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[Xenon481]

Prosper Funding LLC ("PFL") is a new company which is wholly owned by Prosper Marketplace Inc ("PMI").

PFL S-1: http://www.sec.gov/Archives/edgar/data/1416265/000114036112052353/forms1a.htm
PMI S-1: http://www.sec.gov/Archives/edgar/data/1416265/000114036113001267/formposam.htm

PFL has been organized and will be operated in a manner that is intended to minimize the likelihood that it will (i) become subject to bankruptcy proceedings or (ii) be substantively consolidated with the Company [PMI], and thus have its assets subject to claims by the Company’s [PMI's] creditors, in the event the Company [PMI] becomes subject to a bankruptcy proceeding.

PMI formed PFL specifically to shield assets from PMI's potential bankruptcy.

The Company [PMI] intends to restructure its platform so borrower loans are held by PFL and PFL issues and sells the borrower payment dependent notes tied to the loans.

Once PFL is up and running, PMI intends to no longer issue any borrower dependent notes, but instead have PFL doing all of that stuff.

[...] the Company [PMI] intends for PFL to assume all outstanding Notes issued by the Company.

PMI intends to transfer all of its notes (current and future) to PFL up until the time that PFL starts directly releasing its own notes instead. As stated earlier, this is specifically with the intent to shield/hide all of the existing notes from a potential upcoming PMI bankruptcy.

Prior to February 1, 2013, we [PMI] will enter into an Asset Transfer Agreement (the “Asset Transfer Agreement”) with Prosper Funding pursuant to which we [PMI] will (i) transfer the platform and substantially all of our assets and rights related to the operation of the platform to Prosper Funding and (ii) make a cash contribution to Prosper Funding of between $3 million and $6 million.

Under the Asset Transfer Agreement, we [PMI] will also transfer substantially all of our [PMI] remaining assets to Prosper Funding, including (i) all outstanding Notes issued by us [PMI] under the Indenture (the “Indenture”) dated June 15, 2009 between us and Wells Fargo Bank, as trustee (the “Trustee”), (ii) all borrower loans held by us, (iii) all lender/borrower/group leader registration agreements related to our Notes or our borrower loans and all other agreements entered into with our lender and borrower members or delivered to us by any of them, (iv) all documents and information related to the foregoing, and (v) the accounts of PMI held at the Trustee for the benefit of holders of Notes.

PMI isn't just going to transfer the notes to PFL, they are transferring almost everything in an attempt to hide it all from a potential bankruptcy.

In the Asset Transfer Agreement, we [PMI] will agree, among other things, to:
    

• fund any repurchase obligation with respect to Notes issued by us and transferred to Prosper Funding, and indemnify Prosper Funding for any other losses that arise out of any lender/borrower/group leader registration agreement related to such Notes or borrower loans transferred by us to Prosper Funding, including as a result of a breach by us of any of our representations or warranties made therein;
• fund any arbitration filing or administrative fees or arbitrator fees payable under any lender/borrower/group leader registration agreement related to Notes issued by us and transferred to Prosper Funding or borrower loans transferred by us to Prosper Funding; and
• fund any indemnification obligations that arise under any group leader registration agreement entered into by us prior to the date of the Asset Transfer.

To me, this says that even though the otherwise lifeless and empty shell which will be PMI will have essentially next to no assets, they [PMI] will be the ones on the hook for any bad things that PMI did/caused and PFL will be free and clear even though PFL has all of the assets. This just sounds like it shouldn't be legal to me.

We [PMI] will continue to service the borrower loans we transferred to Prosper Funding pursuant to the Administration Agreement between us [PMI] and Prosper Funding.  Under the Administration Agreement, we [PMI] will agree, among other things, to use commercially reasonable efforts to service and collect the borrower loans we transferred to Prosper Funding and will indemnify Prosper Funding for any losses as a result of our [PMI] breach of such obligation.

So, PMI will keep the servicing rights?

Holders of Notes issued by us [PMI] and transferred to Prosper Funding will be third party beneficiaries under the Asset Transfer Agreement and the Administration Agreement.

Does this have any specific legal/financial ramifications on the existing PMI note holders?

Among other changes, the Amended and Restated Indenture will expand the scope of the security interest granted to the Trustee [Wells Fargo] for the benefit of holders of Notes to be consistent with the scope of the security interest granted to the Trustee for the benefit of the holders of the notes to be issued by Prosper Funding.  Specifically, Prosper Funding has granted the indenture trustee [Wells Fargo], for the benefit of the Note holders, a security interest in the borrower loans, the payments and proceeds that Prosper Funding receives on the borrower loans, the bank account in which the borrower loan payments are deposited and the FBO account.  The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the Amended and Restated Borrower Payment Dependent Notes Indenture for the Notes, which would include Prosper Funding’s becoming subject to a bankruptcy or similar proceeding.

So, Wells Fargo will now have a security interest in the loans, payments, and the idle cash sitting in PFL so that those things get priority before unsecured debtors in any BK.

[Beerbud1]

Lobby!

[NewHorizon]

Isn't this called a "remote bankruptcy vehicle"?
http://en.wikipedia.org/wiki/Bankruptcy_remote

I didn't read closely, but among other things, I think it precludes PMI creditors from laying claim to borrower repayments in the event PMI goes bankrupt.  New and current lenders presumably like this.

+1 for Lobby.

[nonattender]

I didn't read closely, but among other things, I think it precludes PMI creditors from laying claim to borrower repayments

My understanding of the legalese is that I now "more fully own" the notes, which I have purchased with my own money - in that they are protected from
being raided by anyone for any reason arising either from within or without of the operations of the platform.  They are more like "my loans" - once again.

New and current lenders presumably like this.

http://www.prosper-stats.com/SearchResults.jsp?dateMin=2009-01-01&dateMax=&sn=nonattender&slM=&slX=&tm=

Indeed!  I'm likin' it!

[Xenon481]

From the PFL S-1:

The PMI Management Rights will not be separable from the Notes offered on the platform and will not be assigned a value separate from the Notes.

When you purchase Borrower Dependent Notes from PFL, you will also be purchasing PMI Management Rights.

Investors [of PMI Management Rights] will have limited contractual rights, collectively through the indenture trustee, to enforce Prosper Marketplace Inc.’s contractual obligations under the Administration Agreement.

Does this mean that a "lender" can't ask PFL for recision of a Borrower Dependent Note if PMI completely botches its loan servicing duties?

Only the indenture trustee, not the holders of the Notes, has a security interest in the above collateral. [...] There can be no assurance, however, that the indenture trustee, or ultimately the Note holders, would realize any amounts from the collateral.

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

Note holders can't seek PMI's money in the event of a PFL bankruptcy.

[...] there can be no assurance that if it [PFL] is obligated to repurchase a Note or indemnify a Note holder, that it will be able to meet its repurchase or indemnification obligation.  If Prosper Funding is unable to meet its indemnification and repurchase obligations, you may lose all of your investment in the Note.

PFL doesn't have enough money to cover the possibility of a large number of recisions. If such is required, a "lender" may lose all of their investment even if PMI does have enough money to cover the recision.

Holders representing at least 25% of the combined total of the outstanding Notes offered hereby and the PMI Notes, collectively, will have the contractual right to cause the indenture trustee to take action as a third-party beneficiary of the Administration Agreement to enforce PMI’s loan servicing obligations under the Administration Agreement.

 

Arrangements for back-up servicing are limited.  If PMI fails to maintain operations or the Administration Agreement is rejected or terminated (in bankruptcy or otherwise), you may experience a delay and increased cost in respect of your expected principal and interest payments on your Notes, and Prosper Funding may be unable to collect and process repayments from borrowers.

Since PMI is doing the servicing, not PFL, if/when PMI goes BK, all of the general "what happens to loan servicing" still exists in this new setup.

Moreover, PMI owns and is not transferring to Prosper Funding ownership of the computer hardware that it currently uses to host and maintain the website or agreements with third parties relating to the hosting and maintenance of the website.

Since PFL doesn't have the hardware to do the servicing, they can't take over in the event of a PMI BK.

If Prosper Funding becomes subject to a bankruptcy or similar proceeding a holder of a Note may not have any priority right to payment from the corresponding borrower loan, may not have any right to payment from funds in the deposit account, and may not have any ability to access funds in the account maintained for the benefit of lender members.

In a bankruptcy or similar proceeding for Prosper Funding, the holder of a Note may be delayed or prevented from enforcing Prosper Funding’s repurchase obligations.

Although Prosper Funding has been organized in a manner that is intended to prevent it from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if Prosper Funding were substantively consolidated in this manner, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped.  The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note.

PMI, in its capacity as servicer, has the authority to waive or modify the terms of a borrower loan without the consent of the Note holders.

PMI has the authority to forgive loans and thus prevent lenders from receiving additional payments, all without consent of the lenders and you can't go back to PFL looking for the lost money.

PMI faces a contingent liability for securities law violations in respect of PMI Borrower Loans sold to its lender members from inception until October 16, 2008.  This contingent liability may impair its ability to perform its obligations under the Administration Agreement.

If PMI goes BK because of the class action lawsuit, then loans may go unserviced.

if the class action securities lawsuit is successful, PMI’s ability to perform its obligations under the Administration Agreement may be adversely affected and, in such event, Prosper Funding’s ability to continue to make payments on the Notes could be materially impaired.

And thus unpaid.

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

[ira01]

I didn't read closely, but among other things, I think it precludes PMI creditors from laying claim to borrower repayments in the event PMI goes bankrupt.  New and current lenders presumably like this.

That's certainly the intent.  Whether it will actually work is a gigantic open question.  Given the current existence of the class action, and the specter of a possible $50M+ judgment currently hanging over Prosper's head, this looks an awful lot like a fraudulent conveyance to me.  It is by no means certain that this maneuvering will be effective, so if I were a P3 lender, I would still be very concerned.

[ira01]

I think one of the class representatives needs to bring this to the attention of Class Counsel.  Since it appears that Prosper may be trying to remove many millions of dollars of its current assets from the reach of its creditors, Class Counsel should be aware of this, and may want to bring it to the attention of the Judge in the class action.  Class Counsel might even want to seek to enjoin Prosper's actions.  But that is all up to Class Counsel, once it is made aware of Prosper's maneuverings. 

[Beerbud1]

I think one of the class representatives needs to bring this to the attention of Class Counsel.  Since it appears that Prosper may be trying to remove many millions of dollars of its current assets from the reach of its creditors, Class Counsel should be aware of this, and may want to bring it to the attention of the Judge in the class action.  Class Counsel might even want to seek to enjoin Prosper's actions.  But that is all up to Class Counsel, once it is made aware of Prosper's maneuverings. 

Done!

[NewHorizon]

FWIW, Prosper Funding LLC was formed last February and announced at least as far back as the S-1 filing last March.

We're slipping.   

[cubbiesnextyr]

FWIW, Prosper Funding LLC was formed last February and announced at least as far back as the S-1 filing last March.

We're slipping.   

Not really, it was mentioned back in May and discussed.

P35

In February 2012, we formed Prosper Funding LLC, a Delaware limited liability company (“PFL”). We are the sole member of PFL and its accounts have been consolidated with the consolidated financial statements presented in this report. PFL has been organized and will be operated in a manner that is intended to minimize the likelihood that it will (i) become subject to bankruptcy proceedings or (ii) be substantively consolidated with the Company, and thus have its assets subject to claims by the Company’s creditors, in the event the Company becomes subject to a bankruptcy proceeding.

[Xenon481]

FWIW, Prosper Funding LLC was formed last February and announced at least as far back as the S-1 filing last March.

We're slipping.   

Not really, it was mentioned back in May and discussed.

P35

In February 2012, we formed Prosper Funding LLC, a Delaware limited liability company (“PFL”). We are the sole member of PFL and its accounts have been consolidated with the consolidated financial statements presented in this report. PFL has been organized and will be operated in a manner that is intended to minimize the likelihood that it will (i) become subject to bankruptcy proceedings or (ii) be substantively consolidated with the Company, and thus have its assets subject to claims by the Company’s creditors, in the event the Company becomes subject to a bankruptcy proceeding.

Exactly. The key thing that has changed is that PLF and PMI have both put out S-1's describing in detail how things will actually work.

[Beerbud1]

Just got an e-mail from prosper announcing this

[msava]

I just don't trust Prosper. This just smells.

[loanuniverse]

So that is the email I deleted earlier.

I thought it was one of those emails asking me to go back to lending.

[cubbiesnextyr]

Just got an e-mail from prosper announcing this

Me too.  Here it is, received in my email 1/9/13 at 5:27pm CT

Last February, Prosper Marketplace, Inc. formed a new subsidiary called Prosper Funding LLC ("PFL"). PFL was formed for two primary purposes: first, to minimize the likelihood of its own bankruptcy proceedings; and second, to insulate its assets from potential claims by Prosper Marketplace, Inc.'s creditors.
This new structure is a first for peer-to-peer lending. By creating PFL, Prosper investors - from the smallest account to the largest institution - will experience protection for their Notes unparalled in the industry. And at the same time we also will be transferring all current Notes to PFL, so your existing investments will receive the new protections as well.
We are happy to announce that the new structure will become effective on February 1, 2013. While this is great news, we know that this change is complex, so here are some questions that we anticipate you might have in the interim:
1.   What does this really mean for me?
The new offering includes a number of new protections for you, from the insulation provided by PFL's structure to an actual lien on the loans which correspond to the Notes in your portfolio. For full details you should refer to our new Prospectus linked below.
2.   Are my existing Notes protected?
Yes. Prosper Marketplace, Inc. is transferring all existing Notes and corresponding borrower loans to PFL, which will provide existing Note holders with the same protections from bankruptcy that PFL Note holders will have. You can think of this as an upgrade for your existing portfolio.
3.   What will I need to do next?
Starting February 1, you will need to agree to the Prosper Funding LLC Lender Registration Agreement to continue investing in Notes. You should also review a copy of the new prospectus for information regarding the risks and benefits of the new offering. Once that's complete, you should be good to go. We'll handle everything else on the back-end.
We hope that you are as excited by this news as we are, and thank you again for your continued commitment to Prosper - where it's now a better time to invest than ever.
Best regards,
The Prosper Team