February 2015

It’s not for nothing that I’m a securities lawyer.  I sincerely believe in the need for and efficacy of full and fair disclosure, both professionally and personally.  That’s one of the many reasons why I have been advocating disclosure reform – or, as we now call it, “effective disclosure” – to assure that important matters are disclosed, and that unimportant matters need not be.

So it’s not surprising that I’m upset about something that happened recently.  I attended a program at which a representative of a major institutional investor said that his firm just doesn’t have time to read the proxy statements of the companies in which the firm has invested.  I’ve heard this song before in various guises – for example, one major institution told me a few years ago that the most they’d ever spend reading a 100-page proxy statement was 15-20 minutes – but for some reason the statement I heard recently really bothered me.

Why do securities lawyers spend most of their waking hours, and many of the hours when they should be sleeping, trying to provide investors with the information they need to make important decisions?  (And, for the cynics out there, I’ve never heard a securities lawyer say anything like “How can we hide this?”)  Why do companies spend untold amounts of money paying their lawyers to do that?  More important, why is it acceptable for major investors to say that they don’t read their investees’ disclosures?  Does it ever occur to them that they may be in violation of their legal and ethical obligations to their clients by blowing off the obligation to read those disclosures and voting on significant matters without reading those disclosures?

Which brings me back to “effective disclosure.”  I’m passionate about the topic, and I’ve put my time (which is, after all, money) where my mouth is.  But I’d be crazy not to think about whether it’s really worth the time and effort it will take to overhaul our approach to disclosure if, at the end of the proverbial day, few if any people will benefit from it or even care about it.

Years ago I commented on an SEC rule proposal by saying, among other things, that it would result in more disclosure that no one would read.  I was told by the then-Director of the SEC Division of Corporation Finance that rulemaking isn’t based on whether anyone reads the disclosures in question.  At the time, I thought he was probably right, but now I’m not so sure.

Your thoughts?

Marketplace lending surely had its day in the sun in 2014.  Peer-to-peer lending, which now goes by the term marketplace lending, took a big step forward last year.  We saw the IPO of Lending Club rocket in its first day of trading on December 11, 2014 by first pricing above the range at $15 per share and then touching a high mark of 67% that day. Lending Club has been the leader in this field and its IPO highlighted the importance and the emergence of this new lending alternative. Despite this surge, however, not everyone attended the party in 2014. Noticeably, the SEC still has not finalized its crowdfunding rules, which are an important next step for the marketplace lending industry.

So what exactly is marketplace lending? Put simply, it is an Internet based lending market that is created by connecting borrowers with lenders or investors.  There are various companies with different approaches to the concept.  In Lending Club’s case, potential borrowers fill out online loan applications.  The company (and its bank behind the scenes) then uses online data and technology to evaluate the credit risks, set interest rates and make loans.  On the other side of the equation, Investors are offered notes for investment that correspond to portions of the loans and can earn monthly returns on their notes that are backed by borrower payments.  As a result, marketplace lending effectively offers secondary market trading for loans.

On the positive side, marketplace lending can be good for borrowers because the lower cost structure of an online platform can be passed along to borrowers in the form of lower interest rates.  The use of the Internet and online credit resources can also speed up the credit approval process so that borrowers can get funds faster.  In addition, some borrowers may get access to loans that they could not get from traditional banks.  In other words, the marketplace could help individuals with lower credit scores or negative credit histories find loans.  Thus, despite its critics, marketplace lending can help serve a niche that has historically been underserved by the banking industry.

Marketplace lending, however, at least when it comes to Lending Club and those like it, still has a bank at its core. So some borrowers will still not be able to get loans through this marketplace model.  Also, the investors are buying registered securities with interests in the loans made in the marketplace.  Lending Club turned to registering their notes with the SEC when Continue Reading Marketplace lending: A hot new industry looking for crowdfunding