Prosper has made much about the recent addition of Mr. Nigel Morris to its board - and the $1 million he brought along to the party.

As has already been noted by observers with deeper insight into the mechanics of all things Prosper, this cash infusion is little more than a minor bridge-loan, priced at a relatively steep 15% interest.  It is rather unclear how this fairly insignificant loan will impact Prosper’s future or delay what appears to be the inevitable demise of the company, as it continues on track to run out of operating funds in the near term.

On November 16, 2009, Prosper filed a 10-Q document with the Securities and Exchange Commission, which provides interesting insight into Prosper’s financial health.  Based on what is known about Prosper cash burn, the recent cash-infusion only buys Prosper an additional couple of months, with Prosper now expected to go broke in February 2010.

Despite the lackluster pace of new loan originations, there is some sense that there is still some potential value yet to be unlocked in this company.  What also remains unclear, however, is the extent to which Prosper is in a position to attract additional investments on favorable terms to operate beyond February 2010, considering the general current economic climate, the uncertainty regarding the viability of Prosper as a going concern, the current regulatory framework and Prosper’s situation with unresolved litigation.

Prosper-watcher Fred93 recently published a notable item on his blog, titled “Prosper.com Paradise Lost; Deadbeats Won.”  While Fred93’s summary of a meeting in Los Angeles between Prosper co-founder Chris Larsen and a number of lenders and borrowers may seem oddly trivial to those not intimately familiar with Prosper, Fred93 uses this meeting as a backdrop to highlight important nuances related to the Prosper experience. 

Set against this backdrop, Fred93 proceeds to dissect the lackluster efforts of Prosper’s Vice President of Operations, Doug Fuller, including his infamous “Big Hat, No Cattle” memo and the dismal failure of Prosper’s secret “legal test strategy.”

Few people are as intimately familiar with Prosper.com as Fred93.  His blog is a must-read and, if you decide to only read ONE blog post about Prosper Marketplace, then this should be the one you read.

Fred93’s shocking blog entry can be found here.

Then, join the discussion taking place at Prospers.org.

Things are quiet on the litigation front, but there was another procedural development today in the sidebar where Prosper Marketplace has filed suit against Greennwich Insurance Company.  Earlier today, Greennwich filed their Answer to First Amended Complaint with the Superior Court of California.

View the docket information here.

Some additional background here.

Prosper-watcher Xraider reports  on a new development in the ongoing litigation involving Prosper Marketplace.

Prosper, through another fancy (read: expensive) San Francisco law firm, has brought a breach of contract and “bad faith” suit against its insurer, Greenwich, for refusing to defend it in the class action. 

Ongoing discussion on this matter can be found at Prospers.org.

You can access the court docket info here.

There was court action yesterday in the class action lawsuit against Prosper Marketplace (Prosper.com). As Prosper-watcher Investar points out here, Judge Kramer sustained the demurrer filed by the 3 remaining outside directors – this time without leave to further amend. A case mangement conference (CMC) was held – and the next CMC scheduled for October 29, 2009.

* DEVELOPING STORY *

Based on material now made public by the Securities and Exchange Commission (SEC) and presented by members of the Prosper community at Prospers.org, PCASM hopes to allow you to take a peek behind closed doors at what actually took place between the SEC and Prosper Marketplace (Prosper.com) in the period leading up to Prosper being shut down – and what occured in the period that followed.

Some of what is being uncovered is quite remarkable and likely of immense interest to Prosper-watchers.  The work is still unfolding and I recommend reading the discussions currently happening in the public “lobby section” of the community (no registration is required to read discussions in the lobby).

As the discussion matures and I have some time to read and digest, I may post more detailed info here on this blog.  The exchanges between Prosper and the SEC are highly relevant to the ongoing class action litigation filed against Prosper by its lenders.

I’d like to acknowledge community members Investar and NewHorizon for the leg work being performed.

On November 1, 2007, in response to what was (presumably) Prosper’s first attempt at filing their S-1 registration statement, the SEC issued a less-than-enthusiastic response:

 

 

 

 

Re: Prosper Marketplace, Inc.

Registration Statement on Form S-1

Filed October 30, 2007

File No. 333-147019

 

 

 

Dear Mr. Giedgowd:

This is to advise you that a preliminary review of the above registration statement indicates that it fails in numerous material respects to comply with the requirements of the Securities Act of 1933, the rules and regulations under that Act, and the requirements of the form. Specifically, we note a failure to identify all co-registrants, a failure to include the required financial statements, and a failure to abide by the Trust Indenture Act. For this reason, we will not perform a detailed examination of the registration statement, and we will not issue any comments because to do so would delay the review of other disclosure documents that do not appear to contain comparable deficiencies.

You are advised that we will not recommend acceleration of the effective date of the registration statement and that, should the registration statement become effective in its present form, we would be required to consider what recommendation, if any, we should make to the Commission.

We suggest that you consider submitting a substantive amendment to correct the deficiencies or a request for withdrawal of the filing.

 

 

The actual letter can be found here.

Prospers.org discussion can be read here: S-1 Fail

The “Fred93 Letter”
Just like other discriminating Prosper aficionados, the SEC staff reads the Fred93 blog.  This was revealed in a June 12, 2009 letter to Prosper from the SEC in response to Amendment No. 4 to Prosper’s Registration Statement on Form S-1.

Specifically, the mention of Fred93’s excellent blog reads as follows:

 

 

 

In postings on the web regarding performance of Prosper loans by one of your lender members, there have been concerns expressed about the number of reported loans that closed during a particular months changing. Please provide the staff, with a view towards improved disclosure, your originated loans for every month that you operated prior to shutting down your site, the number that went 30, 60 and 90 days past due and the number that entered collection. Also, please address any instance where the number of reported loans in a particular monthly set changed from when they were originated to the currently reported amount. Please refer to http://fred93blog.blogspot.com.

 

 

 
Another notable section of the letter reads as follows:

 

 

 

Note 13 – Commitments and Contingencies, F-22

We note your response and revised disclosure to our prior comment 31; however we do not see how you have addressed our comment in its entirety. Please address thefollowing:

· Tell us how you determined that it was not probable that a liabilty had been incured (refer to paragraphs 8, 37 and 39 of SF AS 5); and

· Justify how your low range estimate (i.e. $0) is appropriate considering suits have been brought and you have no factual defense (specifically regarding the Section 5 violation).

 

 

The actual letter can be found here.

Threads worth monitoring (subject to updates throughout the day)

The SEC reads Fred93

Here’s where Prosper flipped the bird to the SEC

Reference

What did Prosper know and when did Prosper know it?

(or something along those lines..)

In preparation for next week’s action in the Superior Court of California, Prosper’s outside directors have filed a reply brief in response to the August 26 opposition memo filed by the plaintiffs, which was filed in response to the August 10 demurrer to the second amended complaint of July 10, 2009.

The actual document is not yet available for download and, based on our experience with the Court’s web site, it’s difficult to tell if it will, at some point, be made available at all.

That said, it is always good to note progress in this case and we look forward to an interesting week.

The State of North Dakota “brought the pain” earlier this year as it sanctioned Prosper to the tune of a whopping $906 for violating North Dakota’s Securities Act by selling unregistered securities to 2,390 residents of North Dakota.

The Administrative Consent Order largely follows the normal template being used by Prosper to settle with States, including:

- Prosper notes are securities

- Prosper sold unregistered securities in North Dakota

- Prosper failed to make required disclosures

You can read the Administrative Consent Order here.

In the ongoing litigation against Prosper Marketplace (prosper.com), one of the issues being discussed is the level of involvement by Prosper’s outside directors in key strategic operational decision-making.

I recently came across a piece which details the relationship between Chris Larsen (co-founder of E-Loan and later co-founder of Prosper) and Bob Kagle (Benchmark Capital). Kagle later went on to become a key financial backer of Prosper and serves on Prosper’s board of directors.

I thought PCASM readers would find this May 2000 item of some peripheral interest (emphasis mine):

http://hbswk.hbs.edu/archive/1497.html

The Power of Partnership: Entrepreneurs and their VC Backers Say Success Stems from Solid Relationships.

What does it take to make things work between an entrepreneur and a venture capitalist? According to the founders of two Internet startups and the venture capitalists who backed them, success stems from solid relationships. “When you’re looking for a venture capital investor,” Bob Kagle of Benchmark Capital told MBA students in California for the annual HBS WesTrek, “you should really look for a partner, somebody who’s going to build this business with you.“

Chris Larsen, CEO, E-LOAN:
First, let me give you a quick summary of our company. E-LOAN is the leading online lending company in the United States. We have about 350 people and did about $2 billion in loan volume last year. We originally targeted the loan business because we thought it was poorly served by the distribution networks. Our idea was to use the Internet to bring consumers to the point of production—to take out all the unnecessary costs. We knew that was going to get big play, but it was very difficult to get people interested at the time, which was about in 1996. We pitched to a lot of angel investors and several large venture capitalists but couldn’t get anyone interested. So, after about six months of being very frustrated, we basically self-funded. We used our credit cards and $100,000 from family and friends and launched the product. After a couple of failed starts with some other venture capitalists, Bob [Kagle of Benchmark Capital] called us. At that time, we were literally running on fumes. Bob said, “Let’s just meet.” I think it was about two weeks later when he actually cut the check. In that time we had developed a really trusting relationship. A VC is a partner who’s going to be on your board. If you can’t bear to hang out with him or her, it will not work. You will be out, and your company could be wrecked. I’m absolutely convinced that our company would never have made it if we went with another VC.

Bob Kagle, General Partner, Benchmark Capital:
Shortly after we formed Benchmark, we decided to focus a lot of our energy on the Internet. I don’t think that was a terribly courageous thing to do at the time, because there was a lot of evidence that this was a really significant phenomenon. In some ways, I think it’s more courageous to try to do that today, given the environment.

Mortgages were actually number three on our list of targets. We started calling around and heard a lot about this company, E-LOAN. We were really impressed with what we saw. They had done a number of very inventive things to put themselves on the map, early on, with few resources. Resourcefulness is something we always look for in entrepreneurs, and we saw it there, from a distance, in E-LOAN.

So I called up Chris. Actually, I didn’t ask him if he was looking for money because I wasn’t sure he was. I asked him if he had any sort of bias against venture capitalists, because I wanted to come by and just talk with him. We had a chance to get together, and it was immediately apparent to me that there was a very special partnership between Chris and [E-LOAN cofounder] Janina Pawlowski. Among all the advantages and attributes I saw that made E-LOAN an attractive investment, it was probably their partnership that impressed me the most. They had this combination of respect and affection for one another, which gave me a lot of confidence that they could get through the tough spots. In addition, we always look for a lot of domain expertise, and they had a tremendous depth of understanding of the business; they had started a mortgage brokerage business prior to E-LOAN.

Now, one of the things we like to see in entrepreneurs is that they will start their businesses without venture capital. What turns me off more than anything else is if people come in to pitch us an idea, and it’s clear to us that they’ll go after their idea only if they get the money. I like those people who are going after it, come hell or high water, and if you are fortunate enough to come along for the experience, good for you. I definitely saw that commitment in Chris and Janina. Another thing that impressed me is that Chris kept coming back to the customer experience. I find that the most successful entrepreneurs have a real sensibility about why they are in business. It’s not for the employees or the shareholders, it’s for the customers.

The other thing I saw at E-LOAN, which has proven out in spades as I’ve watched them face and overcome a number of challenges in the last couple of years, is a real decisiveness in the company. They don’t waste a lot of time mulling over important decisions. They think them through carefully but, more important, quickly. They’re not afraid to decide and move forward aggressively.

When you’re looking for a venture capital investor, you should really look for a partner, somebody who’s going to build this business with you. On the one hand, you should trust your gut on the chemistry; on the other hand, there’s no substitute for homework. You should call at least a half dozen people who’ve worked specifically with that venture capitalist, not just with the firm. And don’t ask, “Was there any value added?” Ask the entrepreneurs, “Is the world any different for your company because so-and-so was involved? What, specifically, did he or she do?” For the best venture capitalists, those answers are going to roll off the entrepreneurs’ tongues. In fact, you’re going to have to quiet them down a bit. And for the others, you’re going to have to struggle to get them to respond to that question.

Finally, I don’t think getting rich quick is the reason to come into the venture capital business or to be an entrepreneur. I believe it’s about satisfaction, making a difference, believing things can be better, and being willing to make personal sacrifices to make that happen. It takes a lot of personal sacrifice to grow a business.

Transcapitalist.com is reporting that peer-to-peer (p2p) platform Pertuity Direct is closing.

“Over the past two weeks, the Twitter-scape has seen a minor flurry of speculation regarding Pertuity Direct, a more recent entrant to the social lending space. As a PD lender, I was mildly worried about the status of my deposits and confused by the lack of formal notice on the platform’s website. This past week, I had my full deposit (plus ~2% interest) returned unceremoniously to my bank account, confirming my suspicions that the site is closing its doors.”

So far, no official word on the Pertuity Direct web site.