Peer-to-Peer Lending: Problems and Promise

Just when it might have proved most useful, peer-to-peer lending has been severely hamstrung by the U.S. Securities & Exchange Commission's efforts to get a regulatory handle on the fledgling industry. With the credit crisis making it harder and harder for cash-strapped households and small businesses to get bank loans, the opportunity for creditworthy applicants to borrow up to $25,000 from strangers at slightly higher interest rates was seen as something of a godsend.

In a cease-and-desist order to Prosper.com on Nov. 24, 2008, the SEC labeled the loan notes that Prosper issued to investors as securities and said the company violated sections of the Securities Act between January 2006 and mid-October 2008, by selling securities without an effective registration statement or valid exemption from registration. The order cited the definition of a security under two Supreme Court cases as the basis of its judgment that Prosper's notes qualify as securities.