Based on Prosper’s operating history and as many as 43 complaints filed with the organization, the Better Business Bureau has provided Prosper Marketplace (Prosper.com) with a rather generous rating of D+ (on a scale from A+ to F).

The complaints filed against Prosper Marketplace covers a wide variety of issues, including false advertising, misrepresentation, unauthorized bank debits, billing errors, failure to honor contracts, failure to respond to phone calls, warranty complaints, etc.

You can read the BBB’s report here.

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.

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.

An interesting video featuring Prosper co-founder Chris Larsen and Jim Breyer of Accel Partners, recorded in late 2006 as part of an Entrepreneurship lecture at Stanford.

Larsen and Jim Breyer, Managing Partner at Accel Partners, stress the value of having approval in a regulated industry.  This provides an excellent barrier to entry and is very attractive to VCs. Larsen draws on his experience from E-Loan and Prosper in suggesting that while it is cumbersome, if an idea is in the interest of the consumer, it is not difficult to obtain approval.

I was unable to get this video to embed properly, so here is the link to the video.

This is video from the “Town Hall” meeting at Prosper Days 2007

This is video from the “Town Hall” meeting at Prosper Days 2008

Prosper just issued the statement re-produced below.  After you peel away the PR-puffery and mis-direction, it looks like the SEC didn’t look too kindly on Prosper re-opening prior to completing their review.

We have been overwhelmed by the outcry from potential investors around the country who want to participate in peer-to-peer lending. Therefore, after much consideration we have decided to voluntarily shut down our operation in order to complete our SEC approval for a nationwide peer-to-peer lending platform.

Your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

As a result of this decision, we will not be accepting new lender or borrower registrations or loans, or new commitments from existing lenders effective immediately. Until this process is complete, we are required to be in a quiet period and will be unable to respond to press, blogger or other inquiries related to our SEC registration process, even though we would like to.

We want to assure you that Prosper is looking forward to being able to offer a transparent, durable and participatory lending institution very soon.

We sincerely apologize for this inconvenience or disappointment our decision may have caused. We want to thank you for your continued support and patience. We look forward to serving the needs of the community in the hopefully not too distant future.

The last few weeks appear to suggest an up-tick in press coverage related to Prosper, P2P and SEC oversight.  Perhaps it is a natural outgrowth of stories related to frozen credit markets, but it is interesting that several pieces are using strikingly similar language.  One wonders if the spirit of the “quiet period” is still being maintained – or whether Prosper’s PR-machine is again cranking?

(The quotes emphasized below are reproduced just because I found them interesting and/or entertaining).

Businessweek (April 6, 2009) – P2P Lending: Problems and Promise

The Big Money (March 30, 2009) – The Government Crackdown on Peer-to-Peer Lending

The SEC registration and wrist-slapping may be the least of Prosper’s worries. It has set the terms for countless additional headaches. Shortly after the SEC’s cease-and-desist, a New York law firm filed a class-action lawsuit on behalf of Prosper lenders arguing they’d been hoodwinked into buying unregistered securities. That case goes to court on May 1. And in a separate case, Prosper has already paid $1 million to the North American Securities Administrators Association to try to head off state litigation.

FierceFinanceIT (April 1, 2009) – In Praise of Peer-to-Peer Lending

The Big Money (March 31, 2009) – Who Should Regulate Peer-to-Peer Lending?

Forbes.com (March 24, 2009) – Where Credit Still Flows

When the agency came after Prosper.com, the largest auction-style player, last year, Chief Executive Chris Larsen pushed back, arguing that given the site’s transparency, lenders knew full well the risks they were taking.

MaineBiz (April 6, 2009) – Perfect Strangers: Small businesses turn to online social lending for financing

Gerson Lehrman Group (April 5, 2009) – Financial Services Innovation and New Credit Sources Impeded by Regulation in the US

The Sovereign Society (April 17, 2009) – The Bank of Tomorrow

While we wait for further legal developments, here is an interesting video featuring Prosper co-founder Chris Larsen discussing fraud prevention.

There are indications to suggest that Prosper had awareness for some time that the product they sold amounted to unregistered securities.

For my own benefit, I am in the process of attempting to compile a timeline of key events during the life of Prosper.com and link these with assorted other developments to help me get my head around all this.  Please note that this still a work in progress.  Given Prosper’s propensity to delete potentially inciminating statements from their web site, certain information is sourced to content reproduced by non-Prosper sites.

February 2006
Prosper opens to the public.

October 25, 2006
Speaking as part of Stanford’s Entrepreneurial Thought Leader Speaker Series, Chris Larsen, CEO and co-founder of Prosper.com and Jim Breyer, Managing Partner at Accel Partners, stress the value of having approval in a regulated industry. Larsen draws on his experience from E-Loan and Prosper in suggesting that while it is cumbersome, if an idea is in the interest of the consumer, it is not difficult to obtain approval.

See the following brief video clips:

on “the emotional rollercoaster…“

On “defensibility through regulatory constraints…“

On “managing the burn rate…“

Listen to the entire conversation:

May 24, 2007
LendingClub launch

October 30, 2007
Prosper files form S-1 with the SEC ”seeking to establish and maintain a secondary trading market online auction platform, and to provide various administrative, clerical, recordkeeping, identity verification, payment processing, collection and other services, with respect to the Prosper Marketplace Borrower Non-Recourse Notes, or the Notes.”

November 1, 2007
In response to Prosper’s attempted S-1 filing, the SEC isues a scathing rejection letter.  The SEC’s letter can be found here.

November 8, 2007
Prosper files with the State of Michigan, seking to register securities.

April 2008
“Lending Club, a start-up based in Sunnyvale, Calif., that facilitates borrowing between members of social networks like Facebook, asked the S.E.C. for permission to create a secondary marketplace — a place on its site where lenders could resell their loans and cash out before the end of a loan’s three-year life cycle.” (New York Times)

April 8, 2008
Prosper issues the following statement:

“Person-to-person lending is an increasingly popular way for individuals to borrow and lend money at attractive interest rates. Understandably, it must be done in a secure and trusted way. While we’re not in a position to comment on another company’s regulatory stance, Prosper believes that the way we have structured the Prosper marketplace is in compliance with applicable state and federal laws. Currently Prosper has over 650,000 members, and more than $130 million in loans have funded through the Prosper marketplace.”

May 28, 2008
Kentucky Department of Financial Institutions (DFI) was the first state regulator to take formal action against the company. DFI issued a stop order on May 28 halting the sale of the securities in the commonwealth, which was later replaced with an agreed order on June 20.

June 20, 2008
LC files with SEC, enters quiet period

July 31, 2008
Prosper co-founder John Witchel abruptly resigns from the company.

August 1, 2008
LendingClub files rom S-1 with the SEC.

October 1, 2008
Loanio opens for business

early October
Zopa Closed down

October 13, 2008
“On Monday, Mr. Larsen said he did not believe Prosper would need to follow the same arduous route, pointing out that Lending Club sets the interest rates on its loans and was itself financing about half the overall loan volume on the site.” (New York Times)

October 14, 2008
“But on Tuesday, Prosper changed its mind and also filed to create a secondary marketplace, halting activity on Prosper.com. The company would not comment, citing the quiet period, but the painful step suggests that it too decided it needed to obtain proper registration from the S.E.C. and avoid any legal ambiguity that could get it into regulatory trouble.” (New York Times)

LendingClub emerges with a successful SEC registration and resumes business.

Prosper goes quiet

October 15, 2008
Prosper “stopped allowing lenders to make new loans, saying it needed to wait while the Securities and Exchange Commission evaluated its regulatory filings.” (New York Times)

November 24, 2008
The SEC issues a Cease and Desist order against Prosper Marketplace.

November 26, 2008
Loanio suspends operations

Three Prosper lenders file suit against Prosper Marketplace (and certain named individuals) in California Superior Court.

November 28, 2008
An interesting posting by Giles appears over at Zopa.

We always took the view that the SEC would likely view our platform, as operated in the UK and Italy, as requiring registration with them. Individual promissory notes from borrowers could be seen as “securities” needing registration, and even if not then the firm at the centre dealing with them could require it. That’s the key reason why we didn’t launch our UK model in the US and watched with great interest when others did proceed with platforms that we felt carried regulatory risk. Lending Club were the first to acknowledge this risk in seeking registration in April, a process which took 6 months at a time when the SEC were arguably a little less “occupied” than today. At least they submitted themselves voluntarily which must have earned them some brownie points. They had also, rather smartly in my view, obtained some institutional funding in order to be able to continue lending, albeit on a small scale, while they were closed to working with normal “retail” lenders. We share something with Lending Club in that we both believe that P2P platforms should provide some added value in credit assessment and not leave this highly complex area solely to uninformed amateurs – no offence intended to any such people reading! The benefit of this approach has been borne out by their much better loan repayment performance than other US players.

However the interesting point is not just whether SEC registration is required, and if so how to get it, but what does an SEC registered business then look like? Our understanding is that it involves making your entire website in effect into a giant prospectus with all the verification issues that entails. I think it looks very difficult to run an interesting business that way.

The next event of note was Prosper deciding last month, one day after issuing a statement that it saw no need and after Lending Club had reopened for business , to seek SEC registration à la Lending Club. What sequence of events led to this Damascene conversion is open to conjecture. However it is noteworthy that the SEC issued a “Cease and Desist” notice to Prosper earlier this week, so it looks like some feathers are somewhat ruffled.

Finally we have just heard that Loanio has also entered a “quiet period” while it makes the appropriate registrations with securities authorities. See this story at finextra for more.

(Editor’s note) From what I understand, a Freedom of Information Act request has been filed with the SEC, seeking access to the correspondence between Prosper and the SEC. I look forward to bei able to contnue to flesh out this timeline.

December 1, 2008
NASAA, the group of national state securities commissioners, announced a settlement with Prosper Marketplace Inc. for the selling of unregistered securities to the public. As part of the settlement, Prosper Marketplace agrees to pay a fine of $1 million.

Read additional info here.

December 5, 2008
Prosper files Amendment No. 1 to Form S-1 

December 8, 2008
 Notice of motion for an order granting class certification  is filed with the California Superior Court

January 16, 2009
Prosper files Amendment No. 2 to Form S-1.

April 14, 2009
Prosper files Amendment No. 3 to Form S-1.

April 16, 2009
Prosper, on a teleconference with the California Department of Corporations and SEC staff advised the parties that Prosper intended to commence an intra-state offering. Discussiona and background can be found here.

April 28, 2009
Prosper resumes operation of their intra-state offering.

April 29, 2009
The SEC dispatches response to Prosper’s Amendment No. 3 to Registration Statement on Form S-1.  This letter includes a tersely worded missive regarding Prosper’s statements in the April 16 conference call and the plan to resume the intra-state offering.

The SEC letter can be read here.
Additional discussion can be found here.

May 9, 2009
Prosper is, once again, shut down.

May 29, 2009
Prosper files Amendment No. 4 to Form S-1.

June 12, 2009
The SEC responds to Prosper’s Amendment No. 4 to Registration Statement on Form S-1.  This is the so-called “Fred93 letter.”

The actual letter can be found here.

June 26, 2009
Prosper files Amendment No. 5 to Form S-1.

July 9, 2009
Prosper files Amendment No. 6 to Form S-1.

July 10, 2009
Prosper’s registration statement with the SEC was declared effective.

July 13, 2009
Prosper resumes lending.

Summer 2009
At some point during the summer, Prosper’s General Coundel Ed Giedgowd departs the company.

August 2009
Prosper names Sachin Adarkar (a long-time unemployed lawyer) as its new General Counsel.