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

12/05/08  Prosper Marketplace Inc           S-1/A                  7:4.2M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Pre-Effective Amendment to Registration Statement   HTML   2.00M 
                          (General Form)                                         
 2: EX-4.2      Instrument Defining the Rights of Security Holders  HTML    332K 
 3: EX-10.1     Material Contract                                   HTML     76K 
 4: EX-10.2     Material Contract                                   HTML     91K 
 5: EX-10.3     Material Contract                                   HTML    233K 
 6: EX-10.4     Material Contract                                   HTML    137K 
 7: EX-23.1     Consent of Experts or Counsel                       HTML      7K 

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As filed with the Securities and Exchange Commission on December 5, 2008

Registration No. 333-147019

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

Amendment No. 1 to

 

Form S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

PROSPER MARKETPLACE, INC.

(Exact name of registrant as specified in its charter)

 

 

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

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered		Amount to be registered		Proposed maximum offering price per unit		Proposed maximum aggregate offering price (1)			Amount of registration fee
Borrower Payment Dependent Notes		—		—		$	500,000,000		$	(2)

(1)  Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

 

(2)  The registration fee on the proposed maximum aggregate offering price of $500 million of securities was previously paid in connection with the registrant’s filing of its Registration Statement on Form S-1 with the Securities and Exchange Commission on October 30, 2007.

 

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.

 

 

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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 DECEMBER 5, 2008

 

$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 issued by Prosper.  In this prospectus, we refer to our Borrower Payment Dependent Notes as the “Notes.”

 

We will issue the Notes in series.  Each series will correspond to a single consumer loan originated through our person-to-person online credit auction platform or a previously-funded single consumer loan offered for sale on our platform by one of our financial institution members.  In this prospectus, we refer to these consumer loans generally as “borrower loans” and we refer to previously-funded consumer loans listed on our platform by one of our financial institution members as “previously-funded loans.”  We refer to the borrower loan upon which a series of Notes is dependent for payment as the “corresponding borrower loan” for the series.

 

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 our 1.0% servicing fee.  We do not guarantee payment of the Notes or the corresponding borrower loans, and the Notes are not obligations of the borrower members.

 

·                  The Notes will bear interest from the date of issuance, be fully amortizing and be payable monthly.

 

·                  Each Note will have an initial maturity of between three months and seven years from issuance as described in this prospectus.

 

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 16.

 

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                  , 2008

 

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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 16, 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, or “borrowers,” to borrow money and its lender members to purchase Notes issued by Prosper, the proceeds of which facilitate the funding or purchase of specific loans made to borrowers.

 

About the Loan Platform

 

Through our online platform, borrower members can request and obtain personal, unsecured loans by posting anonymous “listings” on the platform indicating the principal amount of the desired loan, the maximum interest rate the borrower is willing to pay and the term of the desired loan.  Our platform also enables certain financial institution members to offer previously-funded consumer loans for sale by posting listings on the platform indicating the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan.  When a borrower registers on our platform we obtain the borrower’s social security number, state driver’s license or state identification card number and bank account information to verify the borrower’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  We also assign one of seven letter credit grades (AA, A, B, C, D, E and HR (High Risk)), based on the borrower’s credit score, for each borrower loan listed.  The borrowers’ credit grades, debt-to-income ratios and other credit data are displayed with their listings and are available for viewing by lender members on an anonymous basis.  We also service the borrower loans on an ongoing basis.

 

Our platform also provides our lender members with the opportunity to provide an indirect source of funding of specific borrower loans with credit characteristics, interest rates and other terms the lender members find attractive by purchasing Notes that in turn are dependent for payment on payments we receive on the corresponding borrower loan. See “About the Platform.”

 

The Notes.  Our lender members will have the opportunity to buy Notes issued by Prosper.  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 the corresponding borrower loan and the minimum interest rate they are willing to receive.  By making a bid on a borrower’s listing, a lender member is committing to purchase from Prosper a Note in the principal amount of the lender’s bid.  The lender members who purchase the Notes will designate that the sale proceeds be applied to facilitate the funding or purchase 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.  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 previously-funded loans, the corresponding loan upon which the Notes are dependent for payment may be secured by real property or personal property.

 

Prosper will pay principal and interest on each Note in a series 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 for that series, net of Prosper’s 1.0% servicing fee.  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 or a third-party collection agency charge.  If Prosper were to become subject to a bankruptcy or similar proceeding, the holder of a Note will have a general unsecured claim against Prosper that may or may not be limited in recovery to such borrower payments.  See “Risks Related to Prosper, the Platform and Our Ability to Service the Notes.”

 

The Borrower Loans.  All loans requested by borrowers and originated through our website are unsecured obligations of individual borrower members with a fixed interest rate and a loan term ranging from three months to seven years.  All borrower loans we originate are 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

 

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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 borrower loans, except for our verification of the borrower identity against data from consumer reporting agencies and other identity and anti-fraud verification databases, listings are posted without 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 borrowers in listings.  This verification is normally done at the pre-funding stage, after the listing has been created and bidding has ended, and therefore the results of our verification are not reflected in the listings.  See “About the Platform—How the Platform Operates—Loan Funding and Purchases of Notes.”

 

Previously-funded Borrower Loans.  In addition to loans requested by borrowers and originated through our website, our platform also enables our financial institution members to offer previously-funded loans for sale by posting listings on the platform indicating the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan.  Previously-funded loans offered for sale by our financial institution members are owned by the financial institution offering the loan for sale, and have a fixed interest rate and terms of between three months and seven years.  These previously-funded loans may be unsecured or secured by real property or personal property.  Lender members access our platform and make purchase commitments for Notes that are dependent for payment on payments we receive on the previously-funded loans.  Lender members bid the amount they are willing to commit to the purchase of a Note and minimum interest rate they are willing to receive in the same manner as they would for borrower loans originated on our platform.  At the close of the auction bidding period if bids totaling the listed sale price are received, the financial institution member sells and assigns the loan to Prosper, without recourse to the financial institution, in exchange for the listed sale price of the previously-funded loan.  Financial institution members offering previously-funded loans for sale on the platform have no obligation to purchasers of the Notes.  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 the corresponding loan upon which the Notes are dependent for payment may be secured by real property or personal property.  Although we obtain the borrower’s social security number, name and address from the financial institution member offering the previously-funded loan for sale, we do not obtain any documentation of the borrower’s ability to afford the loan.

 

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 the lender member is willing to receive and other borrower-specific criteria such as the credit grade or grades of borrowers, credit 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.  See “About the Platform—How the Platform Operates—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.

 

From October16, 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 had the ability to access their accounts, monitor their borrower loans and withdraw available funds without charges.  We also limited the borrowing side of our

 

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THE OFFERING

 

Issuer		Prosper Marketplace, Inc.
Notes offered		Borrower Payment Dependent Notes, issued in series, with each series of Notes related to one corresponding borrower loan.
Offering price		100% of principal amount of each Note.
Initial maturity date		Maturities range from three months to seven years following issuance and match the maturity date of the corresponding borrower 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		Each series of Notes will have a stated, fixed interest rate, which is the interest rate for the corresponding borrower loan.
Setting of interest rate		Interest rates vary among the Notes, but each series of Notes that corresponds to a single borrower loan will have the same interest rate. Interest rates are determined in an auction format where prospective borrowers list the maximum interest rate they are willing to pay, and lender members bid the minimum interest rate they are willing to receive. For previously-funded loans, financial institution members list the sale price for the loan, the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan. The interest rate for all Notes with respect to a corresponding borrower loan is determined at the end of a seven-day listing period. If by the end of the listing period a listing receives purchase commitments in an aggregate amount equal to the corresponding borrower loan, 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 Notes. Borrowers requesting loans and financial institution members offering previously-funded loans for sale 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.
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 1.0% servicing fee. We will also pay lender members any other amounts we receive on the corresponding borrower loan, including late fees and prepayments, subject to our 1.0% servicing fee, except that we will not pay to lender members any non-sufficient funds fees or collection fees we or a third-party collection agency charge. We will make any payments on the Notes when we receive the payments from borrower members on the corresponding borrower loan. The Notes are not subject to any credit enhancement. See “About the Platform—Description of the Notes” for more information.
Corresponding borrower loans to consumer borrowers		Lender members who purchase Notes of a particular series will designate Prosper to apply the proceeds from the sale of each series of Notes to the purchase of a corresponding borrower loan originated through our platform to an individual consumer who is one of our borrower members. Each borrower loan originated through our platform is a fully amortizing consumer loan made by WebBank to an individual Prosper borrower member with a loan term of between three months and seven years. WebBank subsequently assigns the borrower loan to Prosper without recourse to WebBank in exchange for the principal amount of the corresponding borrower loan. Borrower loans have interest rates set by the auction bidding process described above, which interest rates range from 0% to 36%. Borrower loans are repayable in monthly

 

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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 and its lender members to purchase Notes issued by Prosper, the proceeds of which provide an indirect source of funding of specific loans made to individual borrowers.

 

Q:               Who is WebBank?

 

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

 

Q:               What is our platform?

 

A:                Our platform is an online auction-style marketplace for loans that facilitates loans to borrowers with interest rates set through auction-style competitive bidding among individuals or institutions who register as lender members of Prosper.  Our platform allows borrower members to request and obtain personal, unsecured loans by posting anonymous “listings” on the platform indicating the principal amount requested, the maximum interest rate the borrower is willing to pay and the term of the desired loan.  We also provide our lender members with the opportunity to facilitate the funding of specific borrower loans with credit characteristics, interest rates and other terms the lender members find attractive by purchasing Notes that in turn are dependent for payment on payments we receive on the corresponding borrower loans.  When a borrower registers on our platform, we obtain the borrower member’s social security number, state driver’s license or state identification card number and bank account information to verify the borrower member’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  We also assign one of seven letter credit grades (AA, A, B, C, D, E and HR (High Risk)), based on the borrower’s credit score, to each borrower member who posts a listing.  The borrower members’ credit grades, debt-to-income ratios and other credit data are displayed with their listings and are available for viewing by lender members on an anonymous basis.  Our lender members bid on borrower listings by indicating an amount they are willing to commit to the purchase of a Note issued by Prosper, with the proceeds of the sale of a series of Notes used to purchase the specific borrower loan described in the listing on which the bid was made.  We also service the borrower loans on an ongoing basis.  See “About the Platform” for more information.

 

Q:               What is a listing?

 

A:                A listing is a request by a borrower member for a 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 borrower’s requested loan amount and maximum interest rate, listings contain the borrower’s credit grade and 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) borrower’s financial situation.  Listings may only be created by individuals registered as borrowers on our platform.  Listings are displayed publicly on our platform, although certain information is only viewable by registered lender members.

 

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 to a borrower member if the listing has received bids totaling the full amount of the requested loan.  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 corresponding to the listing, and the minimum interest rate they are willing 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,

 

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correspond to the principal amount of the corresponding borrower loan and are in the lowest interest rate among all bids placed against the listing.

 

Q:               What are our Borrower Payment Dependent Notes?

 

A:                Our lender members may buy Borrower Payment Dependent Notes issued by Prosper, which we refer to as the “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 of a corresponding borrower loan originated through our platform to an individual consumer who is one of our borrower members.  Each series of Notes will have a stated interest rate, which is the interest rate for the corresponding borrower 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 1.0% servicing fee.  We will also pay you any other amounts we receive on the Notes, 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.  The servicing fee will reduce the effective yield on your Notes below their stated interest rate.  The Notes are special, limited obligations of Prosper only and not the borrower members.  The Notes will be unsecured and do not represent an ownership interest in the corresponding borrower loans.

 

Q:               What are the borrower loans?

 

A:                The borrower loans are unsecured obligations of individual borrower members with an interest rate determined in an auction format and loan terms ranging from three months to seven years.  Each borrower loan is originated through our website, funded by WebBank and sold and assigned to Prosper the day after it is made in exchange for the principal amount of the corresponding borrower loan.  A 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:               Do member lenders loan funds directly to borrower members?

 

A:                No.  Lender members do not make loans directly to our borrower members.  Instead, lender members purchase Notes issued by Prosper, the proceeds of which are designated by the lender members who purchased the Notes to facilitate the funding of a loan to an individual borrower member originated through the Prosper platform.  We use all proceeds we receive from issuences of the Notes to purchase the corresponding borrower loans.  Even though lender members do not make loans directly to borrower members, they will nevertheless be wholly dependent on borrower members for repayment of any Notes lender members may purchase from Prosper.  If a borrower member defaults on its payment obligations under the corresponding borrower loan, Prosper will not have any obligation to make any payments on the related Notes.

 

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 note purchase agreement with Prosper, which will govern all purchases of Notes the lender member makes.

 

Q:               What kinds of loans are available to borrower members on our platform?

 

A:                Borrowers can request closed-end, unsecured, fully-amortizing fixed-rate loans, with payments due monthly, with loan terms between three months and seven years.  Borrowers can repay the full amount of the borrower loan or make partial prepayments of principal at any time; there are no early payment or prepayment penalties associated with the Notes.

 

Q                   What borrower loan amounts are available on our platform?

 

A:                Borrowers may currently request loans in amounts ranging from $1,000 to $25,000.

 

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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 credit grade or grades 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 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 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 determined.  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.

 

Q:               Who are the borrowers?

 

A:                A borrower 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, borrowers can request unsecured loans at rates which are determined by an auction process.  Prosper currently allows borrowers 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 520 in order to post a listing on our platform.

 

Q:               How does Prosper verify a borrower’s identity?

 

A:                When a borrower registers on our platform, Prosper requests his or her name, address, social security number, state driver’s license or state identification card number and bank account information to verify the borrower’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  See “About the Platform—How the Platform Operates” for more information.

 

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.

 

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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 as lender members on our platform.  WebBank is the originating lender of all borrower loans made through our platform, then 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 borrower loans and services the 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 borrowers have more than one loan outstanding at any one time?

 

A:                Yes.  Borrowers may have up to two loans originated through the platform outstanding at any one time, provided that the aggregate outstanding principal balance of both loans does not exceed $25,000.  Currently, to be eligible to obtain a second borrower loan,

 

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

 

·                  borrowers may not post a listing for a second borrower loan within a specified number of months (between six and twelve, depending on the borrower’s credit grade) following the date of origination of their existing borrower loan, and

 

·                  the borrower’s credit grade must not drop below what it was when the borrower’s existing loan was obtained (except that a drop of one grade is allowed for borrowers with a credit grade of AA, A, B or C).

 

Borrower eligibility requirements for second loans are subject to change from time to time.

 

Q:               How are interest rates and payments calculated?

 

A:                The interest rate on a Note is the rate determined by our platform’s auction system and is fixed at the minimum interest rate acceptable to all lender members who are the winning bidders for Notes that are dependent for payment on payments we receive on the corresponding borrower loan listed at the expiration of the auction bidding period.  Payments on each Note are due each month, based on a fully-amortized repayment schedule over a term ranging from three months to seven years.  Each monthly payment on a Note is the same, except that the final payment includes the then remaining principal, unpaid accrued interest, and unpaid late fees and non-sufficient funds fees due on the Note.  See “About the Platform—How the Platform Operates—How to Bid to Purchase Notes” for more information.

 

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.

 

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Q:               What are credit grades?

 

A:                A credit grade is a letter grade that we assigns to a borrower member based on the borrower’s credit score, for use solely on our platform.  We obtain the borrower’s credit score from an independent consumer reporting agency and assigns one of seven letter credit grades, corresponding to seven credit score tiers, with more favorable credit grades assigned to the higher scores.  A borrower’s credit grade is displayed with his or her listing and is available for viewing by lender members who consider bidding on the listing.  The numerical credit score is not displayed or disclosed to anyone (including the borrower).  See “About the Platform—How the Platform Operates—Minimum Credit Criteria and Underwriting” for more information.

 

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

 

A:                Part of a borrower member’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.  Borrower income is self-reported, and Prosper does not verify any borrower’s income when calculating DTI for the listings.

 

Q:               Does Prosper verify the listing information provided by 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.

 

In most instances, we do not verify the income, employment and occupation or other information provided by borrowers in listings.  The borrower’s income, employment and occupation are self-reported, and the borrower’s DTI is determined by Prosper from a combination of the borrower’s self-reported income and information from the borrower’s credit report.  The credit data that appears in listings is taken directly from a credit report obtained on the borrower from a consumer reporting agency, without any review or verification by Prosper.  Prosper does not verify any statements by borrowers as to how borrower loan proceeds are to be used and does not confirm after borrower loan funding how borrower loan proceeds were used.  In most instances, homeownership status is derived from the borrower’s credit report, but is not verified by Prosper; if the report reflects an active mortgage loan, the borrower is presumed to be a homeowner.  In connection with our identity and anti-fraud verification of borrowers, we verify the borrower’s bank account to determine that the borrower is a holder of record of the account.

 

We reserve the right in the Borrower Registration Agreement to verify at any time all statements and information provided by borrowers in listings, and we have the right to cancel listings or refuse to fund a borrower loan if material misstatements or inaccuracies are found in a listing or other information provided by a borrower.  In the limited instances where we choose to verify the income, employment, occupation or other information provided by borrowers in listings, the verification is normally done at the pre-funding stage, after the listing has already been created and bidding has ended.  In such cases, the results of our verification would not be reflected in the listings themselves.

 

Q:               Are the Notes secured by any collateral?

 

A:                No.  The Notes are not secured by any collateral, including the corresponding borrower loans, and are not guaranteed or insured by any governmental agency or instrumentality or any third party.  The Notes are not subject to any credit enhancement.

 

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

 

A:                All payments on the Notes are processed through the Prosper 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).

 

Q:               What happens if a borrower misses a payment or does not repay its 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.  Such late fees are collected by Prosper and passed on to the lender members who own the Notes dependent for payment on payments we receive from that borrower loan.

 

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 Platform—Post-Funding Loan Servicing and Collection” for more information.

 

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, each lender member agrees that under no circumstances may a lender member attempt collection of a late payment themselves.  Lender members must depend on Prosper or our third-party collection agents to pursue collection on delinquent borrower loans.  If collection action must be taken in respect of a borrower loan, we 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 you receive on the Notes.

 

Q:               What happens if a borrower repays early?

 

A:                We allow borrower members to make extra payments on, or prepay, their borrower loans in part or entirely at any time 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 our servicing fee, and interest will stop accruing after the date on which such prepayment is received by us.  If a borrower member partially prepays a borrower loan, we will pay lender members their share of the prepayment amount we receive, net of our servicing fee, and the amount of the prepayment will reduce the principal amount on the Note.  See “About the Platform—Description of the Notes—Prepayments” 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 include OID in income as ordinary interest income for U.S.  federal income tax purposes as

 

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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 “About the Platform—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 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 better rates and give borrowers an additional incentive — the group’s reputation — to meet their obligation to repay a borrower loan.

 

Q:               What are the benefits of group membership?

 

A:                Borrower listings identify the group, if any, to which the borrower belongs.  Groups are rated according to the collective repayment performance of the group’s members on borrower loans, and the group ratings are displayed on our platform.  Prosper believes that highly-rated groups (i.e., those with members who reliably repay their borrower loans) may draw more favorable bids from lender members, resulting in borrower loans with lower interest rates for the group’s borrowers.  Prosper also believes that the group structure may positively influence borrowers’ loan repayment performance, in that borrowers in groups may be less likely to default since default would negatively affect the group to which they belong.

 

Q:               Do groups guarantee their members’ borrower loans?

 

A:                No.  Groups do not 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 make lending decisions or set rates for their members’ borrower loans?

 

A:                No.  Groups do not make lending decisions or set interest rates, although members of groups 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 borrower loans originated through the platform must comply with applicable state laws, including licensing and disclosure requirements.  In addition, 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

 

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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 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 borrower loan is funded, the borrower is charged a transaction fee of 2.0% or 3.0% of the amount of the borrower loan (depending on the borrower’s credit grade), subject to a $75 minimum transaction fee.  The transaction fee is paid by the borrower out of the proceeds of the 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.  In addition, Prosper currently charges lender members a servicing fee equal to an annualized rate of 1.0% of the outstanding principal balance of the corresponding borrower loan, which we deduct from the payment we receive on the corresponding borrower loan.  If Prosper establishes the trading platform on which the Notes may be resold, Prosper intends to charge all lender members selling a Note a nonrefundable resale listing fee of $0.25 per Note being listed for auction resale.  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.  See “Risk Factors” 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 are in ongoing negotiations 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.  Contract negotiations are ongoing and we expect our service contract to be finalized by December 31, 2008.  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 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.

 

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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.  The risks and uncertainties described below are not the only ones you may face.  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 unsecured consumer finance obligations of individual borrowers under the corresponding borrower loans.  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 listings 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 member 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 a corresponding borrower loan, net of our servicing fee.  We will not pay to lender members any non-sufficient funds fees or collection fees we or a third-party collection agency charge.  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 secured by any collateral or guaranteed or insured by any third party.

 

The Notes will not represent an obligation of borrower members or any other party except Prosper, and are special, limited obligations of Prosper.  The Notes are not secured by any collateral and are not guaranteed or insured by any governmental agency or instrumentality or any third party.

 

Borrower loans are not secured by any collateral or guaranteed or insured by any third party, and you must rely on Prosper and our designated third-party collection agency to pursue collection against any borrower member.

 

Borrower loans are unsecured obligations of borrower members.  They are not secured by any collateral, not guaranteed or insured by any third party and not 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 borrower loans.

 

Moreover, borrower loans are obligations of borrower members to Prosper, not obligations to holders of Notes.  Holders of Notes will have no recourse to borrower members and no ability to pursue borrower members 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 member 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 efforts against any borrower member and will not be able to obtain the identity of the borrower member in order to contact the borrower member 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 “About the Platform—Description of the 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 receiving 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 loan to such borrower may present a high risk of loan delinquency or default.  Selected historical default rates on the Notes can be found in this prospectus under the heading “About the Platform—Historical Information About Our Borrowers and Outstanding Borrower Loans.”  There can be no assurance that such historical default rates will be indicative of future default 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 one of seven credit grades, based on the reported credit score.  A credit score or credit grade 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.  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.

 

Borrowers’ credit scores and the credit grades assigned on our platform may differ from the credit scores that other credit reporting services might assign to such borrowers and borrower credit scores may not reflect borrower creditworthiness.

 

We currently use a credit scoring model called Experian Scorex PLUS^SM developed by the Experian consumer reporting agency, and we assign a letter credit grade based upon specific credit score ranges.  While the credit score ranges are similar to FICO™ or VantageScore SM credit scores (which many financial lenders use to determine credit risk), Experian does not use the same algorithm used for FICO™ or VantageScore SM credit scores.  Experian employs a predictive model which may result in credit scores that may differ considerably from the credit score that would have been assigned had we used FICO™ or VantageScore SM credit scores to compute borrower credit grades.  Any credit score or credit grade assigned to a borrower may not reflect a borrower’s creditworthiness, and may not reflect information about a borrower which may have resulted in a credit score or credit grade that would differ considerably from the credit score or credit grade assigned.  Neither Prosper nor any consumer reporting agency is liable for any errors or omissions in credit reporting or credit scores.  See “About the Platform—How the Platform Operates—Minimum Credit Criteria and Underwriting” for more information.

 

Additionally, we currently only retrieve a subsequent credit score for a borrower after the previous credit score 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 since the last credit score was retrieved, or sustained other adverse financial events, and the credit grade assigned to the borrower may not accurately reflect the borrower’s actual current creditworthiness.

 

Information supplied by borrowers may be inaccurate or intentionally false.

 

Borrowers supply a variety of unverified information that is included in the borrower loan listings on our website and in the posting reports and sales reports we will file with the SEC.  We do not verify this information, and this information may be inaccurate.  For example, 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.  Borrowers may misrepresent their intentions for the use of borrower loan proceeds.  Prosper and WebBank do not verify any statements by borrowers as to how loan proceeds are to be used and do not confirm after loan funding how loan proceeds were used.  All borrower 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 borrower members for income and employment verification, the verification is normally done at the pre-funding stage, after the listing has already been created and bidding has ended.  From the period from September 1, 2007 to

 

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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 borrowers through Prosper website postings, and then only on an anonymous and unverified basis.

 

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 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 borrower’s identity and credit history.  Although we use diligent efforts in this regard, there is a risk that our fraud checks could fail and fraud may occur.  Additionally, borrowers may misrepresent their intentions for the 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, 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 Platform—Description of the Notes—Repurchase of the Notes by Prosper” for more information.

 

You must rely on Prosper and our designated third-party collection agency to pursue collection against any borrower.

 

Borrower loans are obligations of borrowers to Prosper, not obligations to holders of Notes.  Holders of Notes will have no recourse to borrowers 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 efforts 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.

 

We do not have significant historical performance data about borrower performance on the borrower loans.  Default rates on the borrower loans may increase.

 

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 borrower performance on borrower loans, and we do not yet know what the long-term loan loss experience will be.  The estimated default rates we display on the website have been

 

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developed from our loss histories.  Moreover, these default 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 through 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 the borrower member 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.  If we refer a loan to a collection agency, we will have no other obligation to attempt to collect that borrower loan.  We 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 member more than 30 days after their due date, then we, or, if we have referred the delinquent loan to an outside collection agency, that collection agency, will retain a percentage of any funds recovered from such borrower member 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 Platform—How the Platform Operates—Post-Funding Loan Servicing and Collection” for more information.

 

Prosper 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.  You must rely on the collection efforts of Prosper and the designated collection agency, and you are not permitted to attempt to collect payments on the borrower loans in any manner.

 

Default 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 default rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers.  In particular, default 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 rate of default for our 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 originated on our platform, although we do not expect the default 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.

 

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The borrower loans on which the Notes are dependent do not restrict borrower members from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrower members 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 member incurs additional debt after obtaining a borrower loan through the Prosper platform, the additional debt may impair the ability of that borrower member 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 member’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower member.  To the extent that the borrower member has or incurs other indebtedness and cannot pay all of his or her indebtedness, the borrower member may choose to make payments to other creditors, rather than Prosper, on the borrower loan.

 

The borrower loans are unsecured credit obligations of individual borrower members.  To the extent borrower members 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 member may impair the borrower member’s ability to repay the borrower loan on which your Note is dependent for payment.  Borrower members may also choose to repay obligations under secured indebtedness before repaying borrower loans originated through our platform because the borrower members have no collateral at risk in the case of the borrower loans.  A lender member will not be made aware of any additional debt incurred by a borrower member, or whether such debt is secured.

 

A borrower may request that his or her bank “chargeback” a payment on a borrower loan upon which the 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.  If such a chargeback occurs within four business days of the initiation of the payment, the payment will be canceled or refunded and declared delinquent.  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.

 

Our platform is a new concept, and the failure of a borrower to perform according to the terms of the corresponding borrower loan may impair your ability to realize all or any of your investment in the Notes.

 

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.

 

Additionally, the anticipated addition of our trading platform on which the Notes may be resold to other lender members may not materialize or lender members may not be drawn to it.  In such cases, your investment may not produce the rate of return that you originally anticipated and you may not be able to find lender members who will buy a Note that you list for resale.

 

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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.

 

The borrower loans do not contain any cross-default or similar provisions.  If a borrower member 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.

 

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

 

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

 

Borrower members may seek protection under federal bankruptcy law or similar laws.  If a borrower member files for bankruptcy (or becomes the subject of an involuntary petition), a stay will go into effect that will automatically put any pending collection actions on hold and prevent further collection action absent bankruptcy court approval.  If we receive notice that a borrower member has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, we will put the borrower member’s loan account into “bankruptcy status.” When we put a borrower loan into bankruptcy status, we terminate automatic monthly ACH debits and do not undertake collection activity without bankruptcy court approval.  Whether any

 

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payment will ultimately be made or received on a borrower loan after a bankruptcy status is declared depends on the borrower member’s particular financial situation.  It is possible that the borrower member’s personal liability on the borrower loan will be discharged in bankruptcy.  In most cases involving the bankruptcy of a borrower member, unsecured creditors, including Prosper as holder of the borrower loans, will receive nothing, or only a fraction of any amount outstanding on their borrower loans.  See “About the Platform—How the Platform Operates—Post-Funding Loan Servicing and Collection” for more information.

 

Federal law entitles borrower members 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 borrower members on active military service with rights that may delay or impair our ability to collect on a borrower loan corresponding to your Note.  The Service Members Civil Relief Act 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.  See “Government Regulation—Regulation and Consumer Protection Laws—Servicemembers Civil Relief Act” for more information.

 

The death of a borrower member 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 member or to receive the interest payments that you expect to receive on the Notes.

 

All borrower members are individuals.  If a borrower member with outstanding obligations under a borrower loan dies while the borrower loan is outstanding, generally, we will seek to work with the executor of the estate of the borrower member to obtain repayment of the borrower loan.  However, the borrower member’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 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.

 

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 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—Description of the Notes—Repurchase of the Notes by Prosper” 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 credit grades and borrower 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 borrower loan at any time without penalty.  Borrower loan prepayments will extinguish or limit your ability to receive additional interest payments on a Note.

 

Borrower loan prepayment occurs when a borrower member decides to pay some or all of the principal amount on a borrower loan earlier than originally scheduled.  A borrower member may decide to prepay all or a portion of the remaining principal amount at any time without penalty.  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 member 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 member 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, even if the prepayment occurs immediately after issuance of your Note.  See “About the Platform—Description of the Notes—Prepayments” for more information.

 

Prevailing interest rates may change during the term of the borrower loan on which your Note is dependent for payment.  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, borrower members 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 have terms ranging from three months to seven years and bear fixed, not floating, rates of interest.  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 member’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 borrower loans.  If prevailing interest rates on consumer loans decrease, borrower members 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 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.

 

Prior to the date of this prospectus, the Notes have been non-transferable except by assignment to a debt purchaser upon default.  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.  If your original investment was for a large principal amount or for any of the other relevant reasons discussed in this prospectus, you may find it difficult or impossible to find lender members willing to buy the Note from you.

 

In either of the above situations, you will 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 you 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

 

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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).

 

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 25, 2008, we entered into a settlement agreement with state securities regulators, to resolve matters relating to the sale and offer of unregistered securities and the omission of material facts in connection with the offer, sale or purchase of a security in various states.  Under terms of the settlement, we agreed not to offer or sell any securities in any jurisdiction until we are in compliance with that jurisdiction’s securities registration laws.  We also agreed to pay a fine of up to $1 million to the states.  The $1 million penalty is to be allocated among the states where we conduct business, based on the loan sale transaction volume in each state.  However, we will not be required to pay any portion of the fine to those states which elect not to participate in the settlement.  We have accrued approximately $425,000 in connection with this contingent liability in accordance with SFAS No. 5, Accounting for Contingencies.  In consideration of the settlement, the states will terminate their investigation of our activities related to the sale of securities before November 24, 2008.

 

·                  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.

 

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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.

 

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

 

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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 24 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 their efforts to collect borrower loans made on our platform, it is possible that improper collection practices may occur which could adversely impact the collectibility of particular borrower loans originated 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.

 

We currently do not have any arrangement for backup servicing, however, we are in ongoing negotiations with a loan servicing company willing and able to undertake our servicing responsibilities in the event we can no longer do so.  Contract negotiations are ongoing and we expect our service contract to be finalized by December 31, 2008.  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

 

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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 and suspended or stopped.  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.  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.  Specifically, the following consequences 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.

 

A bankruptcy or similar proceeding of Prosper may cause delays in payments on Notes.  The 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.  Because a bankruptcy or similar proceeding may take months or years to complete, the suspension of payment 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

 

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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 loan.  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.  Accordingly, the holder of a Note may be required to share the proceeds of the corresponding borrower loan with Prosper’s other creditors.  If such sharing of proceeds is deemed appropriate, those proceeds that 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, 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 whether a holder of a Note has any right of payment from assets of Prosper other than the corresponding borrower loan.  In a bankruptcy or similar proceeding of Prosper, it is possible that a Note could be deemed to have a right of payment only from proceeds of the corresponding borrower loan and not from any other assets of Prosper, in which case the holder of the Note may not be entitled to share the proceeds of such other assets of Prosper with other creditors of Prosper, whether or not, as described above, such other creditors would be entitled to share in the proceeds of the borrower loan corresponding to the Note.  Alternatively, it is possible that a Note could be deemed to have a right of payment from both the borrower loan corresponding to the Note and from some or all other assets of Prosper, for example, based upon the automatic acceleration of the principal obligations on the Note upon the commencement of a bankruptcy or similar proceeding, in which case the holder of the Note may be entitled to share the proceeds of such other assets of Prosper with other creditors of Prosper, whether or not, as described above, such other creditors would be entitled to share in the proceeds of the borrower loan corresponding to the Note.  To the extent that proceeds of such other assets 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.

 

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 borrower has paid Prosper 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—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 access funds in the funding account.  If a lender member has funds in the funding account at the time a bankruptcy or similar proceeding of Prosper is commenced, there can be no assurance that the owner of the funds will have immediate access to the funds or that the funds will ultimately be released to the holder of the Note.  Similarly, if a borrower has paid Prosper on a borrower loan corresponding to a Note before a bankruptcy or similar proceeding of Prosper is commenced, and those funds have been used by Prosper to make payments on the Note prior to the date the bankruptcy or similar proceeding is commenced, but the payments on the Note continue to be held by Prosper in the lender member’s funding account, there can be no assurance that the holder of the Note will have immediate access to the funds constituting the payment or that the funds constituting the payment will ultimately be released to the holder of the Note.  There can be no assurance that, if the matter were to be litigated, such litigation would not delay or prevent the holder of a Note from accessing the portion of those funds in which

 

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the holder has an interest.  See “About the Platform—How the Platform Operates—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 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.

 

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

 

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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.

 

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.

 

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.

 

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.

 

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 purchasers of 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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We may not realize enough fees from our services to offset the cost of maintaining our platform.  In the event that we should fail to maintain operations, you may experience a delay in realizing your investment or an inability to resell the Notes or borrowers may default on their loans.

 

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 and Notes issued on our platform and proposed to be resold on the Note trading platform (should it develop), our ability to maintain operations may be adversely affected.  If 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.  Prosper is in ongoing negotiations with a loan servicing company willing and able to undertake servicing responsibilities on the outstanding borrower loans and Notes in the event Prosper can no longer do so.  Contract negotiations are ongoing and we expect our service contract to be finalized by December 31, 2008.  There can be no assurance that such company will be able to adequately perform the servicing of the outstanding borrower loans and Notes or maintain the operation of the trading platform in such event.  Additionally, transferring these servicing obligations to a third-party may result in delays in the processing and recovery of information with respect to amounts owed on the borrower loans and Notes or, if our platform becomes inoperable, may directly result in many borrowers defaulting on their loans.  If a third party servicer is not able to effectively service the Notes, lender members’ ability to receive principal and interest payments on the Notes may be substantially impaired.

 

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 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.

 

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;

 

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·                  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 Regulation—Regulation 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—Licensing and Consumer Protection Laws” 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 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, 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 through our platform if we were recharacterized as a lender, and the borrower loans could be voidable or unenforceable.  In

 

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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.

 

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.

 

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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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ABOUT THE PLATFORM

 

Overview

 

Prosper provides a person-to-person online credit auction platform, or “platform,” that enables its borrower members to borrow money and its lender members to purchase Notes issued by Prosper, the proceeds of which provide an indirect source of funding of specific loans made to individual borrowers.

 

Through our online platform, borrower members can request and obtain personal, unsecured loans by posting anonymous “listings” on the platform indicating the principal amount requested, the maximum interest rate the borrower is willing to pay and the term of the desired loan.  We also provide our lender members with the opportunity to facilitate the funding of specific borrower loans with credit characteristics, interest rates and other terms the lender members find attractive by purchasing Notes that in turn are dependent for payment on payments we receive on the corresponding borrower loan.  When a borrower registers on our platform, we request the borrower member’s social security number, state driver’s license or state identification card number and bank account information to verify the borrower member’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  We also assign one of seven letter credit grades (AA, A, B, C, D, E and HR (High Risk)), based on the borrower’s credit score, to each registered borrower who posts a listing.  The borrower members’ credit grades, debt-to-income ratios and other credit data are displayed with their listings and are available for viewing by lender members on an anonymous basis.  We also service the borrower loans on an ongoing basis.

 

Our platform operates online only.  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 generate revenue by charging borrowers loan origination fees and by charging lender members ongoing servicing fees on the Notes they have purchased.  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.

 

To borrow on our platform, borrowers must have:

 

·                  a minimum credit score of 520; and

 

·                  no prior charge-offs on borrower loans through our platform.

 

There are additional requirements for borrowers who have an existing loan through the platform, and want a second loan.  See “About the Platform—How the Platform Operates—Borrower Loan Requests” for more information.

 

We preserve the anonymity of our borrower and lender members, in that lender members and borrowers do not know, and are not able to obtain, each other’s actual names and addresses.  Our lender members and borrowers conduct transactions using Prosper screen names.  During our registration process, we verify the identity of borrowers by comparing supplied information against the records of a consumer reporting agency.  We also currently require verification of bank accounts.  Information presented in loan listings that is provided by the borrowers, however, is generally unverified.  Lender members should not rely on unverified information provided by borrowers.  In instances where Prosper chooses to verify the income, employment and occupation or other information provided by borrowers in listings, the verification is normally done at the pre-funding stage, after the listing has been already been created and bidding has ended.  In such cases, the results of our verification are not reflected in the listings themselves.  See “About the Platform—How the Platform Operates—Registration” for more information.

 

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We offer loans through our platform to borrowers throughout the United States.  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.

 

Borrowers who use our platform must identify their intended use of borrower loan proceeds in their initial loan listing.  As of October 16, 2008, among funded borrower loans, borrowers identified their intended use of loan proceeds as follows (most frequent to least frequent):

 

·                  debt consolidation;

 

·                  personal use;

 

·                  business use;

 

·                  home improvement;

 

·                  student use;

 

·                  auto financing; and

 

·                  other miscellaneous uses.

 

We do not verify or monitor a borrower’s actual use of funds following the funding of a borrower loan.

 

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.

 

The Online Person-to Person Lending Industry

 

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 borrower 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 borrowers;

 

·                  the possibility of attractive interest rates for lender members;

 

·                  the possibility for all lender members and borrowers 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.

 

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How the Platform Operates

 

Our online platform allows borrower members to request and obtain personal, unsecured loans by posting anonymous “listings” on the platform indicating the principal amount requested, maximum interest rate the borrower is willing to pay and the term of the desired loan.  We also provide our lender members with the opportunity to facilitate the funding of specific borrower loans with credit characteristics, interest rates and other terms the lender members find attractive by purchasing Notes that in turn are dependent for payment on payments we receive on the corresponding borrower loans.

 

The platform also allows for the formation of community groups and allows borrowers to participate on our platform as a member of a group.  Although borrowers do not need to join a group in order to request borrower loans on our platform, group affiliation may provide lender members additional information about a borrower and may motivate borrower payment performance.

 

If a borrower’s listing is matched with bids by lender members committing to purchase Notes sufficient to facilitate the funding of the amount of the requested borrower loan and certain borrower information can be verified, the borrower receives an unsecured, fully-amortizing borrower loan from WebBank, with a term ranging from three months to seven years, as designated by the borrower.  The loan is sold and assigned to Prosper, and Prosper performs certain administrative, clerical, recordkeeping, identity verification, payment processing, collection and other obligations related to the borrower loans and the Notes.

 

Borrowers are charged a transaction fee of 2.0% or 3.0%, depending on the borrower’s credit grade, of the borrower loan amount at the time the loan is funded, subject to a minimum fee of $75.  The transaction fee is payable from the proceeds of the borrower loan.  We may also assess additional failed payment charges.  We also receive from the lender members who own the Notes a servicing fee on the outstanding principal balance of the Notes, which we deduct from the payments we receive on the corresponding borrower loan.

 

If we are successful in establishing the Note trading platform, we intend to charge all selling lender members a nonrefundable resale listing fee of $0.25 per Note being listed for auction resale to cover administrative expenses.

 

Platform Participants

 

Borrowers.  A borrower 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, borrowers can request unsecured borrower loans at interest rates which are determined by an auction process.  We allow 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 borrowers.  Currently, a borrower must have a credit score of at least 520 in order to post a listing on our platform.

 

Lender members.  Our lender members are individuals and organizations that have the opportunity to buy our Notes.  Lender members must register on our website.  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.  Group leaders are individuals who serve as the head of a group of borrowers or prospective borrowers on our platform.  Group leaders are able to condition membership on personal facts and characteristics that may not be available to lender members generally.  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.

 

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

 

Financial Institution Borrower Members.  Certain commercial banks, savings banks and consumer finance companies may register with Prosper to become financial institution members who may offer previously-funded loans for sale to our lender members through the platform.

 

Registration

 

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.

 

Borrowers.  Borrowers must provide their social security number, state driver’s license or state identification number and bank account information so that Prosper can verify the borrower’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  Those who pass authentication are assigned one of seven “credit grade” credit score bands (AA, A, B, C, D, E, and HR (High Risk)) based on the credit score obtained by Prosper from an independent consumer reporting agency.

 

We also allow individuals to post listings on our platform as a member of a group.  Borrowers 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.  Borrowers’ 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 borrower 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.

 

Lender members.  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 borrowers, 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.

 

Lender members must deposit funds into a funding account prior to bidding on any listing on our platform.  No funds in the lender member’s funding account are ever commingled with Prosper’s own funds.

 

Group Leaders.  An individual must be registered as a borrower or a lender member on our platform in order to register as a group leader.  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 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.  Prior to September 2007, group leaders could receive compensation from Prosper based on the payment performance of borrower loans obtained on our platform by their group’s members.  Group leaders will continue to receive compensation related to borrower loans that resulted from their members’ listings posted before September 13, 2007 (the date as of which Prosper discontinued the payment of compensation to group leaders for borrower loans originated on or after this date).

 

Borrower Loan Requests

 

Once registered, borrowers may use our platform to request borrower loans in amounts ranging from $1,000 to $25,000.  In addition to the amount of the requested borrower loan, borrowers indicate the maximum

 

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interest rate they are willing to pay and the term of the loan, ranging from three months to seven years.  Borrowers’ requests for borrower loans – referred to as “listings” – are displayed and offered for auction on our platform by credit grade, debt-to-income ratio, borrower location and other characteristics drawn from the borrower’s credit report.  Borrowers may also provide a picture and a narrative describing personal characteristics or motivations which they believe may persuade lender members to bid on their listing.  All listings will be posted for seven days or a borrower can designate their listing for “automatic funding,” whereby the bidding period for the listing will end automatically as soon as lender commitments to purchase Notes totaling the amount of the borrower’s requested loan are received.  Borrowers may withdraw their listing without charge at any time prior to expiration of the listing.

 

Borrowers supply a variety of unverified information that is included in the borrowers’ loan listings on our website.  This information includes a borrower’s income, employment status, and occupation.  Employment and income information provided by the borrowers is not verified at the time listings are posted on the platform, and is verified in some cases at the pre-funding stage, after the listing has already been created and bidding has ended.  On the majority of loans originated on the platform, employment and income information is not verified.  Lender members have no ability to verify borrowers’ information.

 

Borrowers’ credit grades are posted with their listings, along with additional summary credit data from the borrower’s credit report as described under “—Borrower Loan Listings and Borrower Member Information Available on Our Website.”  If a new listing is posted more than 30 days after the borrower’s credit grade was last determined from the borrower’s credit report, we will initiate an inquiry to obtain another credit report in order to update the borrower’s credit grade and other credit data.

 

Borrower listings also display an estimate of the borrower’s non-housing debt-to-income ratio, or DTI, that would result if the borrower loan is funded.  In calculating a borrower’s DTI, we include as debt the borrower loan requested through our platform and use existing non-housing debt as shown on the borrower’s credit report, but we rely, without verification, on the borrower’s statement of income.  Listings also display the borrower’s self-reported occupation, employment status and range of income, and indicate whether the borrower is a homeowner.  In most instances, homeownership status is derived from the borrower’s credit report; if the report reflects an active mortgage loan, the borrower is presumed to be a homeowner (although borrowers may also provide proof of homeownership to establish homeownership status).  Listings also display the borrower’s group affiliation, if any, and the group’s rating and other characteristics.

 

Borrowers may have up to two borrower loans outstanding at any one time, provided that the aggregate outstanding principal balance of both borrower loans does not exceed the $25,000.  Currently, to be eligible to obtain a second borrower loan while an existing loan is outstanding:

 

·                  the existing loan must be current;

 

·                  AA and A rated borrowers must have an existing loan for 6 months, must not have been delinquent more than fifteen days in making their payments for the most recent 6 months of payments, and must not have decreased in credit grade more than one level since inception of the previous loan;

 

·                  B and C rated borrowers must have an existing loan for 9 months, must not have been delinquent more than fifteen days in making their payments for the most recent 9 months of payments, and must not have decreased in credit grade more than one level since inception of the previous loan; and

 

·                  D, E, and HR rated borrowers must have an existing loan for 12 months, must not have been delinquent more than fifteen days in making their payments for the most recent 12 months of payments, and must not have decreased in credit grade at all since inception of the previous loan.

 

Borrower eligibility requirements for second loans are subject to change from time to time.

 

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Minimum Credit Criteria and Underwriting

 

After we receive a loan listing, we evaluate whether the prospective borrowers meets the underwriting criteria we established with WebBank with respect to the borrower loans.  The underwriting criteria applies for all loans originated through our platform and may not be changed without WebBank’s consent.  The underwriting criteria requires borrowers to have:

 

·                  a minimum credit score of 520;

 

·                  no prior charge-offs on borrower loans originated through our platform.

 

There are additional requirements for borrowers who have an existing loan through the platform, and want a second loan.  See “How the Platform Operates—Borrower Loan Requests” for more information.

 

We assign one of seven letter credit grades (AA, A, B, C, D, E and HR (High Risk)), based on the borrower’s credit score, to each registered borrower who posts a listing.  We currently use Experian Scorex PLUS^SM credit scores, but may from time to time change the type or source of the credit scores it uses to determine credit grades.  Experian is one of the three leading consumer reporting agencies in the United States.  The Experian Scorex PLUS^SM model we use is proprietary to Experian and was built to predict the risk of new accounts.  Experian’s databases hold information about the credit status of more than 300 million consumers and about 30 million businesses around the world.  Experian collects this information from publicly available sources and from lending organizations.

 

A credit score is a number that attempts to forecast the likelihood of a prospective borrower’s performance of its obligations with respect to extensions of credit.  Scoring algorithms analyze historical data, such as a prospective borrower’s past credit history and payment records, and assign a numerical score of the prospective borrower.  A higher number is generally indicative of greater likelihood that the prospective borrower will pay his or her credit obligations.  Our seven letter credit grades correspond to seven credit score tiers, with more favorable credit grades assigned to the higher scores.  Therefore, a prospective borrower with a credit grade of AA is the most likely to make timely payments on his or her borrower loan and a prospective borrower with a credit grade of HR is the most likely to become delinquent or default on his or her payment obligations.

 

The following table shows the equivalent borrower Experian Scorex PLUS^SM credit scores for our letter credit grades:

 

Credit Grade

AA

A

B

C

D

E

HR

Experian Scorex PLUSSM

760 and up

720-759

680-719

640-679

600-639

560-599

520-559

 

We do not allow individuals with an Experian Scorex PLUS^SM credit score below 520 to post listings on our platform.

 

When a borrower initiates the process of posting a listing for a borrower loan on our platform, we check to see if we already have a credit grade on file for that person.  Currently, if credit grade on file for such borrower is not less than 30 days old, we initiate an inquiry to retrieve a credit score on the borrower and then assign the corresponding credit grade.  Borrowers’ credit grades are displayed with their listings and are available for viewing by lender members.  The numerical credit score is not displayed or disclosed to anyone (including the borrower).

 

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

 

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amount being requested.  Borrower income is self-reported, and on the majority of loans originated on the platform we do not verify the borrower’s income.

 

Borrower Financial Information is Generally Unverified

 

As discussed above, information presented in loan listings that is provided by the borrowers is generally unverified.  Lender members should not rely on unverified information provided by borrowers.  In instances where we choose to verify the income, employment and occupation or other information provided by borrowers in listings, the verification is normally done at the pre-funding stage, 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 borrowers, lender members and group leaders in connection with listings, bids and borrower loans.  We may conduct our review at any time—before, during or after the posting of a listing, or before or after the funding of a borrower loan.  If we are unable to verify material information with respect to a borrower, 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 borrower loan in order to enable us to verify the accuracy of information provided by a borrower, 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 borrower loan, even if the listing garners a sufficient amount of purchase commitments for Notes to otherwise support the funding of the corresponding borrower loan, if material misstatements or inaccuracies are found in the listing or in other information provided by the borrower.

 

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

 

In connection with our identity and anti-fraud verification of borrowers, we verify the deposit account from which the borrower will make payments, to determine that the borrower 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 borrower loan if we are unable to verify the borrower’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 borrowers.  When we perform these verifications, we contact borrowers by email or telephone to request additional information.

 

If the borrowers fail to provide satisfactory information in response to an income or employment verification inquiry, we may request additional information from the borrowers or cancel the borrower’s listing or refuse to proceed with the funding of the borrower loan.

 

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

 

·                  approximately 56.7% 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

 

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

 

We conduct income and employment verification entirely in our discretion as an additional credit and fraud screening mechanism.  We believe that our ability to verify a borrower’s income may be useful in certain circumstances in screening our platform against exaggerated income and employment representations from borrowers.  Lender members, however, should not rely on a borrower’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 borrowers who ultimately have their income and employment verified, will decline as our volumes increase.  See “Risk Factors—Risk Related to Borrower Default—Information supplied by borrowers may be inaccurate or intentionally false” for more information.

 

Transaction Fees

 

Borrowers are charged a transaction fee by WebBank equal to the greater of $75 or a percentage of the principal amount of the borrower loan at the time of funding.  The applicable transaction fee percentage is based on the credit grade of the borrower as shown in the table below:

 

Credit Grade		AA		A		B		C		D		E		HR
Transaction Fee		2	%	2	%	2	%	3	%	3	%	3	%	3	%

 

Standard Terms of the Borrower Loans

 

All Prosper borrower loans are closed-end, unsecured obligations of individual borrowers with a fixed interest rate and loan terms ranging from three months to seven years.  Borrower loans have an amortizing, monthly repayment schedule and may be repaid in whole or in part at any time without prepayment penalty.  See “About the Platform—Description of the Notes” for more information.

 

Borrower Loan Listings and Borrower Member Information Available on the Our Website

 

Once a loan listing is completed by the borrower, the listing is posted on our website and then becomes available for viewing by lender members.  Lender members are also then able to bid to buy Notes that will be dependent for payments on that borrower loan.  Borrower loan requests appear under Prosper screen names, not actual names.  Lender members are able to view:

 

·                  the requested loan amount;

 

·                  the borrower’s credit grade (determined using the process described above), current interest rate, DTI percentage and the annual percentage rate for the borrower loan;

 

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

 

·                  whether the borrower owns a home;

 

·                  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;

 

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·                  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;

 

·                  friends and family of the borrower who have committed to purchase Notes dependent for payment on that borrower loan;

 

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

 

·                  the borrower’s group affiliations;

 

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

 

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

 

Borrowers who use our platform must identify their intended use of the loan proceeds.  For borrower loans funded between January 1, 2008 and September 30, 2008, borrowers 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%)

 

Potential borrowers 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 borrowers and lender members are anonymous to each other, lender members may ask borrowers questions about the loan listing and borrowers may, but are not required to, respond to such questions.  Borrowers 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 borrower 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 borrowers’ responses to lender members’ questions.

 

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Borrower loan posting and borrower 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.  Borrower loan posting and borrower information filed in prospectus supplements will be subject to the liability provisions of the Securities Act.  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 group’s reputation—to meet their obligation to repay a borrower loan.

 

Borrower listings identify the group, if any, to which the borrower belongs.  Groups are rated according to the collective repayment performance of the group’s members on borrower loans, and the group ratings are displayed on our platform.  We believe that highly-rated groups (i.e., those with members who reliably repay their borrower loans) may draw more favorable bids from lender members, resulting in borrower loans with lower interest rates for the group’s borrowers.  We also believe that the group structure may positively influence borrowers’ borrower loan repayment performance, in that borrowers in groups may be less likely to default since default would negatively affect the group to which they belong.

 

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.

 

How to Bid to Purchase Notes

 

A bid on a 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 received on a borrower loan described in the listing, and the minimum interest rate they are willing to receive.  A 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 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 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.

 

To bid selectively, lender members may browse online through available borrower listings displayed on our platform by desired borrower loan amount, current auction interest rate, borrower credit grade, non-housing debt-to-income ratio, and group and other borrower characteristics.  A lender member can bid on as many Notes 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 Note that will be dependent for payment on a borrower loan

 

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issued pursuant to that borrower listing, the minimum interest rate the lender member is willing to receive, the acceptable borrower credit grade or grades 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 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.

 

In order to make Note purchase commitments by bidding on 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.

 

It is expected that a single 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 borrower’s 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.  Borrowers whose listings expire due to an insufficient amount of bids may post a new loan listing on our platform.

 

Treatment of Lender Member Balances

 

In order to make Note purchase commitments by bidding on borrower 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.

 

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.

 

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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.

 

Loan Funding and Purchases of Notes

 

Once a lender member has committed to purchase a Note that is dependent for payment on the corresponding borrower loans and the listings for such borrower loan receives bids from lender members totaling the loan amount requested, we proceed with the funding of the corresponding borrower loan and with the sale of the Notes to the lender members.

 

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.  The amount of the transaction fee is determined by the credit grade of the borrower and currently ranges from 2.0% to 3.0% of the principal amount of the borrower loan, subject to a $75 minimum transaction fee, as set forth in the chart above under “—Transaction Fees.”

 

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 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, 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

 

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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.

 

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 November 20, 2008, we had experienced 18 cases of confirmed identity fraud affecting 31 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 of the corresponding borrower loans, we begin servicing the borrower loans.

 

We assess lender members a servicing fee in respect of their Notes.  Our servicing fee is equal to an amount corresponding to an annualized rate of 1.0% of the outstanding principal balance on the corresponding borrower loan.

 

Our procedures for collecting borrowers’ 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 the borrower loans.  We have also made arrangements for collection procedures in the event of borrower member default.  When a 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 fees we receive are paid to holders of the Notes dependent for payment on that 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 that 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 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.

 

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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.” 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 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 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 borrower loan.  We also defer any other collection activity.  The status of the borrower loan, which the relevant lender members may view, switches to “bankruptcy.”  We next determine what we believe to be an appropriate approach to the member’s bankruptcy.  We first 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 will 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.

 

Borrower Payment Dependent Notes based on Previously-funded Loans

 

In addition to loans requested by borrowers and originated through our website, our platform also enables certain financial institution members to offer previously-funded loans for sale by posting listings on our platform indicating the remaining principal balance of the loan and the interest rate the borrower is obligated to pay on the loan.  Previously-funded loans offered for sale by our financial institution members are made by the financial institution offering the loan for sale, and have a fixed interest rate and maturities of between three months and seven years.  These previously-funded loans may be unsecured or secured by real property or personal property.

 

Lender members access our platform and make purchase commitments for Notes that are dependent for payment on payments we receive on the corresponding previously-funded loan.  Lender members bid the amount they are willing to commit to the purchase of a Note that is dependent for payment on the corresponding previously-funded loan, and the minimum interest rate they are willing to receive.  At the close of the auction bidding period if bids totaling the sale price are received, the financial institution sells and assigns the loan to Prosper, without recourse to the financial institution, in exchange for the proceeds from the sale of the Notes to the lender members who were the winning bidders.  We in turn issue Notes that are dependent for payment on payments we receive on that previously-funded borrower loan.  We use all proceeds from the sale of the Notes to purchase the corresponding previously-funded loan from the financial institution member that posted the loan for sale.

 

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Financial institution members offering previously-funded loans for sale on the platform have no obligation to purchasers of the Notes.  The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding previously-funded loan or the proceeds of such previously-funded loan, even though the corresponding loan upon which the Notes are dependent for payment may be secured by real property or personal property.

 

Although Prosper obtains the borrower’s social security number, name and address from financial institution members offering previously-funded loans for sale, we do not obtain any documentation of the borrower’s ability to afford the loan.

 

Participation in the Funding of Borrower Loans by Prosper

 

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.

 

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 resales of 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 historical information from the original loan posting for the borrower loan corresponding to the Note and the payment history for the Note.

 

To cover administrative costs, Prosper intends to charge subscribers who post resale listings a nonrefundable resale listing fee of $0.25 per Note being listed for resale.  Resale listing fees 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 Prosper’s 1.0% fee for servicing the Note payments.

 

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 1.0% 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.

 

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,

 

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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 as well as Notes purchased from other subscribers through the trading platform.  Notes on which borrowers have become delinquent will be eligible for resale on the trading platform.  There is no limit on the number of times Notes may be resold on the trading platform, so long as they are outstanding.

 

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.  The lowest minimum sale price subscribers may offer in a resale listing will be $0.50.

 

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 allow the selling subscriber to set an automatic sale price, would end the bidding period on a resale listing immediately after the listing receives an initial bid equal to the price, and 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 borrower listing (including the listing title, description, credit data, recommendations, questions and answers, and original bidding history) 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 borrower 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 borrower 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; subscriber withdrawals from the subscriber’s funding account are prohibited to the extent any such withdrawal would reduce the balance below the aggregate amount of the subscriber’s pending bids on borrower 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.

 

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).

 

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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, the final sale price is immediately withdrawn from the winning subscriber’s funding account to pay the selling subscriber.

 

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 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 borrowers 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 Our Borrowers 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 performance of loans to date has been consistent with the credit information presented to lender members.

 

Since our inception in November 2005 through October 16, 2008, we have facilitated 28,941 borrower loans with an average original principal amount of $6,172 and an aggregate original principal amount of $178,626,522.  As of November 20, 2008, 64.4% of outstanding borrower loans were current, 15.4% had been paid in full, 1.4% were 15 to 30 days late, 4.2% were more than 30 days late, and 14.6% had been charged off.  A borrower loan is charged off when it is more than 120 days past due or when it has been discharged in bankruptcy.

 

As of November 20, 2008, the charged off loans were comprised of 4,216 borrower loans, equaling a total charged off amount of $21,844,881.  Of these 4,216 charged off loans, 602 loans with an aggregate charged off amount of $3,676,360 were subject to bankruptcy of the borrower.

 

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 late borrower loans, the following table shows the entire amount of the principal remaining due (not just that particular payment.)

 

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