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The SEC also found that Prosper notes fall into the category of securities under the precedent established by the Supreme Court's opinion in Reves v.
Considering the first element of the family resemblance test, Prosper notes resemble securities based on buyer and seller motivations.
Secondly, Prosper notes resemble securities with regard to the plan of distribution.
Third, Prosper lenders reasonably expect that the purchase of notes on the platform is an investment* Reves states that the "fundamental essence of a 'security' [is] its character as an 'investment.
154) Prior to the cease-and desist-order, lenders were completely reliant on the statements from Prosper and individual borrowers in making investment decisions, with no regulatory supervision.
After evaluating Prosper notes with respect to the four factors of the family resemblance test it is clear that the notes were properly designated as securities under the precedent in Reves.
Dodd-Frank has changed the analysis of Prosper notes with respect to the fourth element of the test, as the new Bureau of Consumer Financial Protection (BCFP) could provide an alternative regulatory scheme for the notes without characterizing them as securities.
Instead of taking on the SEC as Prosper did, once notified that their notes should be registered, Lending Club decided to cooperate and filed a registration statement with the SEC on June 20, 2008.
Compliance with SEC regulations is costly with Prosper spending more than $1 million annually in addition to the $5 million spent completing the registration process, m order to comply with SEC rules.
172) Although Prosper was hopeful that Dodd-Frank would bring regulatory change to the P2P industry, it does not appear that Dodd-Frank will provide any significant changes to the current regulation, as discussed further below.
The services provided by Prosper and Lending Club fall within the established definition of "financial product or service," outlined above.
Efficiently operating P2P markets, allowing for access and innovation, are some of the regulation characteristics Prosper CEO Chris Larsen pleaded for throughout the legislation process, arguing that the current SEC regulations drive costs up and detract from innovation in the sector.