person lending obligations originated on our platform as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions.  If a borrower neglects his or her payment obligations on a borrower loan upon which payment of the corresponding Note is dependent or chooses not to repay its borrower loan entirely, you may not be able to recover any portion of your investment in a Note.

 

Our platform may fail to comply with borrower protection laws such as state lending laws, or federal consumer protection laws such as the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act.  Borrowers may make counterclaims against us, any collection agency or you after collection actions have commenced.

 

Applicable state laws generally regulate interest rates and other charges and require certain disclosures.  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 a borrower loan upon which a series of Notes is dependent for payment.  The borrower loans are also subject to federal laws, including, without limitation, the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to the borrowers regarding the terms of the loan; the federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination 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, in the extension of credit; and the federal Fair Credit Reporting Act, which regulates the use and reporting of information related to each borrower’s credit history.  We may not always have been and may not always be in compliance with these laws.  Failure to comply with the laws and regulatory requirements applicable to our business may, among other things, limit our, or a collection agency’s, ability to collect all or part of the principal of or interest on the borrower loans and, in addition, could subject us to damages, revocation of required licenses or other authorities, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business and ability to maintain our platform and may result in borrowers rescinding their borrower loans.  See “Government Regulation—Regulation and Consumer Protection Laws” for more information.

 

We regularly review the requirements of these laws and take measures aimed at ensuring that the borrower loans originated on our platform 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 collectibility of a borrower loan.

 

In general, the borrower loans do not contain any cross-default or similar provisions.  If a borrower defaults on their debt obligations other than on the borrower loan, the ability to collect on borrower loan on which your Notes are dependent for payment may be substantially impaired.

 

In general, the borrower loans do not contain cross-default provisions.  A cross-default provision makes a default under certain debt of a borrower an automatic default on other debt of that borrower.  Because the borrower loans generally do not contain cross-default provisions, a borrower’s loan will not be placed automatically in default upon that borrower’s default on any of the borrower’s other debt obligations, unless there are independent grounds for a default on the borrower loan.  In addition, the borrower loan will not be referred to a third-party collection agency for collection because of a borrower’s default on debt obligations other than the borrower loan.  If a borrower defaults on debt obligations owed to a third party and continues to satisfy the payment obligations under the borrower loan, the third party may seize the borrower’s assets or pursue other legal action against the borrower before the borrower defaults on the borrower loan.  Payments on Notes may be substantially reduced if a borrower subsequently defaults on a corresponding borrower loan, and you may be unable to recoup any or all of your expected principal and interest payments on those Notes.

 

Borrowers may seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of your Notes.

 

Borrowers on borrower loans 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

 

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pending collection actions 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 loan account into “bankruptcy status.” When this occurs, we terminate automatic monthly ACH debits on Prosper borrower loans and we, and the originator with respect to open market loans, do not undertake collection activity without bankruptcy court approval.  Whether any payment will ultimately be made or received on a borrower loan after a bankruptcy status is declared depends on the borrower’s particular financial situation.  It is possible that the borrower’s liability on the borrower loan will be discharged in bankruptcy.  In most cases involving the bankruptcy of a borrower, unsecured creditors, including Prosper as the holder of the borrower loans, will receive nothing, or only a fraction of any amount outstanding on their borrower loans.  Moreover, although certain open market loans may be secured by personal property, there is no guarantee the collateral securing the loan will be available or sufficient to cover the outstanding balance under the open market loan.  See About the Platform—Post-Funding Loan Servicing and 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 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 loan corresponding to your Note.  The Servicemembers Civil Relief Act, or “SCRA, “requires that the interest rate on preexisting debts, such as 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 loan will not receive the difference between 6% and the original stated interest rate for the borrower loan during any such period.  This 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 loans in default, and, accordingly, payments on Notes that are dependent for payment on payments we receive on these corresponding borrower loans.  If there are any amounts under such a borrower loan still due and owing to Prosper after the final maturity of the Notes that correspond to the borrower loan, we will have no further obligation to make payments on the Notes, even if we later receive payments after the final maturity of the Notes.  We do not take military service into account in assigning credit grades to borrower loan requests.  In addition, as part of the borrower registration process, we do not request Prosper borrower members to confirm if they are a qualified service member or reservists within the meaning of the SCRA.  See “Government Regulation—Regulation and Consumer Protection Laws—Servicemembers Civil Relief Act” for more information.

 

The death of a borrower may substantially impair your ability to recoup the full purchase price of Notes that are dependent for payment on payments we receive on the corresponding borrower loan to that borrower or to receive the interest payments that you expect to receive on the Notes.

 

If a borrower with outstanding obligations under a borrower loan dies while the borrower loan is outstanding, generally, we or the originator will seek to work with the executor of the estate of the borrower to obtain repayment of the borrower loan.  However, the borrower’s estate may not contain sufficient assets to repay the borrower loan on which your Note is dependent for payment.  In addition, if a borrower dies near the end of a borrower loan, it is unlikely that any further payments will be made on the Notes corresponding to such borrower loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.

 

Prosper is not obligated to repurchase any Notes except in limited circumstances.  If Prosper is unable to meet its repurchase obligations, you may lose your entire investment in the Notes.

 

Prosper is not obligated to repurchase any Note except in limited circumstances, such as material default on a Note resulting from verifiable theft of a borrower’s identity, or resulting from the failure of the corresponding borrower loan to comply at origination in material respects with applicable federal and state law. Additionally, the lender registration agreement and the indenture provides that, in the event of a material breach of our representations and warranties, we must either cure the defect, repurchase the Note, or indemnify and hold the lender member harmless against losses resulting from the defect in the Note.  However, we are not obligated to repurchase a Note from a lender member if his or her investment is not realized in whole or in part due to fraud (other than verifiable identity theft) in connection with a listing, or due to false or inaccurate statements or omissions of fact in a borrower’s listing, whether in credit data, borrower representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the Notes.  Even if we are obligated to repurchase a Note, there can be no assurance that we will be able to meet our repurchase obligation.  If we are unable to meet our repurchase obligations with respect to such Note you may lose all of your investment in such Note.  See “About the Platform—Indentity Fraud Reimbursement” and “Summary of Material Agreements—Lender Registration Agreement” for more information.

 

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Risks Inherent in Investing in the Notes

 

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

 

Your expected return on your investment in the Notes depends on the performance of the borrowers on their respective obligations under the corresponding borrower loan.  There are a wide range of Prosper Ratings and listings on our platform and we expect some borrowers to default on their loans.  If you decide to invest through our platform and concentrate your investment in a single Note, your entire return will depend on the performance of a single borrower loan.  For example, if you plan to purchase $200 of Notes, and choose to invest the entire $200 in a single Note instead of in four $50 Notes corresponding to the borrower loans of four different borrowers, your entire $200 investment will depend on the performance of a single borrower loan.  It may be desirable to diversify your portfolio in order to reduce the risk that you could lose your entire investment due to a single default, or a small number of defaults.  However, diversification does not eliminate the risk that you may lose some, or all, of your investment in the Notes.

 

Our platform allows a borrower member to prepay a Prosper borrower loan at any time without penalty, and borrowers under open market loans have similar rights.  Borrower loan prepayments will extinguish or limit your ability to receive additional interest payments on a Note.

 

Borrower loan prepayment occurs when a borrower decides to pay some or all of the principal amount on a borrower loan earlier than originally scheduled.  Borrowers on Prosper borrower loans may decide to prepay all or a portion of the remaining principal amount at any time without penalty.  In general, borrowers under open market loans have similar rights.  In the event of a prepayment of the entire remaining unpaid principal amount of a borrower loan on which your Notes are dependent for payment, you will receive your share of such prepayment but further interest will not accrue after the date on which the payment is made.  If a borrower prepays a portion of the remaining unpaid principal balance on a borrower loan on which your Notes are dependent for payment, the term of the borrower loan will not change, but interest will cease to accrue on the prepaid portion.  If a borrower prepays a borrower loan in full or in part, you will not receive all of the interest payments that you originally expected to receive on Notes that are dependent for payment on payments we receive on the corresponding borrower loan, and you may not be able to find a similar rate of return on another investment at the time at which the borrower loan is prepaid.  Prepayments are subject to our 1.0% servicing fee and any servicing fee charged by the originator for open market loans, even if the prepayment occurs immediately after issuance of your Note.  See “Summary of Material Agreements Indenture and Form of Notes.” for more information.

 

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

 

The borrower loans on which the Notes are dependent for payment bear fixed, not floating, rates of interest, and currently have a term of three years, but Prosper anticipates in the near future extending available loan terms to between three months to seven years.  If prevailing interest rates increase, the interest rates on Notes you purchase might be less than the rate of return you could earn if you invested the purchase price in a different investment.

 

While you may still receive a return on your purchase price for the Notes through the receipt of amounts equal to the interest portion of a borrower’s payments on the corresponding borrower loan, if prevailing interest rates exceed the rate of interest payable on the borrower loan, the payments you receive during the term of the Note may not reflect the full opportunity cost to you when you take into account factors such as the time value of money.

 

There is no prepayment penalty for borrower members who prepay their Prosper borrower loans, and borrowers under open market loans have similar rights.  If prevailing interest rates on consumer loans decrease, borrowers may choose to prepay their borrower loans with money they borrow from other sources or other resources, and you may not receive the interest payments on Notes dependent for payment on payments we receive on those corresponding borrower loans that you expect to receive or be able to find an alternative use of your money to realize a similar rate of return at the time at which the Note is prepaid.

 

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The Notes will not be listed on any securities exchange, will not be transferable except through the Note trading platform, and can be held only by our lender members.  You should be prepared to hold the Notes you purchase until they mature.

 

The Notes will not be listed on any securities exchange.  All Notes must be held by our lender members.  The Notes will not be transferable except through our Note trading platform. There can be no assurance that a market for Notes will develop on the trading platform, or that the trading platform will continue in operation.  Therefore, lender members must be prepared to hold their Notes to maturity.  See “About the Platform—Trading Platform” for more information.

 

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

 

As soon as practicable after the date of this prospectus, Prosper intends to establish the Note trading platform on which the Notes may be resold to lender members.  We cannot guarantee that a resale market will develop for the Notes.

 

A Note for resale 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 investors with the ability to purchase such Notes.  In addition your ability to resell your Note will likely be affected in any adverse changes in the credit status of the borrower under the corresponding borrower loan, in addition to the other risks discussed in this prospectus.  If these situations occur, you may be forced to hold the Note for its remaining term. After the date of this prospectus, except for sales on the note trading platform, the Notes will continue to be non-transferable.

 

If you choose to post your Notes for resale on the Note trading 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 resell your Note on the Note trading platform (should the Note trading platform be successfully developed) 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 resell the Note on our trading 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.

 

You do not earn interest on funds held in your lender member account with Prosper.

 

Your Prosper funding account represents an interest in a pooled bank account that does not earn interest.  See “About the Platform—How the Platform Operates” 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.  Although the matter is not free from doubt, Prosper intends to treat the Notes as debt instruments of Prosper that have original issue discount (OID) for U.S. federal income tax purposes.  Accordingly, a holder of a Note will be required to include OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest payments on the Note), regardless of such holder’s regular method of tax accounting.  You should be aware, however, that the U.S. Internal Revenue Service (IRS) is not bound by Prosper’s characterization of the Notes and the IRS or a court may take a different position with respect to the Notes’ proper characterization.  For example, the IRS could determine that, in substance, each lender member owns a proportionate interest in the corresponding borrower loan for U.S. federal income tax purposes, or for example, the IRS could instead treat the Notes as a different financial instrument (including, for example, 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 equity of Prosper, (i) Prosper would be subject to U.S. federal income tax on income, including interest, accrued on the borrower 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 Prosper’s earnings and profits as computed for U.S. federal income tax purposes.  Such a characterization may significantly reduce the amount available to pay interest on the Notes.  Accordingly, prospective purchasers of the Notes are advised to consult their own tax advisors regarding the U.S. federal, state, local and

 

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non-U.S. tax consequences of the purchase, ownership, and disposition of the Notes (including any possible differing treatments of the Notes).

 

Additional Risks for Prosper Open Market Notes

 

If you purchase a Prosper Open Market Note, you should be aware that the originator selling the corresponding open market loan upon which the Note is dependent for payment will have access to more detailed loan information than that set forth in the open market listing and will have a greater ability to access the risk of the open market loan listed for sale.

 

Although originators will represent and warrant to us that the originator did not use any adverse selection criteria, via scoring algorithm or manual file review, to select the borrower loans listed for sale on our platform, there is no guarantee that originators will not use such adverse selection criteria.  In most cases, originators will have access to more detailed information regarding the open market loan and the borrower under that loan than that set forth in the open market listing.  For example, lender members will not know the name of the borrower, have access to the borrower’s financial statements and may not be aware of adverse changes to the borrower’s credit history after the loan origination date.  Moreover, all open market listing information will be provided by the originator and will not be independently verified by us.  Accordingly, lender members will not have the same ability to determine the default risks of open market loans upon which a Prosper Open Market Note is dependant for payment as the person offering such loan for sale.

 

The holders of Prosper Open Market Notes may be exposed to risks different than those experienced by holders of Prosper Borrower Notes.

 

Holders of Prosper Open Market Notes may be exposed to risks different than those experienced by holders of Prosper Borrower Notes including the following:

 

·                  the projected loss rate provided by the originator for the open market loan may be inaccurate, which could adversely affect the accuracy of the Prosper Rating;

 

·                  the Prosper Rating and credit detail reflected in an open market listing are determined as of the loan origination date and may not accurately reflect the current risk of the open market loan;

 

·                  the information contained in open market listings is not independently verified by Prosper;

 

·                  open market loans will be serviced by the originator and not Prosper, which may introduce additional delays in the receipt of payments and information regarding the underlying open market loans.  In addition, Prosper will likely have limited abilities to collect on delinquent open market loans due to the terms of the servicing agreements with the originators;

 

·                  the possibility of reduced returns due to the repurchase of open market loans by the originator due to non-conformance with the terms and provisions of the loan  purchase agreement between Prosper and the originator;

 

·                  the possibility of reduced returns due to increased expenses or deteriorated value of the collateral securing an open market loan, if any; and

 

·                  in purchasing open market loans reflecting the financing of consumer goods and services, Prosper will be subject to all claims and defenses that borrower could assert against the originator.

 

Prosper Open Market Loans will be serviced by the originator and not Prosper, which could adversely affect or delay payments you receive under the Note.

 

Open market loans will be serviced by the originator of the loan and not by Prosper.  Although the originator has agreed to administer the open market loans serviced by it in a manner and to a standard consistent with servicing practices of prudent lending institutions servicing loans of the same type as the open market loans for their own account, there can be no assurance that it will do so.  Further, there can be no assurance that a third party servicer will forward payments collected from borrowers under such open market loans to Prosper in a timely manner or that such third party servicer will provide Prosper in a timely manner with the information required to be provided to the holders of Notes dependent for payment on that open market loan.  Any failure by the originator to collect payments due from borrowers under the open market loans or

 

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to forward those payments to us or in a timely manner may impact the payment you receive under Notes dependent for payment on that open market loan.

 

Should an originator servicing an open market loan suspend its operations, or in the event of a bankruptcy or similar proceeding of an originator, there could be delays in the receipt of funds as Prosper transfers servicing operations for the open market loans to a backup servicer, as required by the master loan purchase agreements between Prosper and the originator.  If the originator becomes subject to a bankruptcy or similar proceeding, the rights of Prosper and the holders of Prosper Open Market Notes could be uncertain, and the originator’s payments to Prosper under the corresponding open market loans may be limited, suspended or stopped even if the borrowers are making payments on such borrower loans.

 

Risks Related to Prosper, Our Platform and Our Ability to Service the Notes

 

We face a contingent liability for potential securities law violations in respect of loans sold to our lender members from inception until October 16, 2008.  This contingent liability may impair our ability to operate our platform and service the borrower loans that correspond to your Notes.

 

Loans sold to lender members through our platform from our inception 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.  To date, the following litigation has resulted from our prior operations.

 

·                  In November of 2008, the SEC instituted cease and desist proceedings, pursuant to Section 8A of the Securities Act, against us.  In connection with such proceedings, we made an offer of settlement and consented to the entry of a cease and desist order, in which we neither admitted nor denied liability, which was approved by the SEC on November 20, 2008.  The cease and desist order included a finding that we violated the registration requirements of the Securities Act, and required that we cease and desist from committing or causing any violations and any future violations in the future.

 

·                  On November 26, 2008, Prosper and the North American Securities Administrators Association, or “NASAA,” executed a settlement term sheet.  The term sheet sets forth the material terms of a consent order to resolve matters relating to our sale and offer of unregistered securities and the omission of material facts in connection with such offers and sales.  NASAA will recommend that each state adopt the terms of the settlement, however, the settlement is not binding on any state.  The terms of the settlement involved our payment of up to $1 million, which NASAA will allocate among the 50 states and the District of Columbia, where we conduct business, based on the loan sale transaction volume in each state.  We will not be required to pay any portion of the fine allocated to those states that do not execute a consent order with Prosper.  The terms of the settlement require the states to terminate their investigation of our activities related to the sale of securities before November 24, 2008.  We are currently negotiating the terms of the consent order for consideration by the states.  We have accrued approximately $425,000 in connection with the contingent liability arising from the settlement term sheet in accordance with SFAS No. 5, Accounting for Contingencies.

 

·                  On November 26, 2008, a class action lawsuit was filed against us the Superior Court of California, County of San Francisco, California.  The suit was brought on behalf of all loan note purchasers in our online lending platform from January 1, 2006 through October 14, 2008 and alleges that we offered and sold unqualified and unregistered securities in violation of the California and federal securities laws.  The lawsuit seeks class certification, damages, the right of rescission and the award of attorneys’ fees and costs against us.

 

As a result of our prior operations, our lender members who hold these loans may be entitled to rescind their purchase and be paid their unpaid principal amount of the borrower loans plus statutory interest.  In addition, As of September 30, 2008, the aggregate principal balance of loans purchased through our platform by purchasers not affiliated with Prosper was $178.6 million.  We have not recorded an accrued loss contingency in respect of this contingent liability, although we intend 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.  If a significant number of our lender members sought rescission, or if the class action securities lawsuit is successful, our ability to maintain our platform and service the borrower loans to which the Notes correspond may be adversely affected.

 

We have incurred operating losses since our inception and we anticipate that we will continue to incur net losses through 2010.  Our failure to obtain sufficient debt and equity financings and, ultimately, to achieve profitable operations and

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 positive cash flows from operations could adversely affect Prosper’s ability to achieve its business objectives and continue as a going concern.

 

We have incurred operating losses since our inception and we anticipate that we will continue to incur net losses for a number of years as we grow our business.  For the nine months ended September 30, 2008 and the fiscal years ended December 31, 2007 and 2006, we had negative cash flows from operations of $6.9 million, $9.5 million and $6.0 million, respectively.  Additionally, since our inception through September 30, 2008, we have an accumulated deficit of $27.7 million.

 

We have financed our operations, to date, with proceeds from the sale of equity securities.  At September 30, 2008, we had approximately $13.0 million in cash and cash equivalents, which we believe will be sufficient to fund our operations through 2009.  We are dependent upon raising additional capital or debt financing to fund our current operating plan.  Our failure to obtain sufficient debt and equity financings and, ultimately, to achieve profitable operations and positive cash flows from operations could adversely affect our ability to achieve our business objectives and continue as a going concern.  Further, we can provide no assurances as to the availability or terms upon which the required financing and capital might be available.  These matters raise substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments to reflect the possible effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from our inability to continue as a going concern.

 

We have a limited operating history.  As an online company in the early stages of development, we face increased risks, uncertainties, expenses and difficulties.

 

As the number of borrowers, lender members and borrower loans originated on our platform increases, we will need to increase our facilities, personnel and infrastructure in order to accommodate the greater servicing obligations and demands on our platform. Additionally, as soon as practicable after the date of this prospectus, we intend to establish a Note trading platform on which the Notes may be resold to our lender members.  Although we cannot guarantee that a resale market will develop for the Notes, we expect that such addition to our platform may significantly increase the amount of borrower loan originations and sale activity on our platform. Our platform is dependent upon our website in order to maintain current listings and transactions in the Notes.  We must constantly add new hardware and update our software and website, expand our customer support services, and add new employees to maintain the operations of our platform as well as to satisfy our servicing obligations on the borrower loans and the Notes.  If we are unable to increase the capacity of our platform and maintain the necessary infrastructure, you may experience delays in receipt of payments on your Notes and periodic downtime of our systems.

 

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 our platform.

 

Our principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other person-to-person lending platforms, including Lending Club and Virgin Money.  Competition could result in reduced volumes, reduced fees or the failure of our person-to-person lending 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 person-to-person 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.  If we are unable to compete with such companies and meet the need for innovation, the use of our platform could stagnate or substantially decline.

 

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If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.

 

We believe that developing and maintaining awareness of the Prosper brand in a cost-effective manner is critical to achieving widespread acceptance of person-to-person lending through Prosper and attracting new borrower and lender members.  Furthermore, we believe that the importance of brand recognition will increase as competition in the person-to-person lending industry increases.  Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the member experience on our platform. Historically, our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant additional expenses.  These brand promotion activities may not yield increased revenues and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand.  If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing members to our competitors or be unable to attract new members, which would cause our revenue to decrease and may impair our ability to maintain our platform.

 

If we are unable to increase transaction volumes, our business and results of operations will be affected adversely.

 

To succeed, we must increase transaction volumes on our platform by attracting a large number of borrowers and lender members in a cost-effective manner, many of whom have not previously participated in person-to-person 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 our platform.

 

We are subject to extensive federal, state and local regulation.  There can be no guarantee that we will be able to continue our servicing obligations.

 

We are subject to extensive federal, state and local regulation, non-compliance with which may expose us to adverse consequences.  Additionally, new laws and regulations could be enacted that could have a negative impact on our ability to service the Notes, provide a resale market for the Notes, or maintain our platform. We could suffer adverse consequences if we were to fail to comply, even inadvertently, with these laws and regulations.

 

Additionally, we are licensed as a finance lender under the California Finance Lender Law and are regulated and examined by the California Department of Corporations.  We hold similar lending licenses or authorizations in 23 other states, which also supervise and examine our activities.  If we do not comply with applicable laws, we could lose one or more of our licenses or authorizations, which may have an adverse effect on our ability to continue to perform our servicing obligations or to maintain our 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.  For example, debt collectors are prohibited from contacting debtors at unreasonable times, revealing or discussing the nature of the debt with third parties, making false representations in association with efforts to collect the debt, seeking collection fees or other charges not permitted under contract or by state law, making threats of arrest or legal action without actual intention of action on the threat, and using abusive or profane language in the course of collection on the debt.  While Prosper obligates its collection agencies to comply with applicable law in collecting Prosper borrower loans, and Prosper’s agreements with originators requires that they comply with applicable law in collecting open market loans, it is possible that improper collection practices may occur which could adversely impact the collectibility of particular borrower loans originated or sold through our platform.

 

Our arrangements for back-up servicing are limited.  If we fail to maintain operations, you will experience a delay and increased cost in respect of your expected principal and interest payments on your Notes, and we may be unable to collect and process repayments from borrowers.

 

If we are unable to generate sufficient revenues from the fees we receive from borrowers and lender members as a result of the borrower loans originated or sold, the Notes issued on our platform, as well as Notes proposed to be resold by lender members on our Note trading platform (should it develop), our ability to maintain operations may be adversely affected.  If  

 

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we were to fail or become insolvent, there would be no resale market for your Notes, and we would attempt to transfer our servicing obligations on the borrower loans and Notes to a third party pursuant to our contractual agreements with lender members.  We have entered into a back-up servicing agreement with a loan servicing company who is willing and able to transition servicing responsibilities in the event we can no longer do so.  If our platform fails or we became insolvent, we would attempt to transfer our loan servicing obligations to this third party back-up servicer.  There can be no assurance that this back-up servicer will be able to adequately perform the servicing of the outstanding borrower loans.  If this back-up servicer assumes the servicing of the borrower loans, the back-up servicer may impose additional servicing fees, reducing the amounts available for payments on the Notes.  Additionally, transferring these servicing obligations to our back-up servicer may result in delays in the processing and recovery of information with respect to amounts owed on the borrower loans or, if our platform becomes inoperable, may prevent us from servicing the borrower loans and making principal and interest payments on the Notes.  If our back-up servicer is not able to service the borrower loans effectively, your ability to receive principal and interest payments on your Notes may be substantially impaired.

 

We do not have patent protection for all of our proprietary technology.  It may be difficult and costly to protect our intellectual property rights, and we may not be able to ensure their protection.

 

Our ability to maintain our platform and perform our servicing obligations depends, in part, upon our proprietary technology.  We have applied for a patent covering various aspects of the operation of our platform; however, there can be no assurance that it will be granted, or if a patent were issued, that a third party may not be successful in challenging it.  Additionally, we may not protect our proprietary technology effectively, which would allow competitors to duplicate our products and adversely affect our ability to compete with them. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent.  In addition, our platform may infringe upon claims of third-party patents and we may face intellectual property challenges from such other parties.  We may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes.  Furthermore, our technology may become obsolete, and there is no guarantee that we will be able to successfully develop, obtain or use new technologies to adapt our platform to compete with other person-to-person lending platforms, should they develop.  If we cannot protect the proprietary technology embodied in and used by our platform from intellectual property challenges, or if our platform becomes obsolete, our ability to maintain our platform and our ability to perform our servicing obligations on the borrower loans and Notes could be adversely affected.

 

We rely on a third-party commercial bank to process transactions.  If we are unable to continue utilizing these services, our business and ability to service the Notes may be adversely affected.

 

Because we are not a bank, we cannot belong to and 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.

 

If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped.  Although Prosper intends to grant the indenture trustee a security interest in its right to receive payment under and in payments received under the borrower loans upon which the Notes are dependent for payment, the Notes themselves are unsecured and holders of the Notes do not directly have a security interest in the corresponding borrower loans or the proceeds of those corresponding borrower loans.  The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note.  Even funds held by Prosper in trust for the holders of Notes may potentially be at risk.

 

If we were to become subject to a bankruptcy or similar proceeding, the recovery, if any, of a holder of a Note may be substantially delayed in time and may be substantially less in amount than the principal and interest due and to become due on the Note.  Although prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in Prosper’s rights to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon to mitigate this risk, the following consequences still may occur:

 

A bankruptcy or similar proceeding of Prosper may cause delays in borrower payments.  Borrowers may delay payments to Prosper on account of borrower loans because of the uncertainties occasioned by a bankruptcy or similar proceeding of Prosper, 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.  In addition, the  

 

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commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent Prosper from making regular payments on the Notes, even if the funds to make such payments are available.  Although Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in all present and future rights of Prosper to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon in order to mitigate this risk, the indenture trustee still would be required to enforce the security interest in a bankruptcy or similar proceeding of Prosper.  Because a bankruptcy or similar proceeding may nevertheless limit the trustee’s ability to make payments under the Notes 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.

 

Interest accruing upon and following a bankruptcy or similar proceeding of Prosper may not be paid.  In bankruptcy or similar proceeding of Prosper, interest accruing on the Notes during the proceeding 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.

 

In a bankruptcy or similar proceeding of Prosper, there may be uncertainty regarding whether a holder of a Note has any priority right to payment from the corresponding borrower loanIn a bankruptcy or similar proceeding of Prosper, there may be uncertainty regarding whether a holder of a Note has any priority right to payment from the corresponding borrower loan.  Although Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in Prosper’s right to payment and payments received with respect to the corresponding borrower loan for each series of Notes the holders of the Notes do not directly have a security interest in the proceeds of the corresponding borrower loan for that series or the proceeds thereof.  Accordingly, in a bankruptcy or similar proceeding of Prosper, the indenture trustee, but not the holders of the Notes for that series, would have a secured claim, limited in recovery, to the right to receive payments on, and to all payments previously received by Prosper with respect to, the corresponding borrower loan for that series of Notes, but not with respect to any other borrower loan.  If we or the indenture trustee fail to perfect the security interest properly, you may be required to share the proceeds of the borrower loan upon which your Note is dependent for payment with Prosper’s other creditors.  In addition, if proceeds from the corresponding borrower loan are either held by Prosper in the clearing account at the time of the bankruptcy or similar proceeding of Prosper, or not yet received by Prosper from borrowers at the time of the commencement of the bankruptcy or similar proceeding, such proceeds may be at greater risk than those proceeds that are already held by Prosper in the funding account at the time of the bankruptcy or similar proceeding.  To the extent that proceeds of the corresponding borrower loan would be shared with other creditors of Prosper, 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 you on your Note.  See “About the Platform—How the Platform Operates” for more information.

 

In a bankruptcy or similar proceeding of Prosper, there may be uncertainty regarding the rights of a holder of a Note, if any, to payment from funds in the master servicing account.  If a payment is made on a borrower loan corresponding to a Note before a bankruptcy or similar proceeding of Prosper is commenced, and those funds are held in the master servicing account and have not been used by Prosper to make payments on the Note as of the date the bankruptcy or similar proceeding is commenced, there can be no assurance that Prosper will or will be able to use such funds to make payments on the Note.  Other creditors of Prosper may be deemed to have rights to such funds that are equal to or greater than the rights of the holder of the Note.  See “About the Platform—Post-Funding Loan Servicing and Collections” for more information.

 

In a bankruptcy or similar proceeding of Prosper, there may be uncertainty regarding the rights of a holder of a Note, if any, to access funds in the funding account.  Although, we believe that amounts funded by our lender members into the FBO account at Wells Fargo should not be subject to claims of creditors of Prosper other than the lender members for whose benefit the funds are held, the legal title to the FBO account, and the attendant right to administer the FBO account would be property of Prosper’s bankruptcy estate.  As a result, if Prosper were to file for bankruptcy protection, the legal right to administer the funds in the FBO account would vest with the bankruptcy trustee or debtor in possession.  In that case, while neither Prosper nor its creditors should be able to reach those funds, the indenture trustee or the lender members may have to seek a bankruptcy court order lifting the automatic stay and permitting them to withdraw their funds.  Lender members may suffer delays in accessing their funds in the FBO account as a result.  Moreover, United States Bankruptcy Courts have broad powers and, if Prosper has failed to properly segregate or handle lender members’ funds, a bankruptcy court could determine that some or all of such funds were beneficially owned by Prosper and therefore that they became available to the creditors of Prosper generally.  See “About the Platform—Post-Funding Loan Servicing and Collections” for more information.

 

In a bankruptcy or similar proceeding of Prosper, the holder of a Note may be delayed or prevented from enforcing Prosper’s repurchase obligations in cases of confirmed identity fraud.  In a bankruptcy or similar proceeding of Prosper, any right of a holder of Note to require Prosper to repurchase the Note as a result of a confirmed identity fraud incident or other grounds for repurchase may not be specifically enforced, and such holder’s claim for such repurchase may be treated less favorably than a general unsecured obligation of Prosper.

 

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In a bankruptcy or similar proceeding of Prosper, the implementation of back-up servicing arrangements may be delayed or prevented.  In a bankruptcy or similar proceeding of Prosper, our ability to transfer servicing obligations to a back-up servicer 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 loans to the detriment of the Notes.

 

If the security of our lender members’ and borrowers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, your secure information may be stolen, our reputation may be harmed, and we may be exposed to liability.

 

Our platform stores our lender members’ and borrowers’ bank information and other personally-identifiable sensitive data.  Any accidental or willful security breaches or other unauthorized access could cause your 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 our software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any of our lender members’ or borrowers’ data, our relationships with our members will be severely damaged, and we 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 our 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 members to lose confidence in the effectiveness of our data security measures.  Any security breach, whether actual or perceived, would harm our reputation, and we could lose members.

 

Any significant disruption in service on our website or in our computer systems could reduce the attractiveness of our platform and result in a loss of members.

 

Our ability to perform our servicing obligations could be materially and adversely affected by events outside of our control.  The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new members and retain existing members.  Our system hardware is hosted in a hosting facility located in San Francisco, California, owned and operated by Rincon 365 Borrower, LLC.  We also maintain an off-site backup system located in Las Vegas, Nevada.  Rincon 365 Borrower, LLC does not guarantee that access to our website will be uninterrupted, error-free or secure.  Our operations depend on Rincon 365 Borrower, LLC’s ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events.  If our arrangement with Rincon 365 Borrower, LLC is terminated, or there is a lapse of service or damage to Rincon 365 Borrower, LLC’s facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.  Any interruptions or delays in our service, whether as a result of Rincon 365 Borrower, LLC or other third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our members and our reputation.  Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.  Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage at the Rincon 365 Borrower, LLC facility.  These factors could prevent us from processing or posting payments on the borrower loans or the Notes, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause members to abandon our platform, any of which could adversely affect our business, financial condition and results of operations.

 

Our ability to service the borrower loans and Notes may be adversely affected by computer viruses, physical or electronic break-ins and similar disruptions.

 

Our platform may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.  If a “hacker” were able to infiltrate our platform, you 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 your personal information.  While we have taken steps to prevent such activity from affecting our platform, if we are unable to prevent such  

 

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activity, the value of your investment in the Notes and our ability to fulfill our servicing obligations and to maintain our platform would be adversely affected.

 

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees whom we need to support our business.

 

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

 

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve borrowers and lender members could diminish, resulting in a material adverse effect on our business.

 

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

 

Our future depends, in part, on our ability to attract and retain key personnel.  Our future also depends on the continued contributions of our executive officers and other key technical personnel, each of whom would be difficult to replace.  In particular, Christian Larsen is critical to the management of our business and operations and the development of our strategic direction.  The loss of the services of Mr. Larsen or other executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

 

Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

 

Our growth in headcount and operations since our inception has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management and our administrative, operational and financial reporting infrastructure.

 

Our success will depend in part on the ability of our senior management to manage the growth we achieve effectively.  To do so, we must continue to hire, train and manage new employees as needed.  If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed.  To manage the expected growth of our operations and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems. The addition of new employees and the system development that we anticipate will be necessary to manage our growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

 

Purchasers of Notes will have no control over Prosper and will not be able to influence Prosper corporate matters.

 

We are not offering any equity in this offering.  Lender members who purchase Notes offered through our platform will have no equity interest in Prosper and no ability to vote on or influence our corporate decisions.  As a result, our stockholders will continue to exercise 100% voting control over all of our corporate matters, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets.

 

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Risks Relating to Compliance and Regulation

 

Our platform is a novel approach to borrowing that may fail to comply with borrower protection laws such as state lending laws, or federal and state 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 their state counterparts.  Borrowers may make counterclaims regarding the enforceability of their obligations after collection actions have commenced, or otherwise seek damages under these laws.  Compliance with such regimes is also costly and burdensome.

 

Our platform operates a novel program that must comply with regulatory regimes applicable to consumer credit transactions.  The novelty of our platform 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 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 the borrower loans.  Our platform is also subject to other federal and state laws, such as:

 

·                  the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms of their borrower loans;

 

·                  the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination 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, in the extension of credit;

 

·                  the Federal Fair Credit Reporting Act, which regulates the use and reporting of information related to each borrower member’s credit history; and

 

·                  the Federal Fair Debt Collection Practices Act and similar state debt collection laws, which 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.

 

We may not always have been, and may not always be, in compliance with these laws.  Compliance with these requirements is also costly, time-consuming and limits our operational flexibility.  See “Government RegulationRegulation of Consumer Protection Laws” for more information.

 

Noncompliance with laws and regulations may impair our ability to facilitate the origination of or service borrower loans.

 

Generally, failure to comply with the laws and regulatory requirements applicable to our business may, among other things, limit our, or a collection agency’s, ability to collect all or part of the principal amount of or interest on the borrower loans on which the Notes are dependent and, in addition, could subject us to damages, revocation of required licenses or other authorities, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business and ability to maintain our platform and may result in borrowers rescinding their 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 we believe may be applicable to the platform, we have obtained any necessary licenses or comply with the relevant requirements.  Nevertheless, if we are found to not comply with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions, which may have an adverse effect on our ability to continue to facilitate the origination of borrower loans through our platform, perform our servicing obligations or make our platform available to borrowers in particular states, which may impair your ability to receive the payments of principal and interest on your Notes that you expect to receive.  See “Government Regulation—Regulation of Consumer Protection Laws—State and Federal Laws and Regulations” for more information.

 

We rely on our agreement with WebBank to originate loans to qualified borrower members on a uniform basis throughout the United States.  If our relationship with WebBank were to end, we may need to rely on individual state lending licenses to originate borrower loans.

 

Borrower loan requests take the form of an application to WebBank, which currently makes all loans to our borrower members who request loans through our platform, and allows our platform to be available to borrowers on a uniform basis throughout the United States.  If our relationship with WebBank were to end or if WebBank were to cease operations, we may need to rely on individual state lending licenses to originate borrower loans.  Because we do not currently possess state

 

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lending licenses in every U.S. state, we may be required to discontinue lending or limit the rates of interest charged on borrower loans in some states.  We may face increased costs and compliance burdens if our agreement with WebBank terminated.

 

Several lawsuits have sought to recharacterize certain loan marketers and other originators as lenders.  If litigation on similar theories were successful against us, Prosper borrower loans originated through the Prosper platform could be subject to state consumer protection laws in a greater number of states.

 

Several lawsuits have brought under scrutiny the association between high-interest “payday loan” marketers and out-of-state banks.  These lawsuits assert that payday 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 recharacterize the loan marketer as the lender for purposes of state consumer protection law restrictions.  Similar civil actions have been brought in the context of gift cards.  We believe that our activities are distinguishable from the activities involved in these cases.

 

Additional state consumer protection laws would be applicable to the borrower loans originated or sold on our platform if we were recharacterized as a lender, and the borrower loans could be 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.

 

As Internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely.  Our business could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to person-to-person 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 members 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 our platform.

 

Our legal compliance burdens and costs will significantly increase as a result of operating as a public company following the date of this prospectus.  Our management will be required to devote substantial time to compliance matters.

 

After the date of this prospectus, we will become an SEC reporting company and will incur significant legal, accounting and other expenses that we did not incur previously.  Our management and other personnel will need to devote a substantial amount of time to SEC reporting compliance requirements.  Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.  For example, these rules and regulations may make it more expensive for us to obtain director and officer liability insurance coverage and more difficult for us to attract and retain qualified persons to serve as directors or executive officers.

 

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures.  In particular, for the year ending December 31, 2010, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.  Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.  In order to comply with Section 404, we may incur substantial accounting expense, expend significant management time on compliance-related issues, and hire additional accounting and financial staff with appropriate experience and technical accounting knowledge.  Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

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If we are required to register under the Investment Company Act, our ability to conduct our business could be materially adversely affected.

 

The Investment Company Act of 1940, or the “Investment Company Act,” contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities.  We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in our company being characterized as an investment company.  If, however, we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which would materially adversely affect our business, financial condition and results of operations.  If we were deemed to be an investment company, we may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on our business.

 

Events beyond our control may damage our ability to maintain adequate records, maintain our platform or perform our servicing obligations.  If such events result in a system failure, your ability to receive principal and interest payments on the Notes would be substantially harmed.

 

If a catastrophic event resulted in our platform outage and physical data loss, our ability to perform our 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.  We store back-up records in offsite facilities located in San Francisco, California and Las Vegas, Nevada.  If our electronic data storage and back-up data storage system are affected by such events, we cannot guarantee that you would be able to recoup your investment in the Notes.

 

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FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve substantial risks and uncertainties.  All statements, other than statements of historical facts, included in this prospectus regarding Prosper borrowers, credit scores, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements.  The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.  These forward-looking statements include, among other things, statements about:

 

·      the status of borrowers, the ability of borrowers to repay borrower loans and the plans of borrowers;

 

·      expected rates of return and interest rates;

 

·      the attractiveness of our platform;

 

·      our financial performance;

 

·      the impact of our new structure on our financial condition and results of operations;

 

·      the availability and functionality of our trading platform;

 

·      our ability to retain and hire necessary employees and appropriately staff our operations;

 

·      regulatory developments;

 

·      our intellectual property; and

 

·      our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.

 

We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements.  Actual results or events could differ materially from the plans, intentions and expectations disclosed in forward-looking statements.  We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from forward-looking statements contained in this prospectus.  Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that actual future results may be materially different from what we expect.  We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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Use of Proceeds

 

We will use the proceeds of each series of Notes to facilitate the funding of a borrower loan through our platform designated by the lender members purchasing such series of Notes.  Proceeds of the sale of Notes are paid to WebBank for the purchase of borrower loans by Prosper from WebBank.  See “About the Platform” for more information.

 

Plan of Distribution

 

We will offer the Notes to our lender members at 100% of their principal amount.  The Notes will be offered only by Prosper through the Prosper website, and there will be no underwriters or underwriting discounts.  See “About the Platform” for more information.

 

Financial Suitability Requirements

 

The Notes are highly risky and speculative.  Investing in the Notes should be considered only by persons who can afford the loss of their entire investment.  Our platform currently allows lender members to bid as little as $50 and as much as the full amount of any particular listing, up to an aggregate amount of $5,000,000 for individuals and $50,000,000 for institutions.  We are currently seeking to register the offer and sale of our Notes in all 50 states and the District of Columbia.  As part of this process, we expect that certain states will impose minimum financial suitability standards and maximum investment limits for lender members who reside in their states.  Should this occur we will set forth these requirements in a supplement to this prospectus.  Under the lender registration agreement, lender members 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 members who fail to satisfy any such requirements will not be permitted to purchase Notes.

 

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ABOUT THE PLATFORM

 

Overview

 

Our platform enables our borrower members to borrow money, registered originators to list open market loans for sale and our lender members to purchase Notes issued by Prosper, the proceeds of which facilitate the funding or sale of specific loans made to borrowers.  The platform also allows for the formation of community groups and allows Prosper borrower members to participate on our platform as a member of a group.  Although Prosper borrower members do not need to join a group in order to request Prosper borrower loans on our platform, group affiliation may provide lender members additional information about a Prosper borrower member and may motivate borrower payment performance.

 

Online person-to-person lending is a new approach to consumer finance.  Person-to-person lending uses an Internet-based network to connect borrower and lender members.  Our platform generally provides transactional services for the online network, including screening borrowers for borrowing eligibility and facilitating payments.  Our platform allows Prosper borrower members and lender members to connect with each other using a combination of financial and social criteria.  Online person-to-person lending also entails significantly lower operating costs compared to traditional banking and commercial finance institutions because there are no physical branches and related infrastructure, no deposit-taking and interest payment activities and extremely limited third party loan underwriting activities.

 

As an early participant in the development of online person-to-person lending, Prosper views consumer finance delivered through an online person-to-person platform as an important new market opportunity.  Key drivers of person-to-person lending include the following:

 

·                  the possibility of lower interest rates for Prosper borrower members;

 

·                  the possibility of attractive interest rates and yield percentages for lender members;

 

·                  the possibility for all lender members and borrower members to help each other by participating in our platform to their mutual benefit;

 

·                  tightening consumer credit markets, particularly among traditional banking institutions; and

 

·                  growing acceptance of the Internet as an efficient and convenient forum for consumer transactions.

 

In addition, our platform permits originators to list for sale on our platform existing loans and retail installment sale contracts that they own for sale on our website, offering banks, consumer finance companies and other financing entities an additional liquidity option that currently does not exist.  Our lender members may bid and receive Prosper Open Market Notes dependent for payment on payments we receive on these open market loans.

 

How the Platform Operates

 

Our platform is an online auction-style marketplace that permits our lender members to bid on listings and purchase from Prosper, Notes that are dependent for payment on payments we receive on the corresponding borrower loans described in the listing.  Two types of listings appear on our platform: (1) listings posted by individual consumer members of Prosper requesting individual consumer loans, which we refer to as “Prosper borrower listings” and “Prosper borrower loans,” respectively; and (2) listings posted by financial institutions registered with Prosper, whom we refer to as “originators,” setting forth the terms of existing loans and retail installment sale contracts owned by the financial institutions and offered for sale to Prosper, which we collectively refer to as “open market listings” and “open market loans,” respectively.  We refer to borrowers on Prosper borrower loans and open market loans as “borrowers.”

 

Listings

 

Each listing sets forth the desired loan amount or outstanding balance, offered interest rate or yield percentage, and other information including but not limited to the Prosper Rating for the borrower, debt-to-income ratio, and certain credit information from the borrower’s credit report. Prosper borrower listings include the borrower’s self-reported, unless otherwise indicated, annual income range, occupation and employment status, and the borrower’s group affiliation, if any. Open market listings set forth a description of the collateral, if any, securing the borrower loan, and contain as much of the foregoing borrower credit and employment data as the originator provides.  Prosper borrower members are identified by a  

 

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Prosper screen name but are not able to disclose in listings their identity or contact information to lenders.  Listings are displayed publicly on our platform, although certain information is only viewable by registered lender members.

 

Borrower Loans

 

Prosper borrower loans are unsecured, individual consumer loans within specified minimum and maximum principal amounts (currently between $1,000 and $25,000), requested by Prosper borrower members.  Prosper borrower members list the loan amount and the maximum interest rate they are willing to pay, and lender members bid the minimum interest rate they are willing to receive.  If by the end of the listing period a Prosper borrower listing receives purchase commitments in an aggregate amount equal to the corresponding Prosper borrower loan, the Prosper borrower member receives a fully amortizing consumer loan made by WebBank.  Prosper borrower loans currently have a term of three years, but Prosper anticipates in the near future extending available loan terms to between three months to seven years.  WebBank subsequently sells and assigns the borrower loan to Prosper without recourse to WebBank in exchange for the principal amount of the corresponding borrower loan.

 

Open market loans are existing loans with outstanding principal amounts that are not limited to the minimum and maximum amounts applicable to Prosper borrower loans.  Open market loans are owned by the originator that posted the listing, whether or not such originator originally made the loan.  Open market loans may include existing consumer loans or retail installment sale contracts as well as small business loans, where the borrower is a business entity, not an individual (although one or more individuals may be a guarantor of the loan).  Open market loans have a fixed interest rate, maturities of at least three months and may be unsecured or secured by personal property.  All open market loans are sold and assigned by the originator to Prosper, without recourse to the originator, at the end of the auction bidding period, if successful.

 

Verification

 

Prosper borrower listings are posted without our obtaining any documentation of the Prosper borrower member’s ability to afford the loan.  We do not verify the information provided by originators in open market listing but represent and warrant to the holders of Prosper Open Market Notes that the originator has made commercially reasonable efforts to authenticate and verify the identity of the borrower under the corresponding open market loan.  For all Prosper borrower loans, we verify the Prosper borrower member identity against data from consumer reporting agencies and other identity and anti-fraud verification databases, but generally do not verify any other information provided by Prosper borrower members that appear in a Prosper borrower listing.  In limited instances, we verify the income, employment, occupation or other information provided by Prosper borrower members in listings.  Participants in our platform must satisfy certain requirements before we permit a listing to be posted or bids to be placed on our platform.

 

Our platform operates online only and is available to Prosper borrower members, lender members and originators in all 50 states and the District of Columbia.  Our registration, processing and payment systems are automated and electronic.  We have no physical branches, no deposit-taking and interest payment activities and extremely limited loan underwriting activities.  We attract lender members and borrowers to our website, www.prosper.com, through a variety of sources.  We drive traffic through referrals from other parties (which include online communities, social networks and marketers), through search engine results and through online and offline advertising.  We are not dependent on any one source of traffic to our website.  As of October 31, 2008, our website was receiving an average of approximately 288,000 unique visitors per month.

 

Revenue

 

We generate revenue by charging originators transactions fees on open market loans sold to Prosper and lender members ongoing servicing fees on the Notes they have purchased, and from transaction fees paid by borrower members on Prosper borrower loans.  If Prosper establishes the trading platform on which the Notes may be resold, Prosper intends to charge all lender members who post a listing for the sale of a Note a nonrefundable administrative fee in a specified amount (currently $0.25) that is subject to change from time to time.

 

For the fiscal year ended December 31, 2007, we originated $80.8 million dollars of loans, a 187% increase from the prior year.  For the three months ended September 30, 2008, we originated $19.9 million in loans, an 8% increase from the same period in the prior year.  Because we collect small fees and other revenue from thousands of borrowers, no single borrower has accounted for more than 0.1% of our revenue during our fiscal year ended December 31, 2007 or any subsequent fiscal quarter.

 

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Platform Participants and Registration Requirements

 

All platform participants must register with Prosper and agree to our platform rules and terms of use, including consent to receipt of disclosures 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 role for which they are registering.

 

Prosper borrower members

 

A Prosper borrower member may be any natural person at least 18 years of age who is a U.S. resident in a state where loans through the platform are available, with a bank account and a social security number.  After passing Prosper’s anti-fraud and identity verification process, Prosper borrower members are assigned a Prosper Rating and can request unsecured Prosper borrower loans at interest rates which are determined by an auction process.  We allow Prosper borrowers to post listings on our platform regardless of their income.  We reserve the right to restrict access to our platform by setting minimum credit or other guidelines for Prosper borrower members.

 

We also allow individuals to post listings on our platform as a member of a group.  Prosper borrower members who are not already members of a group may request membership in a group in order to be eligible to post listings on our platform as part of a group.  Prosper borrower members’ group membership requests are forwarded by Prosper to the applicable group leader, who determines and communicates whether the borrower has been accepted into the group.  A Prosper borrower members may only belong to one group at a time.  Once accepted into a group, borrowers are eligible to post listings on our platform as part of the group.

 

Originators

 

Commercial banks, savings banks, consumer finance companies and other types of financing entities registered with Prosper are eligible to list open market loans for sale on our platform.  Prior to approving an originator to list loans for sale, Prosper undertakes a due diligence process of the candidate institution.  Our objective is to confirm that the information provided by the originator will accurately describe the loan being listed for sale, and to establish service level agreements and reports to monitor critical processes on an ongoing basis.  This monitoring process includes both monthly reports and periodic on-site audits.  During this process we review the credit quality, underwriting and loss expectation of the open market loans.  We also review the originator’s processes with respect to loan origination, chain of title, documentation, balance calculation, record keeping system, servicing and collections, dispute resolution and end-of-loan procedures.  A copy of the report summarizing the due diligence is posted on the Prosper website for lender members to review.  Additional status information will be posted so that investors can monitor the performance of open market loans sold by particular originators.

 

Lender members

 

Our lender members are individuals and organizations that have the opportunity to buy our Notes.  Lender members must register on our website.  During lender registration, potential lender members must agree to a credit profile authorization statement for identification purposes, a tax withholding statement and 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 the lender members.  Lender members are not required to give credit information to the same extent as Prosper borrower members, but they are required to provide, in the case of individuals, their social security number and state driver’s license or state identification card number, or, in the case of institutions, their taxpayer identification number, to us.  At the time a lender member registers with Prosper, the lender member must agree to the rules, limitations, processes and procedures established by Prosper for originating, servicing, collecting and transferring borrower loans through our platform.  Prior to bidding on a listing, lender members must transfer funds to an account maintained on our platform, which we refer to as a “funding account.” The funding account holds all funds supporting a lender member’s bids and all Note payments payable to the lender member are deposited in the funding account.

 

Group Leaders

 

An individual must be registered as a Prosper borrower member or a lender member on our platform in order to register as a group leader.  Group leaders are individuals who serve as the head of a group of Prosper borrower members or prospective borrowers on our platform. Groups can be any formal or informal collection of people with common interests, including social, cultural, ethnic, professional, education-based, geographical, athletic, religious or any other official or unofficial affiliation.  Group leaders are able to condition membership on personal facts and characteristics that may not be

 

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available to lender members generally. Group leaders also have the ability, if they so choose, to review and approve their group members’ listings before they are posted on our platform for bidding.  Group leaders are notified of any delinquent payments by borrowers in their group, but are not allowed to take any collection actions.  Group leaders may only act as a leader of one group.  Group leaders may also participate in the marketplace as lender members and bid on listings of borrowers within or outside of their group.  Group leaders may also act as borrowers and request borrower loans as an “ungrouped” individual or as a member of a group other than their own.

 

WebBank.

 

WebBank is an FDIC-insured Utah-chartered industrial bank and direct lender that makes loans to Prosper borrower members and sells and assigns the promissory notes evidencing Prosper borrower loans to Prosper.

 

Prosper Rating Assigned to Borrowers

 

Each listing will be assigned a Prosper Rating.  The Prosper Rating is a letter that indicates the borrower’s level of risk and corresponds to an estimated average annualized loss rate range.  This rating system allows Prosper to maintain consistency when assigning a rating to the borrower regardless of originator, type of credit score or type of loan being offered for sale.  The current Prosper Ratings and the estimated loss ranges associated with them are as follows:

 

Prosper Rating

 

Est. Avg. Annual Loss Rate

AA

 

 

<=1%

A

 

 

1.1 – 2.5%

B

 

 

2.6 – 5.0%

C

 

 

5.1 – 7.5%

D

 

 

7.6 – 10.0%

E

 

 

10.1 – 15.0%

HR

 

 

>15%

 

There are currently seven Prosper Ratings, but this, as well as the loss ranges associated with each, may change over time as the marketplace dictates.

 

For Prosper borrower listings, the Prosper Rating will be estimated based on two scores: one obtained from a credit reporting agency and the other an in-house custom score built on the Prosper population. The use of these two scores will determine an estimated loss rate for each listing (based on the historical performance of previous Prosper loans), which then determines the Prosper Rating.  The matrix below provides an example of how this system works.  Each cell indicates an estimated loss rate based on the borrower’s scores.  Cells with similar loss rates are grouped together and mapped to Prosper Ratings.  Score ranges and estimated loss rates will continually be updated.  The score ranges and estimated loss rates provided here are for illustrative purposes only.

 

 

 

Experian Scorex Plus Score*

 

Prosper
score*

 

<551

 

 

700-
729

 

730-
764

 

765+

 

19.8-100

 

50

%(3)

(3) 

30

%(3)

25

%(3)

20

%(3)

 

(3) 

 

 

 

 

4.4-5.4

 

35

%(3)

 

6.0

%

2.0

%(2)

2.5

%(2)

3.0-4.3

 

30

%(3)

 

2.5

%(2)

1

%(1)

0

%(1)

0-2.9

 

25

%(3)

 

1.5

%(2)

1

%(1)

0

%(1)

 

 

 

 

 

 

 

 

 

 

 

 

Cell = estimated average annualized loss rate

 


* Experian:   higher score = lower risk

 

* Prosper:     lower score = lower risk

 

 

For example, in the matrix above:

 

(1) = Prosper Rating AA: expected losses <=1%

(2) = Prosper Rating A:    expected losses 1.1-2.5%

(3) = Prosper Rating HR: expected losses >15%

 

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For open market listings, the originator will provide us with a loss rate on the type of loan being offered for sale, and we will translate the loss rate to a Prosper Rating.

 

Credit Report Score Range

 

In addition to the Prosper Rating, each Prosper borrower listing will also show the borrower’s numerical credit score range based on a credit score on the borrower obtained from a consumer reporting agency. Listings will also indicate the consumer reporting agency from which the consumer report and credit score was obtained, as well as the proprietary credit score used.

 

Prosper borrower listings will indicate the score range at time of the listing.  Listings on the trading platform will show the score range at origination as well as the credit score range at the time of listing.  Open market listings will show the score range at origination, and will show the credit score range at the time of listing only if the credit score range is provided by the originator.  The numerical credit score is not displayed or disclosed to anyone (including the borrower).

 

When a borrower initiates the process of posting a Prosper borrower listing on our platform, we check to see if we had obtained a credit report on that person.  Currently, if credit report on file for such borrower is more than 30 days old, we initiate an inquiry to retrieve a credit report on the borrower and then compute and assign the Prosper Rating.  With respect to open market listings, the originator (or Prosper with the originator’s authorization) may obtain an updated credit score on the borrower.  Borrowers’ Prosper Ratings are displayed with their listings and are available for viewing by lender members.

 

Part of a borrower’s credit profile is a DTI ratio.  DTI is a measurement of the borrower’s ability to take on additional debt.  This number takes into consideration how much debt the borrower had prior to requesting a borrower loan, in addition to what the borrower’s debt will be if the requested borrower loan is made.  The DTI is expressed as a percentage and is calculated by dividing the borrower’s monthly income (before taxes) into his or her monthly non-housing debt payments as shown on the borrower’s credit report taking into account the borrower loan amount being requested.  In some instances, open market listings will include housing payments in the DTI.  Borrower income is self-reported, and on the majority of loans originated on the platform we do not verify the borrower’s income.

 

Platform Listings

 

Prosper Borrower Loan Listings

 

Once a loan listing is completed by the borrower, the listing is posted on our website and then becomes available for bidding by lender members.  A Prosper borrower listing is a request by a Prosper borrower member for a Prosper borrower loan in a specified amount, at an interest rate equal to the maximum interest rate set forth in the listing.  Prosper borrower loans are unsecured obligations of individual borrower members with an interest rate determined in an auction format and with a specified loan term, currently set at three years, but which Prosper anticipates in the near future extending  to between three months to seven years.  Prosper borrower members may currently request loans within specified minimum and maximum principal amounts (currently between $1,000 and $25,000), which are subject to change from time to time.  Prosper borrower loans may be repaid at any time by Prosper borrower members without prepayment penalty.  A Prosper borrower loan will be made to a borrower member only if the borrower’s listing has received bids totaling the full amount of the requested loan.

 

In addition to the Prosper borrower’s requested loan amount and maximum interest rate, Lender members are able to view:

 

·                  the borrower’s Prosper Rating, and numerical credit score range;

 

·                  current interest rate and the annual percentage rate for the Prosper borrower loan;

 

·                  the total amount of bids that have been made to date toward Notes that will be dependent on the Prosper borrower loan;

 

·                  whether the borrower owns a home;

 

·                  DTI percentage;

 

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

 

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

 

·                  the number of 90† days past due delinquencies on the borrower’s credit report in the last 7 years;

 

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

 

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

 

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

 

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

 

·                  the borrower’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 borrower’s open bankcards;

 

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

 

·                  the borrower’s Prosper friends who have committed to purchase Notes dependent for payment on that Prosper borrower loan by bidding on the listing;

 

·                  questions posted by lender members that are answered by the borrower;

 

·                  the borrower’s group affiliations, if any;

 

·                  the number of lender members committed to purchasing Notes that will be dependent for payment on the Prosper borrower loan; and

 

·                  the Prosper borrower member’s self-reported income range, occupation, employment status, intended use of funds.

 

Prosper borrower members who use our platform must identify their intended use of the loan proceeds.  For Prosper borrower loans funded between January 1, 2008 and September 30, 2008, Prosper borrower members identified their intended use of loan proceeds as follows:

 

·                  debt consolidation (approximately 42%);

 

·                  personal use, such as weddings or medical expenses (approximately 21%);

 

·                  business use, such as financing their home-based or small businesses (approximately 16%);

 

·                  home improvement (approximately 5%);

 

·                  tuition or other education expenses (approximately 4%);

 

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

 

·                  other (approximately 9%).

 

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Potential Prosper borrower members typically state the use of funds in a short sentence or clause, such as “Consolidate my credit card debt and be rid of it.” We historically have not verified, and do not plan in the future to verify or monitor, a borrower’s actual use of funds.

 

Although Prosper borrower members and lender members are anonymous to each other, lender members may ask Prosper borrower members questions about the loan listing and Prosper borrower members may, but are not required to, respond to such questions.  Prosper borrower members who respond to a lender member’s question may respond privately, or they may elect to have the question and answer posted publicly in the listing.  Lender members’ questions are not posted in the listing or displayed elsewhere on our website unless the Prosper borrower member elects to answer the question and elects to make the question and answer publicly available, in which case the question and answer appears in the listing.  We do not verify any Prosper borrower members’ responses to lender members’ questions.

 

Prosper borrower listings and Prosper borrower member information available on our website will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Exchange Act.  Prosper Borrower loan posting and borrower information filed in prospectus supplements will be subject to the liability provisions of the Securities Act.  In general, Section 10b-5 and the liability 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 in this prospectus or any omission of a material fact made in connection with the sale of securities.  In this prospectus, we advise potential investors in the Notes as to the limitations on the reliability of borrower-supplied information.  A lender member’s recourse in the event this information is false will be extremely limited.

 

Borrower loan requests remain open for seven days, during which time lender members may make commitments, in the form of bids, to purchase Notes that will be dependent on the borrower loans.

 

Borrower and lender members may choose to belong to certain groups of people with common interests, including social, cultural, ethnic, professional, educational, athletic, religious, or any other official or unofficial affiliation.  Groups may consist of borrowers, lender members or registered Prosper users who have not taken a role, or any combination of the above.  Groups allow people to join together for the common goal of borrowing money at desirable interest rates and give borrowers an additional incentive—the borrower’s reputation within the group—to meet their obligation to repay a borrower loan.

 

Prosper borrower listings identify the group, if any, to which the borrower belongs.  We believe that a borrower’s identification with a group may attract bids from lender members with similar interests, resulting in borrower loans with potentially lower interest rates for the group’s borrowers, or a greater likelihood of loan funding.

 

Some groups are headed by group leaders who may invite prospective borrowers to our platform and display their groups on the Prosper website.  Group leaders do not guarantee payments on any borrower loan or Note.

 

Open Market Loan Listings

 

An open market listing is a listing posted by an originator on our platform that describes an existing loan owned by the originator upon which a series of Prosper Open Market Notes will be dependent for payment.  Originators list the sale price for the open market loan, the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan.  Open market loans may have outstanding principal amounts in excess of the maximum amount a borrower member may request on the platform, and unlike Prosper borrower loans may be repayable more or less frequently than monthly, and may or may not allow the borrower to prepay the loan without prepayment penalty.  All open market loans are sold and assigned by the originator to Prosper, without recourse to the originator, at the end of the auction bidding period, if successful.

 

The listing process for open market loans begins when the originator provides us with information regarding the open market loan they wish to list for sale on our platform.  In addition, to the information noted below, the originator provides personal information regarding the borrower, such as name, address, phone number, social security number and date of birth, and similar items. In the case of an auto loan, the file would contain the full vehicle identification number.  None of the personally identifiable information is displayed in the listing.

 

The information is formatted into a “listing” similar in design to Prosper borrower listings, but with additional information that will make these listings easily identifiable.

 

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Lender members are able to view the following items, if provided by the originator:

 

·                  “starting price” for bidding;

 

·                  remaining principal balance;

 

·                  interest rate the borrower is obligated to pay on the loan;

 

·                  the current balance (by balance type);

 

·                  projected loss rate;

 

·                  the Prosper Rating, based on information as of the time of origination (rather than the time of listing);

 

·                  credit score range and related credit data obtained at origination for the borrower under the loan;

 

·                  the borrower’s credit score range at the time of listing, but no updated credit data;

 

·                  name of the originator;

 

·                  the loan type;

 

·                  the origination date;

 

·                  payment frequency, payment due date and payment amount;

 

·                  current projected end date for the loan.

 

In the case of a loan that is secured by collateral, the listing would contain information regarding the collateral, for example an auto loan would have information such as:

 

·                  the year, make and model,

 

·                  “status” of the car (such as new versus used),

 

·                  and the number of miles.

 

In addition, open market listings that involve loans secured by automobiles or other personal property would contain a notice that the assignee of a consumer credit contract for the financing of goods or services takes the obligation subject to claims and defenses the buyer may have against the seller of the goods or services in accordance with the Federal Trade Commission’s holder in due course rule.

 

Minimum Credit Criteria and Underwriting

 

Prosper Borrower Loans

 

When a borrower member requests a loan, we evaluate whether the borrower meets the underwriting criteria we established with WebBank with respect to the Prosper borrower loans.  The underwriting criteria applies for all Prosper borrower loans originated through our platform and may not be changed without WebBank’s consent.  The underwriting criteria requires, among other things, that borrowers have a minimum credit score of a specified threshold amount (currently 640), and no prior charge-offs on borrower loans originated through our platform.

 

Prosper borrower members with a credit score below the minimum threshold may only post listings and obtain a loan through our platform, through our “open social” feature, where bids are made primarily from friends and family.  For the open social listings, the Prosper borrower member must receive a specified percentage of bids from the Prosper borrower member’s friends before the listing would be open to bids from any lender member.

 

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Borrower members may have up to two Prosper borrower loans outstanding at any one time, provided that the aggregate outstanding principal balance of both Prosper borrower loans does not exceed the then-current maximum allowable loan amount for Prosper borrower loans (currently $25,000).  Currently, to be eligible to obtain a second Prosper borrower loan while an existing loan is outstanding:

 

·                  Prosper borrower members must be current on their existing Prosper borrower loan, and must not have been more than fifteen days past due in making their most recent monthly Prosper borrower loan payments for a specified number of months (between six and twelve, depending on the borrower’s credit score range),

 

·                  Prosper borrower members may not post a listing for a second Prosper borrower loan within six to twelve months (depending on the borrower’s credit score range) following the date of origination of their existing Prosper borrower loan, and

 

·                  the Prosper borrower member’s Prosper Rating must not drop more than a specified number of points (currently twenty to forty points, depending on the borrower’s credit score range at time the existing loan was obtained) below what it was when the Prosper borrower member’s existing Prosper borrower loan was obtained.

 

Prosper borrower loan underwriting requirements, including eligibility requirements for second loans are subject to change from time to time.

 

Open Market Loans

 

Once approved, originators can offer to sell loans involving borrowers of any level of creditworthiness, including non-prime and sub-prime borrowers.  All open market loans listed on the platform must be current and a minimum number of payments, as specified by Prosper and subject to change from time to time, must have been made on the loan.

 

Borrower Financial Information is Generally Not Verified

 

Prosper Borrower Listings

 

Information presented in Prosper borrower loan listings that is provided by Prosper borrower members is generally unverified.  Lender members should not rely on unverified information provided by Prosper borrower members.  In instances where we choose to verify the income, employment and occupation or other information provided by Prosper borrower members in listings, the verification is normally done after the listing has been already been created and bidding has ended.  In such cases, the results of Prosper’s verification are not reflected in the listings themselves.

 

We reserve the right in our member agreements to verify the accuracy of all statements and information provided by Prosper borrower members, lender members and group leaders in connection with listings, bids and Prosper 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 Prosper borrower loan.  If we are unable to verify material information with respect to a Prosper borrower member, listing or bid, we may cancel or refuse to post a listing, or cancel any or all bids against a listing.  We may also delay funding of a Prosper borrower loan in order to enable us to verify the accuracy of information provided by a Prosper borrower member, a lender member or a group leader in connection with the listing or bids, and to determine whether there are any irregularities with respect to the listing or bids.  We may also cancel the funding of a Prosper borrower loan, even if the listing garners a sufficient amount of purchase commitments for Notes to otherwise support the funding of the corresponding Prosper borrower loan, if material misstatements or inaccuracies are found in the listing or in other information provided by the Prosper borrower member.

 

In most instances, we do not verify the income, employment and occupation or other information provided by Prosper borrower members in listings.  The Prosper borrower member’s income, employment and occupation is self-reported, and we derive the Prosper borrower member’s DTI from a combination of the Prosper borrower member’s self-reported income and information from the Prosper borrower member’s credit report.  The credit data that appears in listings is taken directly from a credit report obtained on the Prosper borrower member from a consumer reporting agency, without any review or verification by Prosper.  We do not verify any statements by Prosper borrower members as to how Prosper borrower loan proceeds are to be used and does not confirm after Prosper borrower loan funding how loan proceeds were used.  Although Prosper borrower members may provide proof of homeownership to establish homeownership status, in most instances homeownership status is derived from the Prosper borrower member’s credit report, however, we do not verify this information; if the credit report reflects an active mortgage loan, the Prosper borrower member is presumed to be a homeowner.

 

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In connection with our identity and anti-fraud verification of Prosper borrower members, we verify the deposit account from which the Prosper borrower member will make payments, to determine that the Prosper borrower member is a holder of record of the account.  Even if a listing receives bids in the total amount requested, Prosper will cancel the listing without funding the requested Prosper borrower loan if we are unable to verify the Prosper borrower member’s account.  While we attempt to authenticate each platform participant’s identity, our fraud checks could fail to detect identity theft, fraud and inaccuracies.  See “Risk Factors—Risks Related to Borrower Default” for more information.

 

For example between September 1, 2007 and August 31, 2008, we verified employment and income for only approximately 22.6% of Prosper borrower members.  When we perform these verifications, we contact Prosper borrower members by email or telephone to request additional information.

 

If the Prosper borrower members fail to provide satisfactory information in response to an income or employment verification inquiry, we may request additional information from the Prosper borrower members or cancel the Prosper borrower member’s listing or refuse to proceed with the funding of the Prosper borrower loan.  As discussed, we conduct income and employment verification entirely in our discretion as an additional credit and fraud screening mechanism. We determine whether to verify a Prosper borrower member’s income and employment information primarily based on our analysis of the following factors using a propriety algorithm and matrix:

 

·      Prosper Rating;

 

·      loan amount;

 

·      stated income; and

 

·      debt-to-income ratio.

 

Of the Prosper borrower members undergoing income verification for the period from September 1, 2007 to August 31, 2008:

 

·      approximately 56.4% provided us with satisfactory responses and received a borrower loan;

 

·      approximately 37.7% did not provide satisfactory responses, or did not respond, and their listings were cancelled; and

 

·      approximately 5.9% either withdrew their listings, or failed to receive bids totaling the amount of their requested loan.

 

We believe that our ability to verify a Prosper borrower member’s income may be useful in certain circumstances in screening our platform against exaggerated income and employment representations from Prosper borrower members.  Lender members, however, should not rely on a Prosper borrower member’s stated employment or income or on our ability to perform income and employment verifications.  We cannot assure lender members that we will continue performing income and employment verifications.  We expect that the percentage of listings for which we conduct income and employment verifications, and the percentage of Prosper borrower members who ultimately have their income and employment verified, will decline as our volumes increase.  See “Risk Factors—Risks Related to Borrower Default—Information supplied by borrowers may be inaccurate or intentionally false” for more information.

 

Open Market Listings

 

The information in open market listings describing the borrower loan for sale is provided by the originator and is not verified by Prosper.  Prosper represents and warrants to the holders of each series of Notes, that the originator has made commercially reasonable efforts to authenticate and verify the identity of the borrower under corresponding open market loan upon which a series of Notes is dependent for payment.

 

Transaction Fees

 

Each time a Prosper borrower loan is funded, the borrower is charged a transaction fee equal to a specified percentage (currently 2.5%) of the amount of the Prosper borrower loan, subject to a specified minimum fee (currently $75), payable from the borrower’s loan proceeds at the time of funding of the borrower loan.  Each time an open market loan is sold, the  

 

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originator is charged a transaction fee equal to a specified percentage of the sale price of the open market loan, subject to a minimum transaction fee.  The transaction fee is payable from the loan sale proceeds at the time the open market loan is sold to Prosper.  If Prosper establishes the trading platform on which the Notes may be resold, Prosper intends to charge all lender members who post a listing for the sale of a Note a nonrefundable administrative fee in a specified amount (currently $0.25) that is subject to change from time to time. Listing fees will be charged and collected at the time the listing is posted on the trading platform by deducting the resale listing fee from the selling lender member’s funding account.

 

How to Bid to Purchase Notes

 

Bidding on Prosper Borrower Loans

 

A bid on a Prosper borrower listing is a lender member’s binding commitment to purchase a Note in the principal amount of the lender member’s bid, should the listing receive bids totaling the full amount of the requested loan.  Lender members bid the amount they are willing to commit to purchase a Note dependent for payment on payments we receive on a borrower loan described in the listing, and the minimum interest rate they are willing to receive.  A Prosper borrower loan will be not made unless the listing has received bids totaling the full amount of the requested borrower loan.

 

We provide for two types of lender member bids.  Lender members can bid (i) selectively, by browsing through and bidding on one or more Prosper borrower listings or (ii) bid by making a “portfolio plan” by indicating the amount the lender member is willing to commit toward the purchase of Notes that will be dependent for payment on the corresponding borrower loans, the interest rate and borrower criteria and other characteristics of the Notes or Prosper borrower listing that the lender member would bid on if available.  Lender members can employ either or both methods of bidding.  Currently, the minimum amount a lender member may bid is $50, and the maximum amount a lender member may bid on a listing is the amount of the requested borrower loan.  The maximum aggregate amount an individual lender member may bid on our platform is currently $5,000,000 for individuals and $50,000,000 for institutions. Prosper may change the minimum bid amount or the maximum aggregate bid amounts from time to time.

 

To bid selectively, lender members may browse online through available Prosper borrower listings displayed on our platform by desired borrower loan amount, current auction interest rate, borrower Prosper Rating, debt-to-income ratio, and group and other borrower characteristics.  A lender member can bid on as many listings as the lender member desires, subject to the aggregate bidding limit.

 

To bid using a portfolio plan, the lender member enters an aggregate amount the lender member desires to bid, the maximum amount that may be bid on one Prosper borrower listing, the minimum interest rate the lender member is willing to receive, the acceptable borrower Prosper Rating or Ratings or other credit criteria, as well as any other listing criteria.  When a lender member makes a portfolio plan, bids will automatically be placed on any then-active Prosper borrower listings meeting the criteria selected.  Lender members can pause or cancel a portfolio plan, and can direct that, as new funds are deposited into the lender member’s funding account from Note payments or transfers of new funds, they be applied to the portfolio plan and automatically bid on listings that meet the criteria of the portfolio plan.  Lender members may have one or more portfolio plans bidding concurrently.

 

Both the selective and portfolio plan bidding methods enable lender members to diversify the risk of default of the corresponding borrower loans if they elect to do so.  It is solely up to the individual lender members to select their bidding method and the credit characteristics which are acceptable to the lender member and to determine a diversification strategy.

 

At the time a lender member makes a bid (whether selectively or through a portfolio plan) the lender member must have funds on deposit in the lender member’s funding account in at least the amount of the lender member’s outstanding bids.  Lender members may not withdraw bids once they are posted on a listing.  Bids expire automatically when they are no longer “winning” – i.e., when the bidding lender member is outbid – or when a listing expires without having received bids in the amount of the requested borrower loan or is withdrawn by a borrower or cancelled by Prosper.  Lender member bids become “winning” bids if such bids are in the group of bids for Notes that, in an aggregate, correspond to the requested loan amount of the corresponding Prosper borrower loan and are in the lowest interest rate among all bids placed against the listing.

 

To the extent there are multiple bids at the same interest rate in an aggregate amount in excess of the requested loan amount, the bids placed earliest in time take precedence over later bids. When the total amount of all bids placed in the auction equals or exceeds the initial loan amount, further bids have to be placed at least 0.05% below the current winning interest rate.  It is possible that only a portion of a lender member’s bid is winning on a Prosper borrower listing.  Depending on the amount of the winning bids at the end of the auction period, there may be a winning bidder on a listing with a winning bid of less than $50.  There may be only one partial winning bidder.

 

In order to make Note purchase commitments by bidding on Prosper borrower listings, lender members must have funds in their Prosper accounts in at least the amount of the lender member’s bid or bids.  Once a bid is placed, it is irrevocable, and during the time a bid is a “winning” bid on the listing, the amount of the bid is not permitted to be withdrawn from the lender member’s Prosper account.  Lender member bids become “winning” bids if such bids are in the group of bids for Notes that, in an aggregate, correspond to the amount of the requested borrower loan and are in the lowest interest rate among all bids placed against the listing.

 

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It is expected that a single Prosper borrower loan that gets funded will receive Note purchase commitments from many different lender members.  For example, as of October 16, 2008, during the period in which our lender members purchased loans directly instead of Notes dependent for payment on the corresponding borrower loan, the average aggregate loan size was approximately $6,172 and the average loan purchase commitment per lender per loan was approximately $91.  If by the end of the seven-day listing period a Prosper borrower loan listing does not receive bids totaling the amount of the requested borrower loan, the listing expires and no loan is funded to the borrower.  Prosper borrower members whose listings expire due to an insufficient amount of bids may post a new loan listing on our platform.

 

Bidding on Open Market Loans

 

The bidding process for open market listings focuses on the projected “yield to maturity” of the remaining payments of the loan.  The originator offering the loan for sale sets an initial sale price and an initial yield. The yield is calculated as the internal rate of return of the anticipated cash flows assuming all loan payments are made as scheduled. The initial sale price may be equal to, greater than or less than the outstanding balance of the loan being offered for sale. Similarly, the initial yield may be equal to, greater than or less than the interest rate the borrower is obligated to pay on the open market loan being offered for sale. The sale price and the yield are inversely proportionate. An open market loan sold at a higher price than the outstanding balance will result in a yield lower than the borrower’s interest rate, and an open market loan sold at a lower price will result in a yield higher than the borrower’s interest rate.

 

If the initial sale price is equal to the outstanding principal balance of the loan being offered for sale, the initial yield shown in the listing will be equal to the borrower’s interest rate. If the initial sale price is greater than the outstanding principal balance of the loan being offered for sale, the initial yield shown in the listing will be lower than the borrower’s interest rate, and the loan will be offered at a premium. If the initial sale price is less than the outstanding principal balance of the loan being offered for sale, the initial yield shown will be higher than the borrower’s interest rate, and the loan will be offered at a discount.

 

Lender members bid at a minimum yield percentage that they are willing to accept.  The current yield as set forth in an open market listing at any given time during the duration of the listing is the minimum yield for which there is sufficient participation among bidders to accommodate any corresponding increase in the sale price. The final yield is the minimum yield for which there is sufficient participation among bidders to accommodate the final sale price at the end of the auction period. To the extent there are multiple bids at the same yield in an aggregate amount in excess of the sale price, the bids placed earliest in time take precedence over later bids.  As the yield is bid down, the sale price for the loan will increase.  Prosper’s bidding algorithm will take this into account, so as the current yield on a listing decreases, the sale price will increase to an amount sufficient to produce the new yield, and additional bids will be allowed in to be applied toward the incremental increase in the sale price.  Bids may be in amounts between $50 and the total current price. It is possible that only a portion of a lender member’s bid is winning on a listing. Depending on the amount of the winning bids at the end of the auction period, there may be a winning bidder on a listing with a winning bid of less than $50.

 

When bidding commences on the listing, a lender member may place a bid by specifying an amount to invest and the lowest estimated yield the lender member is willing to receive. If the total amount of all bids placed is less than the initial sale price, new bids can be placed at or below the initial yield. When the total amount of all bids placed in the auction equals or exceeds the initial sale price, further bids have to be placed at least 0.05% below the current winning yield.  If the listing receives sufficient bids to match the necessary sale price of a loan at the winning yield percentage prior to the end of the auction, once ended, Prosper will purchase that loan from the listing originator.

 

In order to make Note purchase commitments by bidding on open market listings, lender members must have funds in their Prosper accounts in at least the amount of the lender member’s bid or bids.  Once a bid is placed, it is irrevocable, and during the time a bid is a “winning” bid on the listing, the amount of the bid is not permitted to be withdrawn from the lender member’s Prosper account.  It is expected that a single open market loan listed for sale will receive Note purchase commitments from many different lender members.

 

Treatment of Lender Member Balances

 

In order to make Note purchase commitments by bidding on listings, lender members must have sufficient funds in their funding account at Prosper.  This is accomplished by having each lender member authorize an electronic transfer using the Automated Clearing House, or ACH, network from the lender member’s designated and verified bank account to the account we currently maintain at Wells Fargo Bank, N.A. “for the benefit of” our lender members.  This so-called “FBO account” is a pooled account titled in our name “for the benefit of” our lender members.

 

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Funds in the FBO account will always be maintained at an FDIC member financial institution.  Our individual members have no direct relationship with Wells Fargo Bank, N.A. by virtue of participating on our platform as a borrower or lender member.  We maintain and administer the FBO account.  No Prosper monies are ever commingled with the assets of lender members in the FBO account.

 

Under the FBO account, we maintain sub-accounts for each of our lender members on our platform to track and report funds committed by lender members to purchase Notes dependent on borrower loans, as well as payments received from borrower members.  These record-keeping sub-accounts are purely administrative and reflect balances and transactions concerning the funds in the FBO account.

 

The FBO account is FDIC-insured on a “pass through” basis to the individual lender members, subject to applicable limits.  This means that each individual lender member’s balance is protected by FDIC insurance, up to the aggregate amounts established by the FDIC.  Other funds the lender member has on deposit with Wells Fargo Bank, N.A., for example, may count against the FDIC insurance limits.

 

Funds of a lender member may stay in the FBO account indefinitely.  Such funds may include funds in the lender member’s sub-account never committed to the purchase of Notes or committed to the purchase of Notes for which the corresponding borrower loan did not fund, and may also include payments received from Prosper related to Notes previously purchased.  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.

 

Prosper Borrower Loan Funding and Purchases of Notes

 

Once a Prosper borrower listing receives bids from lender members totaling the loan amount requested, we proceed with the funding of the corresponding Prosper borrower loan and with the sale of the Notes to the lender members who were the winning bidders on the listing.

 

Borrower members execute an electronic borrower registration agreement at the time they post a listing on the platform. After expiration of the bidding period for the listing and satisfactory completion of our pre-funding review, the borrower executes an electronic promissory note in favor of WebBank in the amount of the requested borrower loan.  Loan proceeds are then disbursed to the borrower’s account by ACH transfer.  WebBank then electronically endorses the promissory note to Prosper and sells and assigns the promissory note to Prosper without recourse to WebBank.  Borrower loans are sold and assigned by WebBank to Prosper on the first business day following loan disbursement.

 

We are obligated to maintain sufficient funds in a funding account maintained by WebBank to satisfy the daily projected borrower loan fundings.  WebBank funds all loans originated on the platform, and we disburse the loan proceeds on WebBank’s behalf to the borrower member who is receiving the borrower loan.

 

The promissory note and the borrower registration agreement contain customary agreements and covenants requiring the borrower members to repay their borrower loans and describing the process of posting listings and obtaining loans through our platform. Borrowers authorize the loan proceeds to be disbursed by ACH transfer into the borrower’s designated bank account.

 

Borrowers pay an origination fee upon successful funding of the borrower loan.  The origination fee is paid by the borrower out of the proceeds of the borrower loan at the time of funding.  The transaction fees are charged by WebBank, and we receive amounts equal to the transaction fees as compensation for loan origination activities.

 

Lender members know only the screen names, and do not know the actual names, of borrower members.  The actual names and mailing addresses of the borrower members are known only to us and WebBank.  We maintain custody of the electronically-executed promissory notes evidencing borrower loans and the Notes sold to lender members in electronic form on our platform.

 

After the funding of a Prosper borrower loan we issue a Note to a lender member and register the Note on our books and records.  We transfer the principal amount of the Note from such lender member’s sub-account under the FBO account to a funding account maintained by WebBank for our benefit.  This transfer represents the payment by the lender member of the purchase price for the Note.  These proceeds are paid to Prosper to reimburse us for our purchase from WebBank of the particular borrower loan selected by the lender member.  WebBank is the lender for all borrower loans to borrower members,

 

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which allows our platform to be available on a uniform basis to borrower members throughout the United States.  The lender registration agreement provides that, in the event of a material breach of our representations and warranties, we must either cure the defect, repurchase the Note, or indemnify and hold the lender member harmless against losses resulting from the defect in the Note.

 

Open Market Loan Sales and Purchases of Notes

 

Once a Prosper borrower listing receives bids from lender members totaling the loan amount requested, we proceed with the funding of the corresponding Prosper borrower loan and with the sale of the Notes to the lender members.

 

Once an open market listing receives bids from lender members totaling the sale price, we proceed with the sale of the corresponding open market loan to Prosper and with the sale of the Notes to the lender members who were the winning bidders on the listing.  At the close of the auction bidding period the originator sells and assigns the loan to Prosper, without recourse to the originator, in exchange for the sale price of the open market loan as determined by the auction bidding process.  Prosper uses the proceeds of the sale of each series of Notes corresponding to the open market loan to purchase the open market loan from the originator.  The originator will provide us with a bill of sale evidencing the transfer of the open market loan to Prosper, and upon receipt of the bill of sale Prosper will electronically transfer funds to the originator in the amount of the sale price of the open market loan, less a transaction fee equal to a specified percentage of the sale price of the open market loan, subject to a minimum transaction fee.

 

Identity Fraud Reimbursement

 

We may repurchase Notes from our lender members if the corresponding borrower loan was obtained through identity fraud.  We generally recognize the occurrence of identity fraud upon receipt of a police report regarding the identity fraud.  This remedy for identity fraud only provides an assurance that our borrower identity verification is accurate; in no way is it a guarantee of a borrower’s self-reported information (beyond the borrower’s identity) or a borrower’s creditworthiness.  We expect the incidence of identity fraud on our platform to be low because of our identity verification process.  As of December 31, 2008, we had experienced 19 cases of confirmed identity fraud affecting 32 loans since our inception.  In these cases, we received a police report from the victim of the identity fraud, evidencing that identity fraud had occurred.  Following our receipt of those police reports, we repurchased from the lender members the promissory notes evidencing the affected borrower loans for the outstanding principal amount of those promissory notes.

 

Post-Funding Loan Servicing and Collection
 

Following the purchase of Notes and the funding or sale of the corresponding borrower loans, we begin servicing the borrower loans. We collect payments from borrowers on Prosper Borrower loans, and the originator collects payments from borrowers on open market loans. For both Prosper borrower loans and open market loans, we transfer amounts collected to the lender members who own Notes corresponding to the borrower loan.

 

We assess lender members a servicing fee in respect of their Notes.  Our servicing fee is equal to an amount corresponding to specified annualized rate applied to the outstanding principal balance on the corresponding borrower loan.  Currently, the servicing fee rate is 1.0% for Prosper borrower loans and 0.5% for open market loans, but Prosper may change the servicing fee rate from time to time.

 

Our procedures for collecting Prosper 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.  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’s sub-account.  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 its FBO sub-account by ACH to the lender member’s designated bank account at any time, subject to normal execution times for such transfers (generally 2-3 days).

 

We disclose on our website to the relevant lender members and report to consumer reporting agencies regarding borrower members’ payment performance on Prosper borrower loans.  We have also made arrangements for collection procedures in the event of borrower member default.  When a Prosper borrower loan is past due and payment has not been received, we contact the borrower member to request payment.  After a 15-day grace period we assess a late payment fee.  The amount of the late payment fee is the greater of 5% of the unpaid installment amount or $15, or such lesser amount as may be provided by applicable law. This fee may be charged only once per late payment.  Amounts equal to any late payment

 

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fees we receive on Prosper borrower loans are paid to holders of the Notes dependent for payment on the corresponding borrower loan.  We may also work with the borrower member 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.

 

On the first failed payment of each billing period, we assess a non-sufficient funds fee in the amount of $15.  We retain 100% of this non-sufficient funds fee to cover our administrative expenses for processing failed payments.

 

If a Prosper borrower loan becomes more than thirty days past due, we identify the loan on our website as “1 month late,” and we refer the borrower loan to an outside collection agency.  Amounts equal to any recoveries we receive from the collection process are payable to lender members on a pro rata basis, subject to servicing fees and an additional collection fee between 15% and 30% of any amounts that are obtained.  The lender member is only charged the additional collection fee if we or the collection agency is able to collect a payment.

 

We keep lender members apprised of the delinquency status of Prosper borrower loans by identifying delinquent loans on our website as “1 month late,” “2 months late,” “3 months late,” or “current.” Prosper borrower loans that become more than 120 days overdue are charged off and designated as such on our website.  Through their online Prosper account lender members are able to monitor the borrower loans corresponding to their Notes, but cannot participate in or otherwise intervene in the collection process.

 

If a borrower member dies while a borrower 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, 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 loan in full, we will treat the unsatisfied portion of that borrower loan as charged off with zero value.  In addition, if a borrower member dies near the end of the term of a borrower loan, it is unlikely that any further payments will be made on the Notes corresponding to such borrower loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.

 

Our normal collection process for Prosper borrower loans changes in the event of a borrower member bankruptcy filing.  When we receive notice of the bankruptcy filing, as required by law, we cease all automatic monthly payments on the Prosper borrower loan and defer any other collection activity.  The status of the Prosper borrower loan, which the relevant lender members may view through their online Prosper account, switches to “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” proceeding, based on instructions we receive from the bankruptcy court.  If the proceeding is a “no asset” proceeding, we take no further action and assume that no recovery will be made on the borrower loan.

 

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

 

·      if the borrower member used the proceeds of the borrower loan in a way other than that which was described in the borrower listing;

 

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

 

·      our view of the costs and benefits to us of any proposed action.

 

Open market loans will be serviced, both before and after default, by the originator (although our loan purchase agreement with the originator may provide that we have the right, in our discretion, to take over servicing in the event of the originator’s default in its servicing obligations).  In servicing open market loans the originator will use commercially reasonable efforts to service and collect the open market loans in accordance with industry standards customary for loans of the same general type and character as the loans involved.  The originator may, in its sole discretion and subject to the agreed-upon servicing standards, refer a borrower loan to a collection agency at any time, or elect to initiate legal action to collect a borrower loan, repossess or foreclose upon any collateral securing a borrower loan, or sell a borrower loan to a third party debt buyer at any time.  The originator is obligated to forward to Prosper any amounts it receives from such activities in respect of the open market loan, including amounts received upon the sale of collateral securing an open market loan.  The holders of Prosper Open Market Notes do not have the right to take legal action to collect on the collateral under the corresponding open market loan or to require that the originator take such action.  In servicing borrower loans the originator may, in its discretion, utilize affiliated or unaffiliated third party loan servicers, repossessors, collection agencies or other agents or contractors.

 

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For open market loans, we will transfer borrower payments to the funding account of the lender members who own Notes corresponding to the borrower loan upon receipt of such payments from the originator servicing the open market loan. Any delay between the time an originator receives a borrower payment and the time the payment is transferred to the lender member’s funding account may reduce the yield to maturity displayed in the open market listing relating to the open market loan.

 

Purchase of Notes by Prosper or Related Parties

 

Prosper does not participate on the platform as a lender.  Some of our executive officers, directors and shareholders have bid on and purchased loans originated through the platform from time to time in the past, and may purchase Notes in the future.  As of October 31, 2008, these individuals had purchased $936,625 in loans.  As certain of our executive officer and directors, by virtue of their duties as employees, have access to information not available to the general population of lender members.  We have adopted the following procedures to prevent and/or detect the improper use of non-public information in bidding activities by such officers and directors:

 

·      Our corporate policies, distributed to all employees, prohibits an employee’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 to information needed to perform employee’s job function.  These limitations are defined by “security group,” which corresponds to both job title and functional content and the number of employees that have access to such non-public information on a “bulk” or “query” basis is extremely limited.

 

·      In addition to prevention efforts, our internal control department has developed a suite of audit trails and audits that are used to identify and investigate bidding activities that are classified as “suspicious.”

 

Trading Platform

 

Lender members may not transfer their Notes except through the resale trading platform operated by a registered broker-dealer yet to be determined.  See “About the Platform—Description of the Notes” for more information.  This trading platform is an internet-based trading platform on which our lender members may offer their Notes for sale or bid on and purchase Notes offered for sale.  Lender members must first establish a brokerage relationship with the registered broker-dealer operating the trading platform before using the trading platform.  In this section, we refer to lender members who have established such brokerage relationships as “subscribers.”  Only transactions involving the resale of a previously-issued Notes will be affected through the trading platform; the trading platform will not handle any aspect of transactions involving the initial offer and sale of Notes by Prosper.  Subscribers may post orders to sell their Notes on the trading platform at prices established by the subscriber.  Other subscribers will have the opportunity to view these prices, along with the listing for the borrower loan corresponding to the Note and the payment history of the corresponding borrower loan.

 

To cover administrative costs, Prosper intends to charge all lender members who post a listing for the sale of a Note a nonrefundable administrative fee in a specified amount (currently $0.25) that is subject to change from time to time.  The administrative fee will be deducted from the subscriber’s funding account at the time the resale listing is posted on the trading platform. In addition, all Notes traded through the trading platform will continue to be subject to the servicing fees charged by Prosper and the originator, as applicable depending on the type of borrower loan corresponding to a Note.

 

Subscribers who sell Notes on the trading platform will be subject to fees charged by the registered broker-dealer.  This fee is expected to equal to a specified percentage of the resale price of the Note sold.

 

We are not a registered national securities exchange, securities information processor, clearing agency, broker, dealer or investment adviser.  All securities services relating to the trading platform are provided by the registered broker-dealer.  Neither Prosper nor the registered broker-dealer will make any recommendations with respect to transactions on the trading platform. There is no assurance that subscribers will be able to establish a brokerage relationship with the registered broker-dealer.  Furthermore, we cannot assure subscribers that they will be able to sell Notes they offer for resale through the trading platform at the offered price or any other price nor can we offer any assurance that the trading platform will continue to be available to subscribers.

 

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Resale of the Notes

 

The Notes may be resold to other subscribers through the trading platform. If a selling subscriber desires to sell a Note prior to the end of the Note’s term, the selling subscriber may post the Note for sale on the trading platform for resale in an auction format.  If a subscriber purchases the Note, then the Note will be transferred through the trading platform to the subscriber.  A Note resold through the trading platform must be purchased in its entirety by a single subscriber.  Once a Note has been resold through the trading platform to a subsequent subscriber, the Note may again be resold through the trading platform. After the date of this prospectus, the Notes will not be non-transferable except through the trading platform.

 

Notes Subject to Resale by Subscribers.  The Note trading platform will enable subscribers to resell Notes originated on our platform or purchased from other subscribers through the trading platform. Notes corresponding to Prosper borrower loans or open market loans that have become delinquent in borrower payments will be eligible for resale on the trading platform. There is no limit on the number of times a Note may be resold on the trading platform, so long as the Note is outstanding.

 

Lender Members Eligible to Bid on Resale Listings.  Lender members must first establish a brokerage relationship with the registered broker-dealer operating the trading platform before using the trading platform.  To open an account, the broker-dealer will likely require lender members to confirm that they satisfy certain minimum financial suitability standards and maximum investment limits, if any, that may be imposed by the state in which the lender member resides.  If the lender member does not satisfy these suitability requirements it will not be able to place bids on the platform.

 

Creation of Resale Listings.  Subscribers who want to sell one or more of their Notes may offer them for resale on the trading platform by creating and posting a “resale listing.”  Subscribers may offer to sell any or all of the Notes they own and may offer to resell more than one Note at the same time.

 

The subscriber will designate a minimum sale price the subscriber is willing to receive for the Note.

 

Resale listings will have a listing duration of seven days.  Selling subscribers may also add an “automatic sale” feature to their resale listing, which would end the bidding period on a resale 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 resale listings without charge at any time prior to expiration of the auction bidding period, before any bids are received.  Resale listings with at least one bid cannot be withdrawn by the selling lender.

 

Display of Resale Listings.  Resale listings will be displayed for auction on the trading platform, and include the selling subscriber’s screen name, the offered sale price of the Note, the interest rate on the Note and the remaining term of the Note, and the yield to maturity that corresponds to the offered sale price.  Resale listings will also include the repayment status on the Note (i.e., current or delinquent), the borrower’s payment history and the next scheduled payment on the Note.  Resale listings will also include the remaining duration of the resale listing, the number of bids, and whether the resale listing has an automatic sale feature.

 

Resale listings will include a link to the original listing (including the listing title, description, credit data, recommendations, questions and answers, and original bidding history) for the borrower loan that corresponds to the Note being offered for resale.  Although resale listings will be displayed publicly on the trading platform, the borrower’s payment history and corresponding listings will be viewable only by registered subscribers.

 

Bidding on Resale Listings.  Only registered subscribers are eligible to bid for and purchase Notes listed for resale on the trading platform. Subscribers may bid for and purchase one or more Notes from selling subscribers.  As with bidding on Prosper borrower listings and open market listings, subscribers who bid on resale listings must have funds on deposit in the subscriber’s funding account in at least the amount of the subscriber’s bid or 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 Prosper borrower listings, open market listings and resale listings.  Subscribers are not eligible to bid on their own resale listings.

 

Subscribers bidding on resale 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 resale by a selling subscriber.

 

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Subscribers bidding on resale listings can only bid selectively, by browsing through and choosing one or more resale listings that appeal to the subscriber.

 

Bids may be made by subscribers until the end of the auction period specified in the resale 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 resale listing with such a feature).

 

Proxy Bidding.  The trading platform will employ 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 resale 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 Resale of Borrower Loans.  When a resale listing ends with a winning bidder, upon settlement of the sale, which will normally occur on the business day following expiration of the resale listing, the final sale price is withdrawn from the winning subscriber’s funding account to pay the selling subscriber. The registered broker-dealer’s fee is deducted from the sale price and retained by the registered broker-dealer.

 

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 subscriber who purchased the Note from the previous subscriber.  The purchasing subscriber may retain ownership of the Note for the remainder of its term, or list the Note for resale on the trading platform. The electronic original Note is kept in the possession and control of Prosper, as servicer of the Note, for the remaining term of the Note.

 

Customer Support

 

We provide customer support to our borrower and lender members.  For most of our members, their experience is entirely web-based.  We include detailed information about our platform on our website.  We also post detailed fee information and the full text of our member legal agreements.

 

We make additional customer support available to members by email and phone.  Our customer support team is currently located at our headquarters in San Francisco, California.

 

Historical Information About Prosper Borrower Members and Outstanding Borrower Loans

 

The performance of borrower loans is a function of the credit quality of the borrowers and the risk and return preferences of the lender members.  Lender members can choose to pursue a variety of bidding strategies including strategies that may or may not maximize the return on their investment.  When making bidding decisions, lender members consider borrowers’ credit grades, debt-to-income ratios and other credit data and information displayed with listings.  The Prosper credit grades reflected in this section differ substantially from the credit grades for a Prosper Rating after the date of this prospectus.  Accordingly, you should not place substantial reliance on our historical information in connection with the risks of investing in Notes under this prospectus.  See “Risk Factors—Risks Related to Borrower Default.”

 

Since its inception in November 2005 through October 16th, 2008 Prosper had facilitated 28,940 borrower loans with an average original principal amount of $6,172 and an aggregate original principal amount of $178,622,722.  As of December 31, 2008, 61.1% were current, 16.5% were paid in full, 1.2% were 15 to 30 days past due, 4.8% were more than 30 days past due, and 16.5% had defaulted.  A borrower loan is considered to have defaulted when it is more than 120 days past due or has filed a bankruptcy which has been discharged.  In addition, of these loans 7,959 loans, or 27.5% , have ever been greater than 15 days past due at one time, and 6,814 loans, or 23.5%, have been more than 30 days past due at one time.

 

The defaulted loans as of December 31, 2008 were comprised of 4,771 borrower loans, equaling a total defaulted amount of $24,783,667.  Of these 4,771 defaulted loans, 681 are loans in which the borrowers filed for bankruptcy, equaling $4,121,037 in defaulted amount.

 

The following table presents additional aggregated information for the period from our inception to October 16, 2008 about delinquencies, default and borrower prepayments, grouped by the credit grade.  With respect to delinquent borrower loans, the following table shows the entire amount of the principal remaining due (not just that particular payment.)

 

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Total Loan Originations

November 2005 - October 16th, 2008
(as of December 31, 2008)

 

 

 

Total Loan Originations

 

Current Loans

 

15-30 Days Past Due

 

Credit Grade

 

Number

 

Amount

 

Number

 

Origination Amount

 

Outstanding Principal

 

Number

 

Origination Amount

 

Outstanding Principal

 

AA

 

 

3513

 

$

32,152,227

 

2213

 

$

21,373,696

 

$

15,002,386.12

 

19

 

$

342,551

 

$

263,496.64

 

A

 

 

3312

 

$

30,798,523

 

2206

 

$

20,088,625

 

$

13,965,201.46

 

29

 

$

399,090

 

$

266,513.84

 

B

 

 

4386

 

$

36,481,614

 

2992

 

$

23,907,328

 

$

16,654,503.91

 

52

 

$

514,099

 

$

364,560.29

 

C

 

 

5643

 

$

34,450,048

 

3743

 

$

20,903,835

 

$

14,170,896.87

 

67

 

$

455,153

 

$

311,297.61

 

D

 

 

5151

 

$

24,655,323

 

3239

 

$

14,395,669

 

$

9,537,631.65

 

71

 

$

342,488

 

$

234,886.42

 

E

 

 

3289

 

$

11,156,095

 

1703

 

$

5,036,920

 

$

3,020,543.47

 

43

 

$

130,625

 

$

84,224.10

 

HR

 

 

3505

 

$

8,602,274

 

1538

 

$

3,591,560

 

$

2,187,340.64

 

56

 

$

123,930

 

$

88,212.39

 

NC

 

 

141

 

$

326,618

 

43

 

91,876

 

$

30,631.65

 

3

 

$

6,701

 

$

2,687.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28940

 

$

178,622,722

 

17677

 

$

109,389,509

 

$

74,577,136

 

340

 

$

2,314,637

 

$

1,635,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

percent of total

 

 

 

 

 

61.1

%

61.2

%

 

 

1.2

%

1.3

%

 

 

 

 

avg loan size:

 

$

6,172.17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paid In Full (1)

 

311† Days Past Due

 

 

 

Defaulted (2)

 

Credit Grade

 

Number

 

Origination Amount

 

Number

 

Origination Amount

 

Outstanding Principal

 

Number

 

Origination Amount

 

Charged Off Principal

 

AA

 

 

1091

 

$

7,386,382

 

76

 

$

1,227,582

 

$

891,086.56

 

114

 

$

1,822,016

 

$

1,447,967.15

 

A

 

 

724

 

$

5,364,100

 

128

 

$

1,804,246

 

$

1,348,718.78

 

225

 

$

3,142,462

 

$

2,512,447.99

 

B

 

 

713

 

$

4,791,245

 

199

 

$

2,158,003

 

$

1,594,745.78

 

430

 

$

5,110,939

 

$

4,269,230.00

 

C

 

 

782

 

$

4,509,006

 

280

 

$

2,010,491

 

$

1,481,460.65

 

771

 

$

6,571,563

 

$

5,512,454.83

 

D

 

 

697

 

$

3,078,240

 

287

 

$

1,451,639

 

$

1,044,808.95

 

857

 

$

5,387,287

 

$

4,507,471.68

 

E

 

 

437

 

$

1,541,416

 

194

 

$

539,978

 

$

436,735.33

 

912

 

$

3,807,156

 

$

3,217,787.34

 

HR

 

 

324

 

$

773,524

 

211

 

$

528,350

 

$

376,652.41

 

1376

 

$

3,584,910

 

$

3,138,437.79

 

NC

 

 

9

 

$

22,650

 

0

 

$

 

$

 

86

 

$

205,391

 

$

177,870.33

 

 

 

4777

 

$

27,466,563

 

1375

 

$

9,820,289

 

$

7,174,208

 

4771

 

$

29,631,724

 

$

24,783,667

 

percent of total

 

16.5

%

15.4

%

4.8

%

5.5

%

 

 

16.5

%

16.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Default due to Delinquency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4090

 

85.7

%


(1) Includes loans with Final Payment in Progress

 

 

 

 

 

 

 

$

20,662,629.12

 

83.4

%

(2) includes all bans 5120 days past due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Default due to Bankruptcy:

 

 

 

 

 

 

 

 

 

 

 

681

 

14.3

%

 

 

 

 

 

 

 

 

$

4,121,037.99

 

16.6

%

 

Because of our limited operating history, the data in the preceding table regarding loss experience may not be representative of the loss experience that will develop over time as additional borrower loans are originated through our platform and the borrower loans already originated through our platform have longer payment histories.  In addition, because of our limited operating history, the data in the table regarding prepayments may not be representative of the prepayments we expect over time as additional borrower loans are originated through our platform and the borrower loans already originated through our platform have longer payment histories.

 

The following table presents aggregated information about borrowers for loans originated over the period from our inception to October 16, 2008, grouped by credit grade:

 

Credit Grade

 

Number of Borrowers

 

Average Interest Rate

 

Average APR

 

AA

 

 

3513

 

11.5

%

12.2

%

A

 

 

3312

 

14.2

%

15.2

%

B

 

 

4387

 

16.5

%

17.5

%

C

 

 

5643

 

18.8

%

20.0

%

D

 

 

5151

 

21.2

%

22.4

%

E

 

 

3289

 

25.5

%

26.8

%

HR

 

 

3505

 

25.5

%

26.9

%

NC

 

 

141

 

23.3

%

24.2

%

 

The following table presents aggregated information for loans originated during the period from March 1, 2007 through October 16, 2008.  Income and employment is self-reported by borrowers at the time of their loan applications and verified in a limited number of instances.  Homeownership information is obtained from credit bureau reporting and Prosper does not independently verify this information except in limited instances where the information is provided by borrowers and verified.

 

Credit Grade

 

Percent of Borrowers
Reporting Home Ownership

 

Average Job Tenure
Months

 

Average Annual
Gross Income

 

Average Debt To Income
(excludes DTI>200%)

 

AA

 

 

77.3

%

76.0

 

72,040

 

19.96

%

A

 

 

57.1

%

67.4

 

58,811

 

24.29

%

B

 

 

54.6

%

71.3

 

56,419

 

27.52

%

C

 

 

49.9

%

70.0

 

53,029

 

25.20

%

D

 

 

29.7

%

63.5

 

46,814

 

25.54

%

E

 

 

27.9

%

65.5

 

48,205

 

23.97

%

HR

 

 

18.6

%

49.1

 

38,829

 

19 47

%

 

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The following table presents aggregated information for loans originated from the period from March 1, 2007 to October 16, 2008 reported by a consumer reporting agency about Prosper borrowers at the time of their loan applications, grouped by credit grade.  Prosper has not independently verified this information:

 

Credit Grade

 

Average Experian
ScoreXPlus

 

Average Number
Current Delinquencies

 

Average Number
Total Open Lines

 

Average Number
Total Credit Lines

 

AA

 

 

792.3

 

0.12

 

9.72

 

26.59

 

A

 

 

737.5

 

0.27

 

9.01

 

24.65

 

B

 

 

697.6

 

038

 

8.78

 

25.15

 

C

 

 

656.8

 

0.70

 

8.12

 

25.07

 

D

 

 

619.5

 

1.05

 

7.89

 

23.77

 

E

 

 

578.3

 

2.20

 

7.62

 

26.63

 

HA

 

 

536.7

 

3.82

 

5.08

 

19.24

 

 

SUMMARY OF MATERIAL AGREEMENTS

 

Indenture and Form of Notes

 

General

 

The Notes will be issued in series under an indenture to be entered into between Prosper and a commercial bank yet to be determined.

 

Each series of Notes will correspond to one borrower loan.  All Notes will be U.S. dollar denominated, fully amortizing and have a fixed rate of interest.  The Notes of each series that correspond to Prosper borrower loans will have a stated interest rate that is the same as the interest rate for the corresponding borrower loan and an aggregate stated principal amount equal to the principal amount of the corresponding borrower loan. The Notes of each series that correspond to Prosper open market loans will have a stated interest rate that is the same as the yield percentage for the corresponding open market loan, and an aggregate stated principal amount equal to the sale price of the corresponding open market loan, as determined by the auction bidding process. The yield percentage and the sale price and may be equal to, greater than or less than the interest rate and the outstanding principal balance, respectively, of the open market loan.

 

Notwithstanding the foregoing, we have no obligation to make any payments on the Notes unless, and then only to the extent that, we have received payments on the corresponding borrower loan.  The Prosper Borrower Notes will also be subject to full or partial prepayment without penalty.  The Prosper Open Market Notes may or may not allow the borrower to prepay the loan without prepayment penalty.

 

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The indenture will not limit the aggregate principal amount of Notes that Prosper can issue under the indenture, but each series of Prosper Borrower Notes will be effectively limited to the maximum allowable principal amount (currently $25,000) of a Prosper borrower loan.  If in the future we change the maximum allowable Prosper borrower loan amount, then the maximum aggregate principal amount of Prosper Borrower Notes per series would also increase.  The aggregate principal amount of Prosper Borrower Notes of each series will equal the principal amount of the corresponding borrower loan.  Each series of Prosper Open Market Notes is not limited to the minimum and maximum amounts applicable to Prosper borrower loans.

 

We will use all proceeds we receive from purchases of the Notes to purchase the corresponding borrower loans from WebBank or, if an open market loan, from the originator.

 

Maturity Dates

 

Prosper Borrower Notes currently have a term of three years, but Prosper anticipates in the near future extending available maturity dates to between three months to seven years.  Prosper Open Market Notes will have maturities of three months or more.  If there are amounts owing to Prosper in respect of the corresponding borrower loan at the initial maturity of a Note, the term of the Note will be automatically extended by one year, which we refer to as the “final maturity,” to allow the Note holder to receive any payments that we receive on the corresponding borrower loan after the maturity of the corresponding borrower loan.  Following the final maturity of a Note, the holder of that Note will have no rights to receive any further payments from Prosper even if the borrower under the corresponding borrower loan, or a bankruptcy trustee, subsequently remits payments to Prosper.

 

Ranking

 

The Notes will be unsecured special, limited obligations of Prosper.  Prosper will be obligated to make payments on each Note in a series only if and to the extent that Prosper receives principal or interest payments from the borrower on the corresponding borrower loan purchased by Prosper with the proceeds of that series, and such borrower loan payments will be shared ratably among all owners of Notes of the series after deduction of Prosper’s (and, if applicable, the originator’s) servicing fee.  Late fees collected by Prosper on Prosper borrower loans are passed on to the lender members who own the Notes dependent for payment on that borrower loan, whereas late fees collected by originators on open market loans may be retained by the originator servicing the open market loan.  In the event of a bankruptcy or similar proceeding of Prosper, the relative rights of the holder of a Note as compared to the holders of other unsecured indebtedness of Prosper with respect to payment from the proceeds of the borrower loan corresponding to that Note or other assets of Prosper is uncertain.  To provide additional certainty regarding this risk, Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in all present and future rights of Prosper to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture solely by reason of Prosper becoming subject to a bankruptcy or similar proceeding and not for any other reason.  In such case, the indenture trustee, but not the holders of the Notes for that series, would have a secured claim, limited in recovery, to the right to receive payments on, and to all payments previously received by Prosper with respect to, the corresponding borrower loan for that series of Notes, but not with respect to any other borrower loan.

 

The indenture will not contain any provisions that would limit Prosper’s ability to incur indebtedness in addition to the Notes.

 

Payments and Paying Agents

 

Subject to the limitations described below under “Limitations on Payments,” we will make payments of principal and interest on the Notes upon receiving Borrower Loan Payments (as defined below) in respect of 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 of equal to the corresponding borrower loan, on payment dates that fall on the due date for each installment of principal and interest on the corresponding borrower loan.

 

We request an ACH payment from a borrower on the day prior to the payment date (day 1), and receive payment the following day (day 2).  A borrower’s loan payment is initially deposited in our servicing account upon receipt and is not distributed to the lender member’s FBO account until the fourth day after the ACH payment was requested and the short return window for ACH funds has expired.  Lenders members can review their account statement online and see that it received payment on the Notes on the fourth day.  Upon maturity of the Note, the same process occurs.  Although payment to  

 

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Table of Contents

 

lender members under the Notes is four days after the applicable payment and maturity date, Prosper treats the payment date and maturity date of the Note to be the same as the dates set forth in the corresponding borrower loan.

 

The stated interest rate on each Note will be the same as the interest rate on the corresponding Prosper borrower loan or the yield percentage on the corresponding open market loan, and interest will be computed on the Note in the same manner as the interest on the corresponding borrower loan is computed.  The Servicing Fee described below will reduce the effective yield on the Notes below their stated interest rate.

 

“Business 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”) 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

 

Each holder of a Note’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 Borrower Loan Net Payments, if any.  For each series of Notes, “Borrower Loan Net Payments” means the amounts, if any, equal to the Borrower Loan Payments from the corresponding borrower loan minus the applicable Servicing Fee.

 

Borrower Loan Payments” for each series of Notes means all amounts received by Prosper in connection with the corresponding borrower loan, including without limitation, all payments or prepayments of principal and interest, any late fees on Prosper borrower loans and any amounts received by Prosper upon collection efforts with respect to the corresponding borrower loan, but excluding the non-sufficient funds fee, any collection fees imposed by Prosper or a third-party collection agency, or late fees collected by originators on open market loans.

 

The “Servicing Fee” is an amount equal to an annualized rate of 1.0% for Prosper Borrower Notes, and 0.5% for Prosper Open Market Notes, of the outstanding principal balance of the corresponding borrower loan prior to the application of the payment. In addition, generally the originator of open market loans charges a servicing fee (shown in the open market listing), which is deducted from principal and interest payments it receives on the open market loans and which will reduce the effective yield of the open market loan below the stated yield percentage.  The term “Servicing Fee” includes servicing fees charged by both Prosper and, if applicable, originators.

 

The “Non-sufficient Funds Fee” is a $15 fee or such lesser amount permitted by law charged by Prosper when our payment request is denied for any reason, including but not limited to, insufficient funds in the borrower member’s bank account or the closing of that bank account.

 

To the extent we do not receive the anticipated Borrower Loan Payments from a borrower loan, we will not make any payments on the Notes related to that borrower loan, and a holder of a Note will not have any rights against Prosper or the borrower member in respect of the Note or the borrower loan corresponding to such holder’s Note.

 

Prepayments

 

To the extent that a borrower member prepays a corresponding borrower loan, such prepayment amount will be a Borrower loan Payment and holders of Notes related to that corresponding borrower loan will be entitled to receive their pro rata shares of the prepayment, net of applicable Servicing Fees.

 

Mandatory Redemption

 

Upon the occurrence of a confirmed identity fraud incident with respect to a borrower loan, Prosper will redeem all of the Notes of the series corresponding to such borrower loan for 100% of the remaining outstanding principal amount of such Notes.  An “identity fraud incident” means that the corresponding borrower loan has been obtained as a result of verifiable identity theft or fraud on the part of the purported borrower member.  We may, in our discretion, require proof of the identity theft or fraud, such as a copy of the police report filed by the person whose identity was wrongfully used to obtain the corresponding borrower loan.

 

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Servicing Covenant

 

We are obligated to use commercially reasonable efforts to service and collect Prosper borrower loans, in good faith, accurately and in accordance with industry standards customary for servicing loans such as the borrower loans.  If we refer a delinquent borrower loan to a collection agency on or after the 31st day of its delinquency, that referral shall be deemed to constitute commercially reasonable servicing and collection efforts.  We may, in our sole discretion and subject to our servicing standard, refer a Prosper borrower loan to a collection agency at any time, or elect to initiate legal action to collect a Prosper borrower loan or sell a Prosper borrower loan to a third party debt buyer at any time.  We will also be obligated to use commercially reasonable efforts to maintain backup servicing arrangements providing for the servicing of the borrower loans.

 

The agreement also provides that open market loans offered for sale on our platform will be serviced, both before and after default, by the originator.  In servicing open market loans the originator will use commercially reasonable efforts to service and collect the open market loans in accordance with industry standards customary for loans of the same general type and character as the open market loans.  The originator may, in its sole discretion and subject to the agreed-upon servicing standards, set forth in this Section, refer a open market loan to a collection agency at any time, or elect to initiate legal action to collect a open market loan, repossess or foreclose upon any collateral securing a open market loan, or sell a open market loan to a third party debt buyer at any time. Any amounts received from borrowers will be forwarded to Prosper by the originator.  In servicing borrower loans the originator may, in its discretion, utilize affiliated or unaffiliated third party loan servicers, repossessors, collection agencies or other agents or contractors.

 

Prosper Open Market Notes will not be secured by any collateral, even though the corresponding open market loan may be secured by personal property.  Although the originator is obligated to forward to Prosper any amounts it receives upon the sale of collateral securing an open market loan, the holders of Prosper Open Market Notes do not have the right to take any legal action under the security interest or to require that the originator take such action.

 

The indenture contains no financial covenants or other covenants limiting our operations or activities, including the incurrence of indebtedness.

 

Notification Requirements

 

Under the lender registration agreement, we agree to notify lender members within 90 days after we become aware that we have breached our representations and warranties under the lender registration agreement and notify them that we have elected to cure the breach or repurchase the applicable Note.  We keep lender members apprised of the delinquency status of borrower loans by identifying delinquent loans on our website as “1 month late,” “2 months late,” “3 months late,” or “current.”  Borrower loans that become more than 120 days overdue are charged off and designated as such on our website.  Lender members are able to monitor the borrower 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 trustee, the trustee is required to notify each holder of the Notes the subject of a default 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 holders of the Notes of such series, except for defaults caused by Prosper failure to make principal and interest payments when required.

 

In addition, as required by Section 313(a) of the TIA, within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, the Trustee shall mail or transmit electronically to each Holder of Securities a brief report dated as of such May 15 that complies with TIA Section 313(a).

 

Consolidation, Merger, Sale of Assets

 

The indenture prohibits us from consolidating with or merging into another business entity or conveying, transferring or leasing our 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;

 

·                  immediately after giving effect to the transaction, no default shall have occurred or be continuing; and

 

·                  we have 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, comply with the indenture and all conditions precedent relating to such transaction have been complied with.

 

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Denominations, Form and Registration

 

We will issue the Notes only in registered form and only in electronic form. This means that each Note will be stored on our 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-protected webpage in the “My Account” section of our website.  We will not issue certificates for the Notes.  Lender members will be required to hold their Notes through our 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 reserve the right to issue certificated Notes only if we determine not to have the Notes held solely in electronic form.

 

We and the trustee will treat the lender members 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.  All Notes must be held by our lender members.  The Notes will not be transferable except through the Note trading platform by a registered broker-dealer yet to be determined.  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 resale trading system and (2) the Note has been presented by the registered holder to us or our agent for registration of transfer.  The registrar for the Notes, which initially will be us, will not be obligated to recognize any purported transfer of a Note, except a transfer through the trading system or except as required by applicable law or court order.  There can be no assurance, however, that a market for Notes will develop on the trading system, or that the system will continue to operate.  Therefore, lender members must be prepared to hold their Notes to maturity.  See “About the Platform—Trading Platform” for more information.

 

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:

 

·                  our failure to make required payments on the Notes for thirty days past the applicable due date;

 

·                  our failure to perform, or the breach of, any other covenant for the benefit of the holders of the Notes of such series which continues for 90 days after written notice from the Trustee or holders of 25% of the outstanding principal amount of the debt securities of all series for which such default exists as provided in the indenture, subject to an additional 90 day cure period; or

 

·                  specified events relating to our bankruptcy, insolvency or reorganization.

 

It is not a default or event of default under the terms of the indenture if we do not make payments when a borrower does not make payments on the borrower loan corresponding with the particular series of Notes.  In that case, we are not required to make payments on the Notes, so no default occurs.  See “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.

 

To provide additional certainty regarding this risk, Prosper intends to grant the indenture trustee, for the benefit of the trustee and the holders of the Notes, a security interest in all present and future rights of Prosper to payment under the corresponding borrower loans and all moneys and property received by Prosper thereon.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture solely by reason of Prosper becoming subject to a bankruptcy or similar proceeding and not for any other reason.  In such case, the indenture trustee, but not the holders of the Notes for that series, would have a secured claim, limited in recovery, to the right to receive payments on, and to all payments previously received by Prosper with respect to, the corresponding borrower loan for that series of Notes, but not with respect to any other borrower loan.

 

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If an event of default occurs due to bankruptcy, insolvency or reorganization as provided in the indenture then the stated principal amount of the Notes shall become due and payable immediately without any act by the trustee or any holder of Notes.

 

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 and its consequences 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 waived, it is deemed cured, but no such waiver shall extend to any subsequent or other default or impair any consequent right.

 

A holder of any Note of any series may not institute a suit against us for enforcement of such holder’s rights under the indenture or pursue any other remedy with respect to the indenture or the Notes unless:

 

·                  the holder gives to the trustee written notice stating that an event of default with respect to the Notes is continuing;

 

·                  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 the remedy;

 

·                  such holder or holders offer to the trustee security or indemnity satisfactory to it against any loss, liability or expense satisfactory to the trustee;

 

·                  the trustee does not comply with the request within 60 days after receipt of the notice, the request and the offer of security or indemnity; and

 

·                  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 indenture will require us every year to deliver to the trustee a statement as to performance of our 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 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;

 

if in either case, we also pay or cause to be paid all other sums payable under the indenture by us and deliver to the trustee an 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.

 

Governing Law

 

The indenture and the Notes will be 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

 

Prosper will select a commercial bank to serve as 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.

 

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If and when the trustee becomes a creditor of ours, the trustee will be subject to the provisions of the Trust Indenture Act regarding the collection of claims against us.  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.

 

Lender Registration Agreement

 

When a lender member registers on the platform, the lender member enters into a lender registration agreement with us that governs the lender member’s purchases of Notes from time to time from us.  Under the agreement, we provide the lender member the opportunity through the platform to review borrower loan requests and , purchase Notes and instruct us to apply the proceeds from the sale of each Note to facilitate the funding or sale of, and our purchase of, a specific Prosper borrower loan or open market loan the lender member has designated.

 

Under the agreement, the lender member must commit to purchase a Note prior to the origination of the Prosper borrower loan, or the sale of the open market loan to which the Note corresponds.  At the time the lender member commits to purchase a Note by bidding on a listing the lender member must have sufficient funds in the lender member’s account with us to complete the purchase, and the lender member will not have access to those funds for as long as the lender member is a winning bidder on the listing.  Once the lender member makes a purchase commitment by bidding, it is irrevocable.  If the borrower loan does not receive purchase commitments for Notes totaling the amount of the requested Prosper borrower loan or the sale price for the open market loan, then we will inform the lender member and release him or her from the purchase commitment.

 

The lender member agrees that the lender member has no right to make any attempt, directly or through any third party, to take any action to collect from the borrower members on the lender member’s Notes or the corresponding borrower loans.

 

The lender member acknowledges that the Notes are intended to be debt instruments issued by Prosper that have original issue discount (OID) for U.S. federal income tax purposes and agrees not to take any position inconsistent with that treatment of the Notes for tax, accounting, or other purposes, unless required by law. The lender member also acknowledges that the Notes will be subject to the OID rules of the Internal Revenue Code of 1986, as amended, as described below under “About the Platform—Material U.S. Federal Income Tax Considerations—Taxation of Payments on the Notes.

 

Representations and Warranties

 

The agreement describes the limitations on payments on the Notes, and the lender member acknowledges that:

 

·                  payment on the Notes, if any, depends entirely on the receipt of payments by Prosper in respect of the corresponding borrower loan;

 

·                  Prosper does not warrant or guarantee in any manner that the lender member will receive all or any portion of the principal or interest it expects to receive on any Note or realize any particular or expected rate of return;

 

·                  the amount received on a Note, if any, is specifically restricted to payments made by Prosper equal to the payments made by the borrower under the corresponding borrower loan, net of servicing fees;

 

·                  we do not make any representations as to a borrower’s ability to pay and do not act as a guarantor of any corresponding borrower loan payment or payments by any borrower.

 

Under the agreement, the lender member represents and warrants to Prosper that:

 

·                  the lender member has not made a decision in connection with any loan requests on our platform on any prohibited basis set forth in the Equal Credit Opportunity Act and Regulation B or any applicable state or local laws, regulations, rules or ordinances concerning credit discrimination;

 

·                  the lender member meets minimum financial suitability standards and maximum investment limits established for the trading platform, as then in effect, or as set forth in a supplement to the prospectus for residents of the state in which lender member resides and agrees to provide us with any additional documentation as we may require to verify such compliance;

 

·                  the lender member has received the prospectus, the indenture, including the form Note;

 

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·                  the lender member has the legal competence and capacity, or corporate power and authority, to execute and perform the lender registration agreement and that you the lender registration agreement has been duly authorized, executed and delivered;

 

·                  the lender member has complied in all material respects with applicable federal, state and local laws in connection with its execution and performance of the lender member’s obligations under the lender registration agreement;

 

·                  if a legal entity, that the execution and performance of the lender registration agreement does not violate any provision of its charter documents; and

 

·                  if a legal entity, that the execution and performance of the lender registration agreement will not constitute or result in a breach or default under, or conflict with, any legal requirement or any agreement to which the lender member is bound.

 

Under the agreement, Prosper represents and warrants to the lender member that:

 

·                  we have complied in all material respects with applicable federal, state and local laws in connection with the offer and sale of the Note;

 

·                  the Note has been duly authorized and, following payment of the purchase price by the lender member and electronic execution, authentication and delivery, the Note, will constitute valid and binding obligation of Prosper enforceable against Prosper in accordance with its terms, except as the enforcement of the Note may be limited by applicable bankruptcy, insolvency or similar laws;

 

·                  prior to a lender member’s purchase of a Note, the loan proceeds have been fully disbursed to the borrower under the corresponding borrower loan;

 

·                  Prosper or, with respect to open market listings, the originator has made commercially reasonable efforts to authenticate and verify the identity of the borrower obligated on the borrower loan that correspond to the Note.

 

We also represent and warrant to the lender member that in the event of a material default under a Note that is the result of verifiable identity theft of the named borrower’s identity, determined in our sole discretion, that we will repurchase the Note by crediting the lender member’s Prosper funding account with the remaining unpaid principal balance of the Note.  Prosper is required to repurchase a Note under this provision until such Note is at least 120 days past-due, although Prosper may elect to do so earlier in its sole discretion.  The lender member agrees that in such circumstances the lender member will have no rights with respect to any such Notes except the crediting of the remaining principal balance of the Note to the lender member’s account.

 

In addition, we represent and warrant to the lender member, as of the date of the agreement and the date a commitment  to purchase a Note is made, that:

 

·                  we are a duly organized and validly existing corporation in good standing under the laws of Delaware and have corporate power to enter into and perform our obligations under the agreement;

 

·                  the agreement has been duly authorized, executed and delivered by Prosper;

 

·                  the Indenture has been duly authorized by Prosper and qualified under the Trust Indenture Act of 1939 and constitutes a valid and binding agreement of Prosper, enforceable against Prosper in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency or similar laws.

 

Remedies

 

If we breach any of our representations and warranties and such breach materially and adversely affects a lender member’s interest in a Note, we agree to,

 

·                  cure the breach, if the breach is susceptible to cure,

 

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·                  repurchase the Note, or

 

·                  indemnify and hold the lender member harmless against all losses (including losses resulting from the nonpayment of the Note), damages, expenses, legal fees, costs and judgments resulting from any claim, demand or defense that arising as a result of the breach.

 

We will determine, in our sole discretion, if a breach is susceptible to cure, whether will cure such breach, repurchase the Note or indemnify the lender member with respect to the Note.  If we elect to repurchase a Note, we will pay the lender member an amount equal to the remaining outstanding principal balance of the Note as of the date of repurchase. Upon any repurchase, the Note is transferred and assigned to Prosper, without recourse, and we are authorized to execute any endorsements or assignments necessary to effectuate the transfer and assignment of the Note on behalf of the lender member.

 

We will notify a lender member with 90 days after we become aware that we have breached our representations and warranties under the agreement at which time we will notify the lender member if we have elected to cure the breach or repurchase the note.

 

We are not obligated to repurchase a Note from a lender member if his or her investment is not realized in whole or in part due to fraud (other than verifiable identity theft) in connection with a listing or due to false or inaccurate statements or omissions of fact in a borrower’s listing, whether in credit data, borrower representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the Notes.

 

Servicing

 

The agreement provides that we will 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 as the Prosper borrower loans.  We may, in our sole discretion and subject to our servicing standard, refer a Prosper borrower loan to a collection agency at any time, or elect to initiate legal action to collect a Prosper borrower loan or sell a Prosper borrower loan to a third party debt buyer at any time.

 

The agreement also provides that open market loans offered for sale on our platform will be serviced, both before and after default, by the originator.  In servicing open market loans the originator will use commercially reasonable efforts to service and collect the open market loans in accordance with industry standards customary for loans of the same general type and character as the open market loans.  The originator may, in its sole discretion and subject to the agreed-upon servicing standards, set forth in this Section, refer a open market loan to a collection agency at any time, or elect to initiate legal action to collect a open market loan, repossess or foreclose upon any collateral securing a open market loan, or sell a open market loan to a third party debt buyer at any time. Any amounts received from borrowers will be forwarded to Prosper by the originator.  In servicing borrower loans the originator may, in its discretion, utilize affiliated or unaffiliated third party loan servicers, repossessors, collection agencies or other agents or contractors.

 

Form of Master Loan Purchase Agreement

 

The sale and transfer of the loans from each originator to Prosper will be governed by a master purchase agreement that will specify the type of loans eligible for listing for sale as well as the manner in which the transfer and servicing of open market loans sold to Prosper through the platform will occur.  The master purchase agreements will typically have a term of one year, renewable for additional one-year terms.  All loans sold to Prosper during the term of the agreement will be subject to the terms and conditions of the master purchase agreement and will become a part thereof as evidenced by electronic addendums comprised of the records in the listing file and the bill of sale.

 

The master purchase agreement will general require the originator to make the following representation and warranties to Prosper:

 

·                  that it has good title free of any lien or claim;

 

·                  that the borrower loans were originated and serviced in accordance with the requirements of all applicable laws;

 

·                  that no loan account is the subject of an unresolved dispute or any pending litigation;

 

·                  that the borrower under the borrower loan is not deceased;

 

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·                  that the account holder has not filed for bankruptcy since the origination of the account;

 

·                  that all payments received as of the listing date have been applied as required by the terms of the borrower loan;

 

·                  that the borrower loan account balance is correct

 

·                  that no adverse selection via scoring algorithm or manual file review was used in determining what borrower loan to offer for sale on our platform; and

 

·                  that all electronic data provided is an accurate reflection of the originator’s electronic business records and the originator’s system of record is functioning in good order as of the date of production.

 

Originators will not make representations directly to the lender members who hold Notes dependent for pay on payments we receive on the corresponding open market loan sold by the originator.  In the event the originator is required to repurchase an open market loan under the terms of the master purchase agreement, upon our receipt of the repurchase price we distribute the proceeds to the holders of the Notes dependent for payment on that open market loan.

 

The master purchase agreement will set forth repurchase requirements and procedures for open market loans that fail to conform to the terms of the agreement.  The master purchase agreement or an ancillary agreement will contain the originator’s servicing and reporting requirements with respect to open market loans offered for sale on the platform, which will generally include or address:

 

·                  whether monthly statements are mailed to borrowers under the open market loans;

 

·                  the standards for the retention and availability of the underlying documentation for the open market loan;

 

·                  service level agreements for collecting on delinquent loans;

 

·                  the amount, manner and entity responsible for any fees arising out of the servicing;

 

·                  monthly reporting requirements for both normal status items and any defined exceptions; and

 

·                  processes for correctly managing any collateral securing the loan.

 

Under the agreement, the originator will agree to indemnify Prosper regarding any litigation arising from the origination, transfer or servicing of open market loans listed or sole on our platform.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion sets forth the material U.S. federal income tax considerations generally applicable to our lender members who purchase Notes.  This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder (“Treasury Regulations”), administrative pronouncements of the U.S. Internal Revenue Service (“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’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 members 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 members that may be subject to special tax rules, such as:

 

·                  securities dealers or brokers, or traders in securities electing mark-to-market treatment;

 

·                  banks, thrifts, or other financial institutions;

 

·                  insurance companies;

 

·                  regulated investment companies or real estate investment trusts;

 

·                  tax-exempt organizations;

 

·                  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;

 

·                  partnerships or other pass-through entities;

 

·                  persons subject to the alternative minimum tax;

 

·                  certain former citizens or residents of the United States;

 

·                  non-U.S. Holders (as defined below); or

 

·                  “U.S. Holders” (as defined below) whose functional currency is not the U.S. dollar.

 

As used herein, a “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” 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

 

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TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR PERSON.  ACCORDINGLY, ALL PROSPECTIVE LENDER MEMBERS 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.

 

Tax Characterization of the Notes

 

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, Prosper intends to treat the Notes as debt instruments of Prosper that have original issue discount (OID) for U.S. federal income tax purposes.  Where required, Prosper intends to file information returns with the IRS in accordance with such treatment, in the absence of any change or clarification in the law, by regulation or otherwise, requiring a different characterization of the Notes.  You should be aware, however, that the U.S. Internal Revenue Service (IRS) is not bound by Prosper’s characterization of the Notes and the IRS or a court may take a different position with respect to the Notes’ proper characterization.  For example, the IRS could determine that, in substance, each lender member owns a proportionate interest in the corresponding borrower loan for U.S. federal income tax purposes, or for example, the IRS could instead treat the Notes as a different financial instrument (including, for example, 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 equity of Prosper, (i) Prosper would be subject to U.S. federal income tax on income, including interest, accrued on the borrower 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 Prosper’s earnings and profits as computed for U.S. federal income tax purposes.  Such a characterization may significantly reduce the amount available to pay interest on the Notes.  Accordingly, prospective purchasers of the Notes are advised to consult their own tax advisors 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).

 

The following discussion assumes that each Note will be treated as a debt instrument of Prosper that will have original issue discount (OID) for U.S. federal income tax purposes.

 

Taxation of Payments on the Notes

 

A U.S. Holder of a Note will be required to include original issue discount (OID) in income as ordinary interest income for U.S. federal income tax purposes as it accrues under a constant yield method, regardless of such U.S. Holder’s regular method of tax accounting.  If a Note is paid in accordance with its payment schedule, the amount of OID includible in income by a U.S. Holder is anticipated to be based on the yield of the Note determined net of the 1.0% service charge, as described below, which yield will be lower than the stated interest rate on the Note.  As a result, the holder will generally be required to include an amount of OID in income that is less than the amount of stated interest paid on the Note.  On the other hand, if a payment on a Note is not made in accordance with such payment schedule, for example because the borrower member did not make timely payment in respect of the corresponding borrower loan, a U.S. Holder will be required to include such amount of OID in taxable income as interest even though such interest has not been paid.

 

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 generally may 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 Notes provide for one or more alternative payment schedules because Prosper is obligated to make payments on a Note only to the extent that Prosper receives payments on the corresponding borrower loan.  The payment schedule for each Note provides for payments of principal and interest (net of the 1.0% service charge) on the Note in accordance with the payment schedule for the corresponding borrower loan.  In addition to scheduled payments, Prosper will prepay a Note to the

 

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extent that a borrower member prepays the borrower loan corresponding to the Note, and late fees collected on Prosper borrower loans corresponding to a Note will be paid to the holders of the Note, whereas late fees collected by originators on open market loans may be retained by the originator servicing the loan.  Notwithstanding such contingencies, Prosper has determined to use the payment schedule of a Note to determine the amount and accrual of OID on the Note because Prosper 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 by the borrower member on the borrower loan corresponding to such Note will be remote or incidental.  If in the future Prosper determines that the previous sentence does not apply to a Note, Prosper anticipates that it 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 shall so notify U.S. Holders of the Note.

 

Prosper’s determination is not binding on the IRS.  If the IRS determines that the Notes are “contingent payment debt instruments” due to the contingencies described above (or in the future, if Prosper so concludes with respect to a particular series of Notes), the Notes will be subject to special rules applicable to contingent payment debt instruments.  Such rules generally require a holder (i) to accrue interest income based on a projected payment schedule and comparable yield, which may be higher or lower than the stated interest rate on the Notes, and (ii) treat as ordinary income, rather than capital gain, any gain recognized on the sale, exchange, or retirement of the debt instrument.  This discussion assumes that the Notes are not subject to the contingent payment debt instrument rules.

 

The OID on a Note will equal the excess of the Note’s “stated redemption price at maturity” over its “issue price.” The stated redemption price at maturity of a Note includes all payments of principal and stated interest on the Note (net of the 1.0% service charge) under the payment schedule of the Note.  The issue price of the Notes will equal the principal amount of the Notes.

 

The amount of OID includible in a U.S. Holder’s income for a taxable year is the sum of the “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’s adjusted issue price at the beginning of the accrual period and its yield to maturity (properly adjusted for the length of the period).  Prosper 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 (net of the 1.0% service charge).  A Note’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 (net of the 1.0% service charge) under the payment schedule of the Note, produces an amount equal to the issue price of such note.

 

Cash payments of interest and principal (net of the 1.0% service charge) 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, a U.S. Holder 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 the U.S. Holder’s adjusted tax basis in the Note.  In general, the U.S. Holder’s adjusted tax basis of the Note will equal the U.S. Holder’s cost for the Note, increased by the OID and market discount previously included in gross income by the holder, as discussed below, and reduced by any payments previously received by the holder in respect of the Note.

 

Except as described below with respect to any Note acquired at a market discount or, as discussed above, treated as a contingent payment debt instrument, such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, retirement or other taxable disposition, such Note has been held for more than one year.  Under current U.S. federal income tax law, certain non-corporate U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income taxation in respect of long-term capital gains.  The deductibility of capital losses is subject to limitations under the Code.

 

Prepayments

 

As discussed above, Prosper will prepay a Note to the extent that a borrower member prepays the borrower loan corresponding to the Note.  If Prosper prepays a note in full, the Note will be treated as retired, and, as described above, a U.S. Holder generally will have gain or loss equal to the difference, if any, between the amount realized upon the retirement

 

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and the U.S. Holder’s adjusted tax basis in the Note.  If Prosper prepays a Note in part, a portion of the Note will be treated as retired.  Generally, for purposes of determining (i) the gain or loss attributable to the portion of the Note retired and (ii) the OID accruals on the portion of the Note remaining outstanding, the adjusted issue price, holder’s 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 a U.S. Holder purchases a Note on the trading 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” for U.S. federal income tax purposes, unless that difference is less than a specified de minimis amount.  Under the market discount rules, a U.S. Holder 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 the U.S. Holder.  Such market discount will accrue on the Note on a ratable basis over the remaining term of the Note unless the U.S. Holder elects to accrue market discount on a constant yield basis.  In addition, a U.S. Holder 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 incurred on indebtedness incurred or continued to purchase or carry such Note.

 

A U.S. Holder 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.  An election to currently include market discount in gross income, once made, applies to all market discount obligations acquired by the U.S. Holder on or after the first taxable year to which the election applies and may not be revoked without the consent of the IRS.  Lender members should consult their own tax advisors before making this election.

 

Acquisition Premium

 

If a U.S. Holder purchases a Note on the trading platform for an amount greater than the Note’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 the U.S. Holder 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 a U.S. Holder purchases a Note on the trading platform for an amount in excess of the sum of all amounts payable on the Note after the purchase date, the U.S. Holder will not be required to include OID in income with respect to the Note.

 

Late Payments

 

As discussed above, late fees collected on Prosper borrower loans corresponding to the Notes will be paid to the holders of the Notes, whereas late fees collected by originators on open market loans may be retained by the originator servicing the loan.  Prosper 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 a U.S. Holder of Notes should be taxable as ordinary income at the time such fees are paid or accrued in accordance with the U.S. Holder’s regular method of accounting for U.S. federal income tax purposes.

 

Nonpayment of Borrower Loans Corresponding to Note — Automatic Extension

 

In the event that Prosper does not make scheduled payments on a Note as a result of nonpayment by a borrower member on the borrower loan corresponding to the Note, a U.S. Holder 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’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 member, Prosper 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 member on the borrower loan corresponding to such Note will be remote or incidental.  Accordingly, the Note may become subject to the

 

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contingent payment debt instrument rules.  In addition, in the event that a Note’s maturity date is automatically extended because amounts remain due and payable on the initial maturity date by the borrower member on the borrower loan corresponding to the Note, the Note likely will be treated as reissued and become subject to the contingent payment debt instrument rules.  As discussed above, contingent payment debt instruments are subject to special rules.  If Prosper determines that a Note is subject to the contingent payment debt instrument rules as a result of such a reissuance, it will notify the U.S. Holders and provide the projected payment schedule and comparable yield.

 

If collection on a Note becomes doubtful, a U.S. Holder may be able to stop accruing OID on the Note.  Under current IRS guidance, it is not clear whether a U.S. Holder may stop accruing OID if scheduled payments on a Note are not made.  U.S. Holders should consult their own tax advisors 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, a non-corporate U.S. Holder who did not acquire the Note as part of the holder’s trade or business generally should be entitled to deduct the 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 the 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, corporate U.S. Holders and other U.S. Holders that acquired Notes as part of a trade or business generally are entitled to deduct as an ordinary loss any loss sustained during the taxable year on account of a Note becoming wholly or partially worthless.  U.S. Holders should consult their own tax advisors regarding the character and timing of losses attributable to Notes that become worthless in whole or in part.

 

Backup Withholding and Reporting

 

Generally, payments of principal and interest, and the accrual of OID, with respect to the Notes will be subject to information reporting and possibly to backup withholding.  Information reporting means that the payment is required to be reported to the holder of the Notes and the IRS.  Backup withholding means that we are required to collect and deposit a portion of the payment with the IRS as a tax payment on your behalf.  Backup withholding will be imposed at a rate of 28%.

 

Payments of principal and interest, and the accrual of OID, with respect to Notes held by a U.S. Holder, other than certain exempt recipients such as corporations, and proceeds from the sale of Notes through the U.S. office of a broker will be subject to backup withholding unless that U.S. Holder supplies us with a taxpayer identification number and certifies that its taxpayer identification number is correct or otherwise establishes an exemption.  In addition, backup withholding will be imposed on any payment of principal and interest, and the accrual of OID, with respect to a Note held by a U.S. Holder that is informed by the U.S. Secretary of the Treasury that it has not reported all dividend and interest income required to be shown on its U.S. federal income tax return or that fails to certify that it has not underreported its interest and dividend income.

 

A U.S. Holder that does not provide its correct taxpayer identification number may be subject to penalties imposed by the IRS.  In addition, any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against the holder’s U.S. federal income tax liability, provided that certain required information is furnished to the IRS.

 

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BUSINESS

 

Overview

 

Prosper Marketplace, Inc. is the operator of an Internet credit auction platform. The platform is described in more detail in this prospectus under the caption “About the Platform.” Our platform provides a number of benefits to our borrowers.  We believe the key features of the Prosper experience are 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 believe that the following business strengths differentiate us from competitors and are key to our success:

 

·                  Interest rates set by the marketplace.  We believe that our auction bidding process provides an efficient method of setting interest rates for both borrowers and lenders, in a way that is fair and transparent to all parties.

 

·                  Open access.  We allow individuals with a wide range of credit characteristics to apply for loans, and enable them to leverage their social capital and receive loans from the lender community at large.

 

·                  Transparency and data availability.  By making all site transactions visible to our customers and available electronically for analysis, we allow our customers to better understand our marketplace and make better decisions about their activity.

 

·                  Open market listings provide additional liquidity option for financial institutions.  Our open market listings offer an effective and cost-effective method for financial institutions to unlock liquidity in their existing borrower loans, which may not exist in the current economic environment as such lenders can no longer pool and sell these loans in the securitization market.

 

Corporate History

 

We were incorporated in the State of Delaware in March 2005, and our principal executive offices are located at 111 Sutter Street, 22nd Floor, San Francisco, California 94104.  Prosper’s telephone number at that location is (415) 593-5400.  Prosper’s website address is www.prosper.com. Information contained on our website is not incorporated by reference into this prospectus.

 

From the launch of our platform in February 2006 until October 16, 2008, the operation of our platform differed from the structure described in this prospectus, and we did not offer Notes.  Instead, our platform allowed lender members to purchase, and take assignment of, borrower loans directly as described under “Prior Operation of Our Platform.”

 

Marketing

 

Our marketing efforts are designed to attract members to our website, to enroll them as members and to have them understand and utilize our services for borrowing or investing in Notes on our platform. We believe there are significant opportunities to increase the number of members who use our platform through additional marketing initiatives.  We employ a combination of paid and unpaid sources to market our platform. We also invest in public relations to build our brand and visibility.  We are constantly seeking new methods to reach more potential Prosper members.

 

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We attract members in a variety of ways, including advertising, search engine results and word-of-mouth referrals.  We frequently hear from new borrowers that they heard about us from current borrowers.  In addition, we have been featured in a variety of media outlets, including television and print media.  We have also participated in interviews to promote Prosper.

 

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.

 

For the year ended December 31, 2007, we spent approximately $2.9 million on marketing, and for the nine months ended September 30, 2008 we spent approximately $2.3 million on marketing.

 

Technology

 

Our system hardware is located in a hosting facility located in San Francisco, California, owned and operated by Rincon 365 Borrower, LLC under an agreement that expires in August 2011.  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, fire detection and suppression systems. The facility has multiple interconnects to the Internet, and we use Internap Network Services Corporation as our service provider.  We also maintain off-site backups in Las Vegas, Nevada.

 

We own all of the hardware deployed in support of our platform. We continuously monitor the performance and availability of our platform. We have a scalable infrastructure that utilizes standard techniques such as load-balancing and redundancies.

 

We have written our own accounting software to process electronic cash movements, record book entries and calculate cash balances in our members’ funding accounts.  We process electronic deposits and payments by originating ACH transactions.  Our 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 have entered into a back-up servicing agreement with a loan servicing company who is willing and able to transition servicing responsibilities in the event we can no longer do so.  The third party is a financial services company who has extensive experience and knowledge entering into successor loan servicing agreements.  The third party will provide monthly investor reports on our loan servicing activity that will be available to all registered users.

 

Scalability

 

Our platform is designed and built as a highly scalable, multi-tier, redundant system. Our platform 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 backend tiers to allow us to scale 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

 

All sensitive data that is transmitted to and from our customers and service providers is transacted using a secure transport protocol.  Communication of sensitive data via the web site to our customers is secured utilizing SSL 128-bit enabled encryption certificates provided by VeriSign.  Communication of sensitive data with our 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 our 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 our 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, our platform utilizes

 

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host based intrusion prevention, antivirus, antispyware, 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 OFAC compliance.  In addition, we use specialized third-party software to augment our identity fraud detection systems. In addition to our identity fraud detection system, we have a dedicated team which conducts additional investigations of cases flagged for high fraud risk.  See “About the Platform—Borrower Financial Information is Generally Not Verified” for more information.  We also enable our lender members to report suspicious activity to us, which we may then decide to evaluate further.

 

Engineering

 

We have made substantial investment in software and website development and we expect to continue or increase the level of this investment as part of our strategy to continually improve our platform. In addition to developing new products and maintaining an active online deployment, the engineering department also performs technical competitive analysis as well as systematic product usability testing.  As of September 30, 2008, our engineering team consisted of seven developers, one quality assurance manager, four quality assurance contractors, two product managers, one director of database systems, one database administrator, one director of network operations, one network engineer and the Chief Technology Officer.  Our engineering expense totaled $2.0 million for the fiscal year ended December 31, 2007 and approximately $1.7 million for the nine months ended September 30, 2008.

 

Competition

 

The market for person-to-person lending is competitive and rapidly evolving.  We believe the following are the principal competitive factors in the person-to-person lending market:

 

·                  fee structure;

 

·                  website attractiveness;

 

·                  member experience, including borrower loan funding rates and lender returns;

 

·                  acceptance as a social network;  

 

·                  branding; and

 

·                  ease of use.

 

The primary competitors of our platform are major credit card companies such as JPMorgan Chase Bank, Bank of America, Citibank, other commercial banks, savings banks and consumer finance companies.  We also face competition from other peer-to-peer platforms such as Lending Club and Virgin Money and other peer-to-peer platforms appear to be preparing to commence operations.

 

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 than we do 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 than we do.  In addition, these potential competitors may have longer operating histories and greater name recognition than we do.  Moreover, if one or more of our competitors were to

 

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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

 

Our intellectual property rights are important to our business.  We rely on a combination of copyright, trade secret, trademark, patent and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property.  We have filed a patent application in respect of our system.

 

Although the protection afforded by copyright, trade secret, trademark and patent law, 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 our software and website development personnel;

 

·                  frequent enhancements to our 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.  We enter into confidentiality and other written agreements with our employees, consultants and service providers, and through these and other written agreements, we attempt to control access to and distribution of our software, documentation and other proprietary technology and information.  Despite our efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as ours.  Policing all unauthorized use of our intellectual property rights is nearly impossible.  Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.

 

We have developed our own software, and do not use software licensed to us by third parties, for processing electronic cash movements, recording book entries and calculating cash balances in our members’ Prosper accounts.

 

Employees

 

As of September 30, 2008, we employed forty-one full-time employees.  Of these employees:

 

·                  15 were in network and engineering;

 

·                  11 were in customer services, which includes the employees who conduct our collection activities;

 

·                  7 were in legal and finance;

 

·                  4 were in marketing; and

 

·                  4 were in general and administration.

 

None of our employees are represented by labor unions.  We have not experienced any work stoppages and believe that our relations with our employees are good.

 

Facilities

 

Our corporate headquarters, including our principal administrative, marketing, technical support and engineering functions, is located in San Francisco, California, where we lease workstations and conference rooms under a five year lease agreement that expires in July 2011.  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.

 

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Legal Proceedings

 

In November of 2008, the SEC instituted cease and desist proceedings, pursuant to Section 8A of the Securities Act, against Prosper.  In anticipation of the institution of these proceedings, we submitted an offer of settlement, in which Prosper neither admitted nor denied liability, which was accepted by the SEC.  Pursuant to the offer, we consented to the entry of a cease and desist order, approved by the SEC on November 20, 2008, which included findings that we violated Sections 5(a) and (c) of the Securities Act and required us to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and (c) of the Securities Act.

 

On November 26, 2008, Prosper and the North American Securities Administrators Association, or “NASAA,” executed a settlement term sheet.  The term sheet sets forth the material terms of a consent order to resolve matters relating to our sale and offer of unregistered securities and the omission of material facts in connection with such offers and sales.  NASAA will recommend that each state adopt the terms of the settlement, however, the settlement is not binding on any state.  The terms of the settlement involved our payment of up to $1 million, which NASAA will allocate among the 50 states and the District of Columbia, where we conduct business, based on the loan sale transaction volume in each state.  We will not be required to pay any portion of the fine allocated to those states that do not execute a consent order with Prosper.  The terms of the settlement require the states to terminate their investigation of our activities related to the sale of securities before November 24, 2008.  We are currently negotiating the terms of the consent order for consideration by the states.  We have accrued approximately $425,000 in connection with the contingent liability arising from the settlement term sheet in accordance with SFAS No. 5, Accounting for Contingencies.

 

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 us, certain of our executive officers and our directors in the Superior Court of California, County of San Francisco, California.  The suit was brought on behalf of all loan note purchasers in our online lending platform from January 1, 2006 through October 14, 2008.  The lawsuit alleges that Prosper offered and sold unqualified and unregistered securities in violation of the California and federal securities laws.  The lawsuit seeks class certification, damages, the right of rescission and the award of attorneys’ fees and costs against Prosper and the other named defendants.  We intend to vigorously defend this lawsuit, however, the final outcome of this lawsuit is not presently determinable or estimable and there can be no assurance that the matter will be finally resolved in our favor.  If the lawsuit is not resolved in our favor, we might be obliged to pay damages, and might be subject to such equitable relief as a court may determine.

 

We are not currently subject to any other material legal proceedings.  Except for the above matters, we are not aware of any litigation matters which have had, or are expected to have, a material adverse effect on us.

 

Prior Operation of Our Platform

 

Our Prior Operating Structure

 

From the launch of our platform in February 2006 until October 16, 2008, the operation of our platform differed from the structure described in this prospectus, and we did not offer Notes.  Instead, our platform allowed lender members to purchase, and take assignment of, borrower loans directly.  Under that structure, the borrower loans were evidenced by individual promissory notes in the amount of each lender member’s winning bid, which notes were thereafter sold and assigned to each lender member with a winning bid, subject to our right to service the borrower loans.  Borrower loans resulting from listings posted prior to April 15, 2008 were made by Prosper and sold and assigned to the lender members who were winning bidders for the loans; loans resulting from listings posted on or after April 15, 2008 were made by WebBank and then subsequently sold and assigned by WebBank to Prosper, which in turn sold and assigned such loans to the lender members who were winning bidders for the loans.  In addition, we previously assigned one of seven letter credit grades based on the borrower’s credit score and displayed the borrower’s credit grade in the listing posted on our platform.  On the effective date of this prospectus, however, each listing will be assigned a Prosper Rating.  For Prosper borrower listings, the Prosper Rating will be derived from two scores:  a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous Prosper borrower loans with similar characteristics. For open market listings, the originator will provide us with a loss rate on the type of loan being offered for sale, and we will translate the loss rate to a Prosper Rating.

 

From October 17, 2008 until the date of this prospectus, we did not offer lender members the opportunity to purchase loans on our platform. During this time, we also did not accept new lender registrations or allow new loan purchase commitments from existing lender members.  We continued to service all previously-funded borrower loans, and lender members had the ability to access their accounts, monitor their borrower loans and withdraw available funds.  During this

 

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period, borrowers could still request loans, but those loan requests were forwarded to companies that had a pre-existing relationship with Prosper that could make or facilitate a loan to the borrower.  We have made significant changes to the operation of our lending platform that will become effective as of the date of this prospectus.  Our 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 our lending platform and our operations prior to the date of this prospectus.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.

 

Securities Law Compliance

 

Since our commencement of operations in February 2006 through October 16, 2008, we sold approximately $178.6 million of loans to our lender members through an operating structure that involved our sale and assignment of promissory notes directly to lender members.  We did not register the offer and sale of the promissory notes offered and sold through our platform under the Securities Act or under the registration or qualification provisions of state securities laws.  In our view, analyzing whether or not the operation of our platform 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 our platform were viewed as a securities offering, we would have failed to comply with the registration and qualification requirements of federal and state law and our lender members who hold these promissory notes may be entitled to rescission of unpaid principal, plus statutory interest.  Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act is one year from the violation, although the statute of limitations period under various state laws may be for a longer period of time.  Due to the legal uncertainty regarding the sales of promissory notes offered through our platform under our prior operating structure, and as a result of discussions with the SEC and various state securities law administrators, we decided to restructure our operations to resolve such uncertainty.  We began our implementation of this decision on October 16, 2008, when we ceased offering lender members the opportunity to make loan purchases on our platform, ceased accepting new lender members registrations and ceased allowing new loan purchase commitments from existing lender members.  Furthermore, pursuant to this decision, we filed this prospectus, and the registration statement of which it forms a part, with the SEC, in which we describe the restructuring of our operations and our new operating structure.  We will resume transactions with lender members starting on the date of this prospectus.  Our decision to restructure our operations and cease sales of promissory notes offered through our platform effective October 16, 2008 limited this contingent liability, under federal law, so that it only related to the period from February 2006 until October 16, 2008 in which sales occurred under our prior operating structure.  We have, however, accrued approximately $425,000 in connection with the $1 million contingent liability arising from the settlement term sheet we entered into with NASAA on November 26, 2008 in accordance with SFAS No. 5, Accounting for Contingencies.  See “—Legal Proceedings” for more information.

 

The change in the operation of our platform, the resulting litigation, as well as our adoption of new accounting pronouncements, will have a significant impact on our financial statements and results of operations for periods following the effective date of the registration statement.  Because the Notes are a novel financing structure, we will continue to evaluate the impact the changes this shift in our operations will have on our financial condition, results of operations and cash flow. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Impact of New Lending Platform Structure” for more information.

 

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GOVERNMENT REGULATION

 

Overview

 

The consumer loan industry is highly regulated.  Prosper, and the borrower loans made through our platform, are subject to extensive and complex rules and regulations, licensing and examination by various federal, state and local government authorities.  These authorities impose obligations and restrictions on our activities and the borrower loans made or sold through our platform. In particular, these rules limit the fees that may be assessed on the borrower loans, require extensive disclosure to, and consents from, our borrower members, prohibit discrimination and impose multiple qualification and licensing obligations on Prosper.  Failure to comply with these requirements may result in, among other things, revocation of required licenses or registration, loss of approved status, voiding of the loan contracts, indemnification liability to contract counterparties, class action lawsuits, administrative enforcement actions and civil and criminal liability.  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

 

Borrower loan origination activities on our platform and the servicing of Notes are subject to state and federal regulation.  WebBank and the borrower loans it makes must comply with applicable state usury and lending laws, including interest rate and fee limitations, and licensing and disclosure requirements.  In addition, Prosper and WebBank must comply with the federal Consumer Credit Protection Act, including, without limitation, the Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act and Electronic Fund Transfer Act, as well as the federal Electronic Signatures in Global and National Commerce Act (ESIGN) and other federal and state laws governing privacy and data security and prohibiting unfair or deceptive business practices.  Prosper and WebBank are subject to examination, supervision, and potential regulatory investigations and enforcement actions by state and federal agencies that regulate their activities, and federal agencies, including but not limited to the Utah Department of Financial Institutions and the FDIC with respect to WebBank and various state consumer credit regulatory agencies and the Federal Trade Commission with respect to Prosper.

 

State Licensing Requirements.  We hold consumer lending licenses or similar authorizations in 23 states and the District of Columbia.  We are 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 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 permits 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 our 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.

 

Disclosure Requirements and Other Lending Regulations.  We are is also subject to and seeks to comply with state and federal laws and regulations applicable to consumer lending, including requirements relating to loan disclosure, credit discrimination, credit reporting, debt collection and unfair or deceptive business practices.  These laws and regulations may be enforced 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.

 

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Truth-in-Lending Act.  The Truth-in-Lending Act (TILA), and the regulation issued by the Federal Reserve Board implementing 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 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.  Prosper and WebBank comply with ECOA’s nondiscrimination requirements, and the lender registration agreement requires lender members to comply with ECOA in their bidding practices.  We also require individual group leaders who form groups on Prosper to comply with ECOA in that they are prohibited from excluding individuals from membership in a group on a prohibited basis.

 

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/or WebBank also provide prospective borrowers who attempt but fail to obtain a borrower loan through our 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 and WebBank have a permissible purpose for obtaining credit reports on borrower members and Prosper reports loan payment and delinquency information to the credit bureaus in compliance with the FCRA.  Prosper’s 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, Prosper has contracted with professional third party debt collection agencies to engage in debt collection activities.  Prosper’s agreements with lender members and group leaders prohibit registered lender members and group leaders from attempting to directly collect on the Notes, and Prosper has 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 the military member can devote his or her full attention to military duties.  In accordance with the SCRA, Prosper 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 and can show that such military service has materially affected his or her ability to make payments on the borrower loan, Prosper will reduce the interest rate on the borrower loan to 6% for the duration of the borrower’s active duty.  During this period, the lender members on the borrower loan will not receive the difference between 6% and the interest rate that was established for the borrower loan by the auction bidding system on our platform. 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 credit grades to borrowers’ loan listings.

 

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 our platform are done by Automated Clearing House (ACH) electronic transfers of funds subject to detailed timing and

 

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notification rules and guidelines administered by the National Automated Clearinghouse Association (NACHA).  Transfers of funds on our 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 to be in writing.  When a platform participant registers on our 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, and we have policies and procedures intended to maintain platform participants’ personal information securely, and we do not sell, rent or share such information with third parties for marketing purposes.

 

Bank Secrecy Act.  We check customer names against the list of Specially Designated Nationals maintained by the Office of Foreign Assets Control (OFAC) pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act (BSA), and its implementing regulation.  We have also has instituted procedures to comply with the anti-money laundering requirements of the USA PATRIOT Act and the BSA.

 

Foreign Laws and Regulations

 

We do not permit non-U.S. residents to register as members on our platform and does not operate outside the United States.  We are not, therefore, subject to foreign laws or regulations.

 

MANAGEMENT

 

The following table sets forth information about our executive officers and directors as of the date of this prospectus:

 

Name

 

Age

 

Position(s)

 

 

 

 

 

 

 

Christian A. Larsen

 

47

 

Chief Executive Officer, President and Director

 

 

 

 

 

 

 

Christopher Denend

 

41

 

Chief Technology Officer

 

 

 

 

 

 

 

Douglas Neal Fuller

 

49

 

Vice President of Operations

 

 

 

 

 

 

 

Edward A. Giedgowd

 

52

 

Corporate Secretary, Chief Compliance Officer and General Counsel

 

 

 

 

 

 

 

Kirk T. Inglis

 

42

 

Chief Financial Officer

 

 

 

 

 

 

 

S. Catherine Muriel

 

54

 

Chief Marketing Officer

 

 

 

 

 

 

 

James W. Breyer

 

47

 

Director

 

 

 

 

 

 

 

Lawrence W. Cheng

 

33

 

Director

 

 

 

 

 

 

 

Rajeev Date

 

37

 

Director

 

 

 

 

 

 

 

Paul M. Hazen

 

67

 

Director

 

 

 

 

 

 

 

Robert C. Kagle

 

52

 

Director

 

 

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Christian A. Larsen co-founded Prosper and has served as our Chief Executive Officer and President, and one of its directors since inception.  Prior to joining Prosper, Mr. Larsen co-founded E-LOAN, Inc.  in 1996, and served 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, Mr. Larsen served as Chief Executive 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, a mortgage brokerage he co-founded in 1992 and E-LOAN’s predecessor company.  Prior to attending business school, Mr. Larsen 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.

 

Rajeev Date has served as one of our directors since January 2009.  Mr. Date has served as the Managing Director in the Financial Institutions Group at Deutsche Bank Securities since August 2007, where his key responsibility is acting as a coverage officer for specialty finance firms and regional banks.  Prior to his current role, Mr. Date served as the Senior Vice President for Corporate Strategy and Development at Capital One Financial, where he led merger and acquisitions development efforts across U.S. banking and specialty finance markets.  Mr. Date has also spent several years with the financial institutions practice of the consulting firm McKinsey & Company, and was an attorney in both the private and public sectors before joining Capital One Financial.  Mr. Date is a graduate of the University of California at Berkeley, and the Harvard Law School.

 

Christopher Denend has served as our Chief Technology Officer since July 2008 and served as our Vice President of Engineering from May 2005 to June 2008.  Prior to joining Prosper, Mr. Denend spent seven years in executive engineering roles at Macromedia, a multimedia authoring and website development software company, where he managed the engineering team for Contribute, a web site editing tool for the consumer market.  Mr. Denend earned a B.A. in Electrical Engineering from Stanford University.

 

Douglas Neal Fuller has served as our Vice President of Operations since August 2007.  Prior to joining Prosper, Mr. Fuller served as the Chief Research Officer at Credigy, a provider of receivables managements services focused on purchasing distressed receivables, from July 2005 to July 2007.  Prior to Credigy, Mr. Fuller served as the principal consultant for Priority Perspective from September 2002 to June 2005, and as the Senior Vice President at First Select Corporation/Providian Financial from September 1999 to September 2002.  Mr. Fuller holds a Ph.D.  in Systems Engineering from the University of Virginia and a B.I.E. with highest honors from the Georgia Institute of Technology.

 

Edward A. Giedgowd has served as our Chief Compliance Officer, Secretary and General Counsel of since June of 2005.  Prior to joining Prosper, Mr. Giedgowd served as General Counsel at E-LOAN from October 1999 until June of 2005.  Prior to October 1999, Mr. Giedgowd was the head of the consumer finance practice group at the San Francisco law firm of Severson & Werson P.C., where he practiced for 17 years specializing in all aspects of consumer finance law, including regulatory compliance, mortgage and auto finance, licensing, the development of multistate direct and indirect lending programs. Mr. Giedgowd earned a J.D.  from Boston College in 1982 and a B.A. from the University of Massachusetts at Amherst in 1978.

 

Kirk T. Inglis has served as our Chief Financial Officer since November 2006.  Prior to joining Prosper, from June to November 2006, Mr. Inglis 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.

 

S. Catherine Muriel has served as our Chief Marketing Officer since July 2007.  Prior to joining Prosper, Ms. Muriel served as the Chief Marketing Officer of PayByTouch, a biometric payment transaction company, from January 2007 to June 2007.  Prior to PayByTouch, Ms. Muriel served as the Chief Marketing Officer of E-LOAN form May 2004 to October 2006 and as the Chief Marketing Officer of Upromise, the country’s largest private college savings loyalty service, from October 2002 to May 2004.  Ms. Muriel also served in executive level positions with AXA Financial, Prudential Financial and Citigroup’s credit card division.  Ms. Muriel holds a law degree from the London School of Economics and Political Science.

 

James W. Breyer has served as one of our directors since April, 2005.  Mr. Breyer has been a partner of Accel Partners, a venture capital firm, since 1990.  Mr. Breyer has served on the board of Wal-Mart Stores, Inc., a world-wide operator of retail

 

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stores, since 2001 and on the board of Marvel Entertainment, Inc., a character-based entertainment company, since June 2006.  He also serves on the boards of other privately held companies.  Mr. Breyer is a member of the Board of Associates of the Harvard Business School and is Chairman of the Stanford Engineering Venture Fund.  Mr. Breyer holds a B.S.  from Stanford University and an M.B.A. from Harvard University, where he was named a Baker Scholar.

 

Lawrence W. Cheng has served as one of our directors since July 2006.  Mr. Cheng has been a Partner at Fidelity Ventures, a venture capital firm, since June 2007, and a Principal since February 2005.   From February 2000 to January 2005, Mr. Cheng was a senior associate at Battery Ventures and from 1998 to 2000, he was an associate of Bessemer Ventures.  Mr. Cheng currently serves on the boards of Mindshift Technologies, Inc., Cortera, Primatech (aka Stylesight) and MFG.com. Mr. Cheng holds a B.A. from Harvard College.

 

Paul M. Hazen has served as one of our directors since July 2006.  Mr. Hazen has served as the Chairman of the Board of Directors of KKR Financial Holdings LLC since July 2004.  Mr. Hazen joined Wells Fargo & Company in 1970, serving as Chairman of Wells Fargo from February 1997 to May 2001, Chairman and Chief Executive Officer from February 1997 to November 1998, Chief Executive Officer from January 1995 to February 1997, President and Chief Operating Officer from 1984 to 1995 and Vice Chairman from 1981 to 1984.  Mr. Hazen retired after he left his post as Chairman of Wells Fargo in May 2001.  During his retirement, Mr. Hazen acted as Chairman of Accel-KKR Company, Deputy Chairman and Lead Independent Director of Vodafone PLC and Lead Independent Director of Safeway, Inc.  Mr. Hazen is currently the Lead Independent Director of Safeway, Inc., the Chairman of Accel-KKR Company and KKR Financial Corp., and a director of Xstrata plc.  Mr. Hazen attended Amherst College and holds a B.S.  in Finance from the University of Arizona and an M.B.A. from the University of California at Berkeley.

 

Robert C. Kagle has served as one of our directors since April 2005.  Mr. Kagle has been the general partner of Benchmark Capital since its founding in May 1995.  He has served on the board of Jamba, Inc., and its predecessor, the Jamba Juice Company, a retailer of blended beverages and healthy snacks, since 1994.  Since 1999, he has served as a director of ZipRealty, Inc., a residential real estate brokerage firm. Mr. Kagle also serves on the boards of other privately held companies.  Mr. Kagle holds a B.S.  in Electrical and Mechanical Engineering from General Motors Institute (renamed Kettering University) where he was named a Sobey Scholar, and an M.B.A. from Stanford University.  Mr. Kagle is currently the Chairman of the Board of Trustees of Kettering University.

 

Board Composition and Election of Directors

 

Our board of directors currently consists of six members, all of whom were elected as directors pursuant to the terms of a voting rights agreement entered into among certain of our stockholders.  The board composition provisions of our voting rights agreement will continue following the date of this prospectus.  Holders of the Notes offered through our platform will have no ability to elect or influence our directors or approve significant corporate transactions, such as a merger or other sale of our company or its assets.

 

There are no family relationships among any of our directors or executive officers.

 

Director Independence

 

Because our common stock is not listed on a national securities exchange, we are not required to maintain a board consisting of a majority of independent directors or to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors.  Our board of directors has not analyzed the independence of our directors under any applicable stock exchange listing standards.  Holders of the Notes have no ability to elect or influence our directors.

 

Board Committees

 

Nominating Committee and Compensation Committee

 

We are not a “listed issuer” as defined under Section 10A-3 of the Exchange Act.  We are, therefore, not required to have a nominating or compensation committee comprised of independent directors.  We currently do not have a standing nominating or compensation committee and accordingly, there are no charters for such committees.  We believe that standing committees are not necessary and the directors collectively have the requisite background, experience, and knowledge to fulfill any limited duties and obligations that a nominating committee and a compensation committee may have.

 

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Audit Committee and Audit Committee Financial Expert

 

We are not a “listed issuer” as defined under Section 10A-3 of the Exchange Act.  We are, therefore, not required to have an audit committee comprised of independent directors.  We currently do not have an audit committee and accordingly, there is no charter for such committee.  Our board of directors performs the functions of an audit committee.  We believe that our directors collectively have the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have, including overseeing our accounting and financial reporting practices.

 

Director Compensation

 

During the year ended December 31, 2007, none of our directors received any compensation for service as a member of our board of directors.  Non-employee directors have not been reimbursed their travel and other expenses incurred in connection with attending our board meetings.

 

Limitations on Officers’ and Directors’ Liability and Indemnification Agreements

 

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

 

·                  any breach of the director’s duty of loyalty to us or our stockholders;

 

·                  any act or omission not in good faith, believed to be contrary to the interests of the corporation 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, our amended and restated certificate of incorporation and bylaws also provide that:

 

·                  we will indemnify our directors and officers to the fullest extent permitted by law;

 

·                  we may indemnify our other employees and other agents to the same extent that we indemnify our officers and directors; and

 

·                  we will advance expenses to our 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 our amended and restated certificate of incorporation and s bylaws are not exclusive.

 

In addition to the indemnification provided for in our amended and restated certificate of incorporation and bylaws, we have entered into indemnification agreements with each of our directors.  The indemnification agreements require us, 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 Prosper) 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 by reason of,

 

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·                  such person’s service as a director or officer of Prosper,

 

·                  any action taken by such person while acting as director, officer, employee or agent of Prosper, or

 

·                  such person’s actions while serving at the request of Prosper as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and in any such case described above, whether or not serving in any such capacity at the time any liability or expense is or was incurred; or

 

·                  establishing or enforcing a right to indemnification under the agreement.

 

Under the indemnification agreements, we are 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 Prosper, 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.  Moreover, with respect to third party proceedings, we are not obligated to provide indemnification if such person has been adjudged to be liable to Prosper, unless a court of competent jurisdiction determines such person is entitled to indemnification in view of all the circumstances of the case.  In addition, under the indemnification agreements, we are not obligated to provide indemnification:

 

·                  for any proceedings or claims initiated or brought voluntarily by such person and not by way of defense, other that a proceeding to establish such person’s right to indemnification;

 

·                  for 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 a court of competent jurisdiction determines that each of the material assertions made by such person in that proceeding was not made in good faith or was frivolous;

 

·                  for any expenses and liabilities that have been paid directly to such person under a directors’ and officers’ liability insurance policy maintained by Prosper; and

 

·                  for expenses and payment of profits arising from the purchase and sale by such person of securities in violation of Section 16(b) of the Exchange Act.

 

The indemnification agreements also provide that we agree to indemnify such persons to the fullest extent permitted by law, even if such indemnification is not specifically authorized by the other provisions of the agreement or our 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 and that, to the extent permitted by law, any future changes under Delaware law that would limit the ability of a Delaware corporation to indemnify its officers and directors shall have no effect on our indemnification obligations as set forth in such agreements.

 

We also maintain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.

 

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

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table provides information regarding the compensation earned during the year ended December 31, 2007 by each person serving during the fiscal year ended December 31, 2007 as our principal executive officer or other executive officer, who we collectively refer to as our “named executive officers.”

 

Name and Principal Position

 

Year

 

Salary ($)

 

Bonus ($)

 

Option
Awards ($)(1)

 

All Other
Compensation

 

Totals ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Christian A. Larsen, Chief Executive Officer

 

2007

 

$

150,000

 

 

 

 

$

150,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John Witchel, former Chief Technology Officer(2)

 

2007

 

$

150,000

 

 

 

 

$

150,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Edward A. Giedgowd, Corporate Secretary, General Counsel

 

2007

 

$

175,000

 

$

25,000

 

$

11,971

 

 

$

211,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kirk T. Inglis—Chief Financial Officer

 

2007

 

$

180,000

 

 

 

 

$

180,000

 

 


(1) Calculated in accordance with SFAS No.  123R.

(2) Mr. Witchel resigned as our Chief Technology Officer on July 31, 2008.

 

We have granted equity awards primarily through our 2005 Stock Option Plan (the “2005 Plan”), which was adopted by our board of directors and stockholders to permit the grant of stock options to our officers, directors, employees and consultants.  The material terms of our 2005 Plan are further described under “Employee Benefit Plans—2005 Stock Option Plan” below.

 

In the fiscal year ended December 31, 2007, we granted Edward A.  Giedgowd incentive stock options to purchase 40,000 shares of our common stock under our 2005 Plan, at an exercise price equal to the fair market value on the date of grant.  Our board of directors determined the fair market value of our common stock in good faith based upon consideration of a number of relevant factors including the status of our development efforts, financial status and market conditions.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Stock-Based Compensation.”  The options granted to Mr. Giedgowd, have a term of ten years and vest over four years, with one quarter of the shares subject to the stock option vesting on the one year anniversary of the vesting commencement date and the remaining shares vesting in equal quarterly installments thereafter over three years.

 

Outstanding Equity Awards at December 31, 2007

 

The following table sets forth certain information regarding outstanding equity awards granted to our executive officers that remain outstanding as of December 31, 2007.

 

 

 

Option Awards

 

Name

 

Number of Securities
Underlying Unexercised
Options (#) Exercisable

 

Number of Securities Underlying Unexercised Options (#) Unexercisable

 

Option
Exercise
Price

 

Option
Expiration
Date

 

 

 

 

 

 

 

 

 

 

 

Edward A. Giedgowd

 

85,416

 

14,584

 

$

.25

 

6/15/2015

 

 

 

 

 

 

 

 

 

 

 

Edward A. Giedgowd

 

17,500

 

22,500

 

$

.50

 

2/26/2017

 

 

 

 

 

 

 

 

 

 

 

Kirk T. Inglis

 

68,058

 

67,059

 

$

.50

 

12/11/2016

 

 


(1) All options have a term of ten years and vest over four years, with one quarter of the shares subject to vesting on the one year anniversary of the vesting commencement date and the remaining shares vesting in equal quarterly installments thereafter over three years.

 

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Employee Benefit Plans

 

Stock Option Plan

 

In 2005, our stockholders approved the adoption of the 2005 Stock Option Plan.  On January 31, 2008 our board of directors approved an increase of the total number of options under the 2005 Plan by 500,000 and our stockholders approved the amendment.  The 2005 Plan will terminate upon the earliest to occur of (i) January 31, 2018, (ii) the date on which all shares of common stock available for issuance under the 2005 Plan have been issued as fully vested shares of common stock, and (iii) the termination of all outstanding stock options granted pursuant to the 2005 Plan.  The 2005 Plan provides for the grant of the following:

 

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

 

·                  nonstatutory stock options (“NSOs”), which may be granted to our directors, consultants or employees, including officers.

 

Share Reserve.  As of the date hereof, an aggregate of 2,379,468 shares of our common stock are authorized for issuance under our 2005 Plan.  Shares of our common stock subject to options that have expired or otherwise terminate under the 2005 Plan without having been exercised in full again will become available for grant under the plan.  Shares of our common stock issued under the 2005 Plan may include previously unissued shares or reacquired shares bought on the market or otherwise.

 

Administration.  The 2005 Plan is administered by our board of directors, which may in turn delegate authority to administer the plan to a committee (the “Administrator”).  Subject to the terms of the 2005 Plan, our board of directors or its authorized committee determines recipients, the numbers and types of stock awards to be granted and the terms and conditions of the stock awards, including the period of their exercisability and vesting.  Subject to the limitations set forth below, our board of directors or its authorized committee will also determine the exercise price of options granted under the 2005 Plan.

 

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

 

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

 

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

 

Limitations.  The aggregate fair market value, determined at the time of grant, of shares of our common stock with respect to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000.  The options or portions of options that exceed this limit are treated as NSOs.  No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power unless the following conditions are satisfied:

 

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

 

·                  the term of any ISO award must not exceed five years from the date of grant.

 

Option Grants to Outside Directors and Consultants.  Options may be granted to outside directors in accordance with the policies established from time to time by the board of directors specifying the number of shares, if any, to be subject to each award and the time(s) at which such awards shall be granted.  All options granted to outside directors shall be NSOs and, except as otherwise provided, shall be subject to the terms and conditions of the 2005 Plan.  As of the date hereof, we have granted 100,000 options to Rajeev Date, an outside director.

 

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

 

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

 

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

 

·                  all options must be exercised as of a specified time prior to the Reorganization Event or will be terminated immediately prior to the Reorganization Event; or

 

·                  all outstanding options will terminate upon consummation of such Reorganization Event and each participant will receive, in exchange therefore, a cash payment per share equal to the difference between the acquisition price per share and the exercise price.

 

A “Reorganization Event” is defined as (i) a merger or consolidation of Prosper with or into another entity, as a result of which all of our common stock is converted into or exchanged for the right to receive cash, securities or other property or (ii) any exchange of all of our common stock for cash, securities or other property pursuant to a share exchange transaction.

 

401(k) Plan

 

We maintain through our payroll and benefits service provider, a defined contribution employee retirement plan that covers all of our employees meeting certain eligibility requirements.  The 401(k) plan is designed to provide tax-deferred retirement benefits in accordance with the provisions of Section 401(k) of the Internal Revenue Code.  Eligible employees may defer up to 90% of eligible compensation up to the annual maximum as determined by the Internal Revenue Service, which is $15,500 for 2008.  Participants who are at least 50 years old can also make “catch-up” contributions, which in 2008 may be up to an additional $5,000 above the statutory limit.  Under the 401(k) plan, each employee is fully vested in his or her deferred salary contributions.  Employee contributions are held and invested by the plan’s trustee.  Prosper’s contributions to the plan are discretionary and we have not made any contributions to date.

 

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TRANSACTIONS WITH RELATED PERSONS

 

Since our inception, we have engaged in the following transactions with our directors, executive officers and holders of more than 5% of our voting securities, and affiliates and immediate family members of our directors, executive officers and 5% stockholders.  We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties.

 

Participation in Our Platform

 

With the exception of Paul Hazen and Edward Giedgowd, our current executive officers and directors and 5% shareholders have bid on and purchased loans originated through the platform from time to time in the past, and may do so in the future.  As of October 31, 2008, these parties had facilitated the funding of $957,741.57 in loans through the platform. Christian Larsen has purchased loans in an aggregate amount of $410,991.82; James Breyer has purchased loans in an aggregate amount of $223,231.09; and Robert Kagle has purchased loans in an aggregate amount of $155,072.54.  The loans were obtained on terms and conditions that were not more favorable than those obtained by other lenders.

 

Financing Arrangements with Significant Shareholders, Directors and Officers

 

In March 2005, we awarded, for nominal value, an aggregate of 4,000,000 shares of common stock valued at $0.10 per share or $400,000, to our co-founders.  2,000,000 shares were issued to Christian A. Larsen, our Chief Executive Officer, and 2,000,000 shares were issued to John Witchel, our former Secretary and Chief Technology Officer.  1,000,000 shares were immediately vested and the remaining 3,000,000 shares were to vest over 3.5 years for services rendered.  The unvested shares were subject to a repurchase agreement if the founders leave Prosper, in which case we could elect to repurchase any unvested shares at the lesser price of $0.10 per share or the fair market value at the date service ceases.  As a result of Mr. Witchel’s departure on July 31, 2008, we repurchased the 75,000 unvested shares then held by Mr. Witchel for $7,500, or $0.10 per share.  All of Mr. Larsen’s shares were fully vested as of September 30, 2008.

 

In April 2005, we issued and sold to investors an aggregate of 4,023,999 shares of our Series A convertible preferred stock (“Series A”) at a purchase price of $1.875 per share for an aggregate consideration of $7,464,450, net of issuance costs of $80,550.  In February 2006, we issued and sold to investors an aggregate of 3,310,382 shares of our Series B convertible preferred stock (“Series B”) at a purchase price of $3.776 per share for an aggregate consideration of $12,412,301, net of issuance cost of $87,700.  In June 2007, we issued and sold to investors an aggregate of 2,063,558 shares of Series C convertible preferred stock (“Series C”) at a purchase price of $9.692 per share for an aggregate consideration of $19,919,009, net of issuance costs of $80,996.

 

The participants in these convertible preferred stock financings included the following holders of more than 5% of our capital stock or entities affiliated with them, as well as certain of our directors, as set forth in the following table.

 

Participant

 

Series A

 

Series B

 

Series C

 

 

 

 

 

 

 

 

 

James W. Breyer

 

266,600

 

42,632

 

20,630

 

 

 

 

 

 

 

 

 

Benchmark Capital Partners V, L.P.

 

2,000,000

 

317,797

 

30,953

 

 

 

 

 

 

 

 

 

Paul M. Hazen

 

 

 

129,767

 

 

 

 

 

 

 

 

 

 

 

Accel IX L.P. and its affiliates

 

1,733,400

 

275,435

 

134,137

 

 

 

 

 

 

 

 

 

Fidelity Ventures

 

1,853,814

 

257,945

 

 

 

 

 

 

 

 

 

 

 

Meritech Capital

 

 

 

 

 

773,834

 

 

 

 

 

 

 

 

 

Omidyar Network Fund LLC

 

 

 

662,076

 

72,225

 

 

Two of our directors, James W. Breyer and Robert C.  Kagle are affiliated with Accel IX L.P. and its affiliates and with Benchmark Capital Partners V, L.P., respectively.  The notes to our beneficial ownership table describe these affiliations in greater detail.  See “Principal Securityholders.”

 

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In connection with our Series C convertible preferred stock financing, we entered into amended and restated investor rights, voting, and right of first refusal and co-sale agreements containing voting rights, information rights, rights of first refusal and registration rights, among other things, with certain holders of our convertible preferred stock and certain holders of our common stock.

 

Under the voting rights agreement, the investors in our convertible preferred stock, including the participants set forth above, have each agreed, subject to maintaining certain ownership levels, to exercise their voting rights so as to elect two designees of Series A preferred stock, one designee of Series B preferred stock, two common stockholder designees and one additional designee to our board of directors, as well as our chief executive officer, who shall also serve as one of the two common stockholder designees.  Under the terms of the investor rights agreement, the holders of at least a majority of the shares issuable upon conversion of our Series C convertible preferred stock have the right to demand that we file up to two registration statements so long as the aggregate amount of securities to be sold under a registration statement is at least $20 million.  These registration rights are subject to specified conditions and limitations.  In addition, if we are eligible to file a registration statement on Form S-3, holders of the shares having registration rights have the right to demand that we file a registration statement on Form S-3 so long as the aggregate amount of securities to be sold under the registration statement on Form S-3 is at least $10 million, subject to specified exceptions and conditions and limitations.  The investor rights agreement also provides that if we register any our shares for public sale, stockholders with registration rights will have the right to include their shares in the registration statement, subject to specified conditions and limitations.

 

Indemnification Agreements

 

Our amended and restated certificate of incorporation provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we have entered into separate indemnification agreements with each of our directors and executive officers.  For more information regarding these agreements, see “Management—Limitations on Officers’ and Directors’ Liability and Indemnification Agreements” for more information.

 

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PRINCIPAL SECURITYHOLDERS

 

The following table sets forth information regarding the beneficial ownership of our common stock as of November 30, 2008, by:

 

·                  each beneficial owner of 5% or more of our common stock;

 

·                  each of our directors;

 

·                  each of our named executive officers;

 

·                  each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock; and

 

·                  all of our directors and executive officers as a group.

 

Beneficial ownership is determined in accordance with the rules of the SEC.  These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of common stock issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days after November 30, 2008.  Except as otherwise indicated in the footnotes to the table below, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws.  The information is not necessarily indicative of beneficial ownership for any other purpose.

 

Percentage ownership calculations are based on 13,718,094 shares of common stock outstanding as of November 30, 2008, assuming conversion of all of our outstanding shares of convertible preferred stock.  Currently, each share of our convertible preferred stock, regardless of series, is convertible into one share of common stock at any time, at the discretion of the holder.

 

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options and warrants held by that person that are currently exercisable or exercisable within 60 days of November 30, 2008.  We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.  Beneficial ownership representing less than 1.0% is denoted with an asterisk (*).  Except as otherwise indicated in the footnotes to the table below, addresses of named beneficial owners are in care of Prosper Marketplace, Inc., 111 Sutter Street, 22nd Floor, San Francisco, CA 94104.

 

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Total Beneficial
Ownership

 

Name of Beneficial Owner

 

Number of
Shares

 

Beneficial
Ownership
Percentage

 

 

 

 

 

 

 

James W. Breyer(1)

 

2,472,564

 

18.02

%

 

 

 

 

 

 

Lawrence W. Cheng

 

 

 

 

 

 

 

 

 

Paul M. Hazen(2)

 

129,767

 

*

 

 

 

 

 

 

 

Kirk T. Inglis

 

72,647

 

*

 

 

 

 

 

 

 

Robert C. Kagle(3)

 

2,348,750

 

17.12

%

 

 

 

 

 

 

Christian A. Larsen(4)

 

2,006,621

 

14.63

%

 

 

 

 

 

 

Edward A. Giedgowd

 

115,370

 

*

 

 

 

 

 

 

 

John B. Witchel and Jessica W. Wheeler, JNTN (5)

 

1,925,000

 

14.03

%

 

 

 

 

 

 

All directors and executive officers as a group (11) (6)

 

13,464,447

 

98.15

%

 

 

 

 

 

 

Accel IX L.P. and its affiliates (7)

 

2,142,972

 

15.62

%

 

 

 

 

 

 

Benchmark Capital Partners V, L.P. (8)

 

2,348,750

 

17.12

%

 

 

 

 

 

 

DAG Ventures (9)

 

773,834

 

5.64

%

 

 

 

 

 

 

Fidelity Ventures (10)

 

2,111,759

 

15.39

%

 

 

 

 

 

 

Meritech Capital (11)

 

773,834

 

5.64

%

 

 

 

 

 

 

Omidyar Network Fund LLC (12)

 

734,301

 

5.35

%

 


(1)

Mr. Breyer directly owns 329,592 shares of convertible preferred stock and is deemed to indirectly own or control 2,142,972 shares of convertible preferred stock, of which 1,786,168 shares are held by Accel IX, L.P., 190,296 shares are held by Accel IX Strategic Partners L.P. and 166,508 shares are held by Accel Investors 2005 L.L.C.  Accel IX Associates L.L.C.  (“A9A”) is the general partner of Accel IX L.P. and Accel IX Strategic Partners L.P. and has sole voting and investment power over the shares held by these limited partnerships.  Mr. Breyer is one of the managing members of A9A and of Accel Investors 2005 L.L.C.  and, therefore, is deemed to share voting and investment power over the securities held by these entities.  Mr. Breyer disclaims beneficial ownership of the shares held by Accel IX, L.P., Accel IX Strategic Partners L.P. and Accel Investors 2005 L.L.C.  except to the extent of his pecuniary interest in such shares.

 

 

(2)

Represents shares of convertible stock indirectly held by Mr. Hazen through family trusts.  The Brandt Hazen 2005 Gift Trust and Brooke Hazen 2005 Gift Trust each own 6,620 shares, with 116,527 shares held by the Paul and Cassandra Hazen Trust, of which Mr. Hazen is a beneficiary and trustee.

 

 

(3)

Represents 2,348,750 shares of convertible preferred stock held by Benchmark Capital Partners V, L.P. Mr. Kagle is the managing member of Benchmark Capital Management Company V, LLC, the general partner of Benchmark Capital Partners V, L.P. and, therefore, is deemed to share voting and investment power over the securities held by Benchmark Capital Partners V, L.P. Mr. Kagle disclaims beneficial ownership of any of these shares except to the extent of his pecuniary interest therein.

 

 

(4)

Represents 6,621 shares of convertible preferred stock held directly and 2,000,000 shares of common stock held indirectly by Mr. Larsen through the Larsen-Lam Family Trust, for which Mr. Larsen and Lyna Lam serve as trustees.

 

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(5)

Mr. Witchel resigned as the Chief Technology Officer and Secretary of Prosper on July 31, 2008.  The address of Mr. Witchel is 576 Eureka Street, San Francisco, California 94114.

 

 

(6)

Includes 181,396 shares of common stock potentially issuable upon the exercise of stock options that are exercisable within 60 days after November 30, 2008.

 

 

(7)

Excludes 329,592 shares of convertible preferred stock held directly by Mr. Breyer.  1,786,168 shares are held by Accel IX L.P., 190,296 shares are held by Accel IX Strategic Partners L.P. and 166,508 shares are held by Accel Investors 2005 L.L.C.  Accel IX Associates L.L.C.  (“A9A”) is the general partner of Accel IX L.P. and Accel IX Strategic Partners L.P. and has sole voting and investment power over the shares held by these limited partnerships.  Mr. Breyer is one of the managing members of A9A and of Accel Investors 2005 L.L.C.  and, therefore, is deemed to share voting and investment power over the securities held by these entities.  Mr. Breyer disclaims beneficial ownership of such shares except to the extent of his individual pecuniary interest therein.  The address of A9A and its affiliated entities is 428 University Avenue, Palo Alto, California 94301.

 

 

(8)

The address of Benchmark Capital Partners V, L.P. is 2480 Sand Hill Road, Suite 200, Menlo Park, California 94025.

 

 

(9)

Represents 583 shares of convertible preferred stock held by DAG Ventures GP Fund III, LLC, 565,308 shares of convertible preferred stock held by DAG Ventures III – QP, L.P., 53,175 shares of convertible preferred stock held by DA