to-Peer: Fostering Innovation

Report
Brian Korn, Pepper Hamilton LLP
Braden Perry, Kennyhertz Perry
Rick Eckman, Pepper Hamilton LLP
Candace Klein, Dealstruck, Inc.
#LEND360 ● LEND360.org
Brian Korn of Pepper Hamilton LLP
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Corporate and Securities practice group, based in New York
Hands-on transaction execution and market expertise across
product categories, including equity capital markets, debt
capital markets, leveraged finance and private equity
Former in-house counsel at Barclays and Citigroup
investment banks
Specialist in IPOs, the JOBS Act and SEC compliance, as well
as early-stage fundraising, high yield debt and
swaps/derivatives
Media Appearances: Fox Business Television, Bloomberg,
NPR, CCTV America
Published or Quoted: Forbes, CNBC, MSNBC, New York Law
Journal, Law360, Philadelphia Inquirer, Pittsburgh PostGazette, The Financier, Review of Securities & Commodities
Regulation
Seasoned 16 year securities expert and frequent speaker:
PLI, NYC Bar faculty member; Speaker at national securities
and crowdfunding conferences
Board Member, Crowdfunding Professional Association
J.D. Northwestern University School of Law
B.A. with Honors and Distinction, University of California,
Berkeley
212.808.2754
[email protected]
Richard P. Eckman is a partner in the
Wilmington office of Pepper Hamilton
LLP. He is a finance and transactional
lawyer and chairs the firm’s Financial
Services Practice Group. He has practiced
consumer financial services law for over
35 years representing financial
institutions, non-depository lenders,
investors, and service providers in
product design, compliance matters,
strategic transactions, government
investigations and enforcement actions.
302.777.6580
[email protected]
Braden Perry, partner in the Kansas
City-based law firm of Kennyhertz
Perry, LLC is a former federal
enforcement attorney and veteran in
government compliance, having over
10 years of experience in the areas of
financial services compliance, internal
investigations, enforcement matters,
regulatory issues, and litigation. He
currently advises highly regulated firms
and frequently speaks on compliance
and regulatory topics. He was
previously a Senior Trial Attorney for
the U.S. Commodity Futures Trading
Commission and the Chief Compliance
Officer of a global financial firm.
816.527.9447
[email protected]
Candace Klein is Chief Strategy Officer for Dealstruck
(dealstruck.com), an alternative Peer-to-Peer lending
platform that provides loans and lines of credit to small
business borrowers. Prior to Dealstruck, Candace coauthored the legislation that became the JOBS Act, then
chaired the Crowdfund Intermediary Regulatory
Advocates, the industry advocacy group for platforms and
broker dealers affected by the JOBS Act. Candace was the
founder and CEO of two companies: Bad Girl Ventures
(bgv.bz) and SoMoLend (somolend.com). Candace
continues to serve as General Counsel for Women
Investing in Women, a global NGO focused on increasing
access to capital for female entrepreneurs, and as Advisor
to LoanHero, a peer-to-peer lending company for
consumer loans at the merchant point of sale.
Candace Klein received her bachelor degree in
Communications from Northern Kentucky University.
Candace began working as a lobbyist for the Northern
Kentucky Chamber and United Way, and then began
attending law school at Chase University. While attaining
her law degree, Candace led the Communities Practice at
Property Advisors, with the title of "Maven" and the job
description, "run and think."
858.430.8301
[email protected]
Public Crowdfunding Background
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Capital
Raising
Online
While
Deterring
Fraud and
Unethical
NonDisclosure
Backdrop: Current Crowdfunding
Landscape – Five Varieties
Type
Rewards/
DonationBased
Securities to Accredited
Investors (Title II)
Securities to
the Public
(Title III)
Peer-to-Peer Lending
Intrastate Crowdfunding
Examples
Kickstarter,
Indiegogo,
Rockethub,
Youcaring
Ourcrowd, Realty Mogul,
FundersClub, AngelList,
None so far;
potentially a
rewards or
accred platform
LendingClub, Prosper,
Funding Circle, Zopa (UK),
Ratesetter (UK), Auxmoney
(Germany)
Invest Georgia Exemption,
Michigan Invests Locally
Exemption (MILE), Maine,
Kansas, Texas (pending)
Securities Reg
Status
Not sales of
“securities”
Sales of securities to
accredited investors
through deal-specific
special purpose vehicles;
Intrastate rules have been
enacted in GA, MI, ME and
KS and are proposed in TX
Sales of
securities to
the general
public
Registered borrowerpayment dependent notes to
the general public (25 states
only) or private placements
Public offerings to residents
of a single state; exempt
from SEC rules under
Securities Act 3(a)(11)
exemption/Rule 147
Regulation
State-level
antifraud
only; not
SECregulated
SEC-regulated, no-action
letters protect website
solicitations from being
public offerings
Extensive SEC
regulation;
currently illegal
until SEC rules
are finalized
SEC-registered securities,
not really crowdfunding;
banking regulations, not legal
in several states due to blue
sky restrictions; Private
placements have blue sky
preemption
State regulated
Bad Actor
Disqualification
Not
applicable
Applies for all issuers and
for the crowdfunding sites
themselves
Not applicable
under JOBS
Act, but SEC
has said it will
apply
Not applicable
Varies by state
Crowdfunding vs. Other Exemptions
Feature
Public Crowdfunding
(Title III)
Regulation A+
(Tier 1)
Regulation A+
(Tier 2)
Maximum Total
Raised
$1 million per 12 month
period
$5 million per 12
month period;
including up to $1.5
million for selling
shareholders
$50 million per 12 month period;
including up to $15 million for
selling shareholders
Number of
Investors
Unlimited but subject to
maximum total raised
Unrestricted
Unrestricted
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Investment Per
Investor
Restricted by income/net Unrestricted
worth
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Investor
Disclosure
Required, must be filed
with SEC
Restricted by income/net worth
Private Placements Including Title
II Crowdfunding (Regulation D Rule
506 (b/c))
Unlimited
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Unlimited accredited investors; up
to 35 non-accredited investors
unless soliciting (if soliciting- 0 nonaccreds)
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Unrestricted
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Required, must be filed Required, must be filed with SEC
with SEC
Not required if all accredited
investors; Form D filing proposed
No
No
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No
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Yes; audited financials filed
annually; annual, semi-annual,
current reporting required
No
Intermediary
Required
Yes – broker/dealer or
funding portal
Subject to
ongoing SEC
reporting
following raise
Yes, at least annually,
No; as long as exit
possibly more frequently report is filed not later
than 30 calendar days
after termination or
completion
May file exit report, so long as
issuer meets certain
qualifications
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Crowdfunding vs. Other Exemptions
Feature
Public Crowdfunding Regulation A+
(Tier 1)
Disclosure
Liability
Yes, full disclosure
liability with a
knowledge exception
Shares restricted Yes, for one year
Regulation A+
(Tier 2)
Yes, full disclosure liability Yes, full disclosure liability with a
with a knowledge exception knowledge exception
No
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Only anti-fraud liability
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No
Yes, for public companies most
can sell under Rule 144 after six
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months
Exempt from state securities law Usually no if only offering to
registration and qualification if sold accredited investors
to “qualified purchasers,” defined
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to include all offerees in a
Regulation A offering and all
purchasers in a Tier 2 offering
State Filing
Possibly, depends on
future rules by state
Not exempt from state
securities law registration
and qualification
Advertising and
general
solicitation
Not allowed
"Testing the waters"
"Testing the waters" permitted
permitted before filing;
before filing; general solicitation
general solicitation
permitted after qualification
permitted after qualification
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Yes, but limited
Yes, but limited
Can public cos., No
foreign issuers,
investment
companies and
exempt inv.
companies issue
Private Placements
(Regulation D Rule 506 (b/c))
Allowed if sales are made only
to accredited investors and
issuer takes reasonable steps to
verify accredited status
Yes
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In Philadelphia, it’s worth 50 bucks…
Peer-to-Peer
States Cannot Agree on Investor
Legality
Top Legal issues in Peer-to-Peer
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Neither LendingClub nor Prosper are banks
– Peer-to-peer lending sites facilitate loans to consumers from WebBank, a Utahchartered state industrial bank
– WebBank allows interest rate to be “portable”
– WebBank sets credit terms, extends credit and holds loan for 1 day
– Both LC and Prosper have been in business over 5 years
• Battles have been waged in each state to arrive at this point
– Platforms retain servicing rights and service loan
– $$ is not FDIC or SIPC insured
Bank regulatory “lite” applies – Platforms must comply with consumer finance credit, privacy
and auto-deduction laws, but……
– Exempt from 23A and 23B affiliate rules*
– Exempt from regulatory capital rules*
– Exempt from too big to fail, living wills, Volcker
– Will big banks start to care at some point, and then what happens?
Borrower may not pay and Lender cannot sue Borrower
– Lender has limited ability compared to traditional lending
– Limited recourse to enforce loan
– Collection fees will exceed recovery
Lending Regulation Issues
for Peer to Peer Lenders
• Usury Laws
• True Lender
• State Licensing Requirements
– Lending
– Money Transmitter
• Fair Credit Reporting Act
Consumer Protection Issues
• Truth in Lending / Regulation Z
• FTC Act Title 5 / CFPB UDAAP
• Equal Credit Opportunity Act / Reg B and Fair
Lending
• Electronic Funds Transfer Act / Reg E
• Fair Debt Collection Practices Act
• Vendor Management Oversight

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