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[Investar]

Kansas has ordered Prosper to pay $5,311 to the Office of the Kansas Securities Commissioner Investor Education Fund. Kansas declared that Prosper sold securities that were not registered with the office of their securities commissioner in violation of Kansas law. Securities Commissioner, Chris Biggs proclaimed 11,805 Kansas lenders were adversely affected and reported these folks invested a total of $951,183 on Prosper. That indicates each participant was 'snookered' to the tune of a mere $80. It seems likely far fewer among their citizenry were affected and those folks funded 11,805 Prosper borrowers in whole or part.

PDF of Order
http://www.ksc.ks.gov/proceed/synops09/PropserConsent_6_15_09.pdf

Background on the NASAA settlement and list of other states who have (publicly) issued their sanction:
http://www.prospers.org/forum/prospers_settlement_with_state_securities_regulators_previewreview-t16017.0.html

«Lobby please»

[God-Father]

Second for lobby

[Faithful_Steward1]

With all these states declaring these illegal securities, it seems like the class action lawsuit should be a slam dunk.

[NewHorizon]

I can't help but wonder, in my decidedly unlawyerly way, what would happen if Prosper is successful at convincing the U.S. gov't that P2P lending is a banking function, not securities trading -
http://www.newcreditmodels.com/news/2009/10/20/financial-start-ups-form-coalition-for-new-credit-models.html - and to accomplish this before the class action litigation concludes (not to mention before Prosper itself goes out of business).

[ira01]

With all these states declaring these illegal securities, it seems like the class action lawsuit should be a slam dunk.

The actions of "all these states" is irrelevant to the class action (which only asserts claims under federal and CA law).

[ira01]

I can't help but wonder, in my decidedly unlawyerly way, what would happen if Prosper is successful at convincing the U.S. gov't that P2P lending is a banking function, not securities trading -
http://www.newcreditmodels.com/news/2009/10/20/financial-start-ups-form-coalition-for-new-credit-models.html - and to accomplish this before the class action litigation concludes (not to mention before Prosper itself goes out of business).

I don't think this would have any effect on the class action, because the class action concerns whether Prosper unlawfully sold unregistered securities in the past, while any legislation would simply reclassify P2P lending for the future.  Put another way, just because Congress might change the rules doesn't mean that Prosper didn't break the old rules. 

[Investar]

I can't help but wonder, in my decidedly unlawyerly way, what would happen if Prosper is successful at convincing the U.S. gov't that P2P lending is a banking function, not securities trading -
http://www.newcreditmodels.com/news/2009/10/20/financial-start-ups-form-coalition-for-new-credit-models.html - and to accomplish this before the class action litigation concludes (not to mention before Prosper itself goes out of business).

+1 @ Ira but it would give them back their lenders in the 24 'curmudgeon' states.

[NewHorizon]

Put another way, just because Congress might change the rules doesn't mean that Prosper didn't break the old rules. 

But atm, there are no rules specific to P2P lending.  Only the SEC's interpretation of these "old rules".

Let's say you and your friends are walking down the street whistling.  The police throw you guys in jail for "disturbing the peace" because (for the purposes of this example), that's the only law that comes close applying to the whistling.

While you're preparing to vigorously defend yourselves in court, the local gov't passes legislation that specifically says  whistling while walking down the street is permitted.  Is there still a case against you for disturbing the peace?

[bamalucky]

The SEC alreadyhad rules for selling unlicensed securities. IMO that isn't whistling.

[NewHorizon]

The SEC alreadyhad rules for selling unlicensed securities. IMO that isn't whistling.

Using the analogy, I'm saying the SEC has rules against "disturbing the peace".

[bamalucky]

The SEC alreadyhad rules for selling unlicensed securities. IMO that isn't whistling.

Using the analogy, I'm saying the SEC has rules against "disturbing the peace".

You aren't making any sense.

[ira01]

Put another way, just because Congress might change the rules doesn't mean that Prosper didn't break the old rules. 

But atm, there are no rules specific to P2P lending.  Only the SEC's interpretation of these "old rules".

Let's say you and your friends are walking down the street whistling.  The police throw you guys in jail for "disturbing the peace" because (for the purposes of this example), that's the only law that comes close applying to the whistling.

While you're preparing to vigorously defend yourselves in court, the local gov't passes legislation that specifically says  whistling while walking down the street is permitted.  Is there still a case against you for disturbing the peace?

Probably yes, because most laws are prospective only -- not retroactive.  For example, when Prohibition ended, that didn't void the convictions (or bar prosecutions) of people who illegally sold alcohol during Prohibition.  Moreover, criminal law is not the same as civil law -- and the class action is a civil case, not criminal.

[NewHorizon]

The SEC alreadyhad rules for selling unlicensed securities. IMO that isn't whistling.

Using the analogy, I'm saying the SEC has rules against "disturbing the peace".

You aren't making any sense.

Of course there are rules against unlicensed securities.
But let's back up.

Which legislation classifies P2P loans as securities in the first place?
Answer: none.  
We only have the SEC's interpretation of the "old rules" (referring back to when Prosper tried to convince the SEC that Prosper didn't need to file with the SEC and the SEC answered, "We think that you do.").


Well, anyway, I see ira01 responded as I write this.  And a very sensible reply it was!  
So that answers it for me.  Thanks, ira.

[bamalucky]

Which legislation classifies P2P loans as securities in the first place?

Loans resold are securities. You seem to be hung up on the p2p part

[NewHorizon]

Well fwiw, Prosper had argued that,

The Notes are debt instruments issued by Prosper pursuant to an indenture that will be governed by New York law.  As a matter of New York contract law, Prosper will be the sole obligor in respect of the Notes.

... and ...

The United States Supreme Court has made clear that not all “notes” constitute securities and that a literal interpretation of Section 2(1) is not appropriate.  Reves v. Ernst & Young, 494 U.S. 56, 63 (1990).  Rather, the Court held that notes are issued in a variety of consumer and commercial contexts in which the notes are not properly viewed as securities.  Id. at 64-65.  The Reves decision adopted a non-exclusive list for those types of notes that are not securities, including, as relevant here, notes delivered in consumer financing, and notes evidencing a character loan to a bank customer.  Id. at 65.  Reves also acknowledged that this list should extend to notes that bear a “family resemblance” to the types of notes identified by Reves.  Id.  The following factors are used in the “family resemblance” approach:  (i) the motivations that would prompt a reasonable seller and buyer; (ii) the plan of distribution; (iii) the reasonable expectations of the public; and (iv) the presence of risk-reducing factors.  Id. at 66-67.

More dense verbiage at http://www.sec.gov/Archives/edgar/data/1416265/000110465909003175/filename1.htm

Apologies if it was confusing for me to refer to these "notes" as "P2P loans".