The secret P2P-loan loophole one lender says it found.
New Lending Loop startup maintains it complies with rules
rival marketplace lenders aren’t sure how they’re doing it, and the folks at Lending Loop aren’t telling. but the Toronto-based firm has opened the door to u.S.-style peer-to-peer lending that allows anyone with $50 to pool the money into larger loans for small businesses and reap the returns.
more than 450 individual lenders have signed up for the online platform since the Oct. 7 launch, with around 100 of them actively participating in lending, says Cato Pastoll, one of the founders.
“We are planning to quickly scale this up over the coming weeks and months,” Pastoll told the financial Post.
There are a handful of other businesses in Canada using online platforms to source money to bundle into loans for individuals and businesses. but those were all launched on the understanding that they had to restrict their investor pool to institutional and well-heeled “accredited” investors that meet or exceed established wealth or income thresholds.
A regulatory interpretation unique to Canada suggests matching lenders to borrowers online could constitute dealing in securities. Anyone who offers securities must prepare a comprehensive and expensive document called a prospectus and provide them to regulators and investors for vetting — unless they can rely on an exemption, such as the one that limits them to dealing with “accredited” investors.
That’s how vancouver-based Grouplend and Toronto’s borrowell got into the business. by tapping only well-heeled “accredited” and institutional investors, who are viewed by regulators as less in need of protection when they invest, the peer-topeer marketplace lenders qualify for the prospectus exemption.
Pastoll won’t share how Lending Loop is able to include any and all investors in his “u.S.-style peer-to-peer lending” venture, which he says works in similar fashion to large American players like Lending Club.
The recent graduate from Ivey business School at Western university says he is reluctant to reveal specifics of his business plan for competitive reasons.
“We have been working with our legal counsel at dentons LLP for almost a year to ensure we are compliant with the existing securities regulations in Canada,” Pastoll said, adding that Lending Loop doesn’t intend to challenge the regulatory interpretation that extending peer-topeer loans could constitute dealing in securities.
“We spent a great deal of time ensuring that we structured our business in a way that is compliant with existing prospectus and registration exemptions,” he said.
Kevin Sandhu, chief executive of Grouplend, said he’s had an ongoing dialogue with regulators since getting into the business about a year ago, and he can’t see how Lending Loop can pool money from regular, non-accredited investors yet comply with the regulatory interpretation of the business.
“In our ongoing discussions with various securities regulators across the country, we have not identified a structure that is both compliant and cost-effective” when it comes to taking capital from retail investors, he said.
“In Grouplend’s case, we are not open to all investors.”
Andrew Graham, chief executive of borrowell, said he has no idea how Lending Loop is doing what it claims to be doing, but wished Pastoll and his team well.
“I hope they’ve figured this out in a way that allows others to follow,” Graham said.
In June, a notice from the Ontario Securities Commission cautioned peer-to-peer lenders that a loan arrangement entered into on their websites “may” constitute a security under provincial regulations, which reinforced the view of players such as Grouplend and borrowell that they should be sticking with wealthy “prospectus-exempt” investors to be on the safe side.
The notice said anyone approaching Ontario investors to fund peer-topeer loans or loan portfolios “should be talking to the OSC about securities law requirements, including whether you need to be registered or require a prospectus.”
but for some, the mystery surrounding Lending Loop shines a light the fact that Canadian regulators have not come to a hard landing about whether — and how — the new business of peer-to-peer or marketplace lending should be regulated.
Industry players say there’s far greater clarity in New Zealand and the united Kingdom.
The Ontario Securities Commission is closely scrutinizing a halfdozen or so firms operating or preparing to operate in Canada, with a view to determining whether a new “regulatory framework” for the sector is necessary, according to OSC chair Howard Wetston, who stepped down from the commission this week.
In an interview with the financial Post earlier this month, Wetston said the regulator is still working to determine whether the lenders are selling, or promoting the sale of, securities. If the conclusion is reached that they are, there could be further restrictions or controls, such as mandatory registration with the securities commission.
“We’re not jumping to any conclusions here, but I can tell you it’s really on our radar screen,” Wetston said. The fledgling businesses “could be legitimate,” he said, “but it may be necessary to have a regulatory framework there for investor protection.” He said he’s not surprised there are different interpretations among peer-topeer lenders as they attempt to establish themselves in the sector – one that could suddenly be subject to new rules or reassessments of existing regulations.
“They don’t (know what to do) because basically it’s not regulated,” Wetston said.
We have not identified a structure that is both compliant and cost-effective