Lending Loop returns to market after hiatus

Lending Loop, the first company to offer U.S.-style peerto-peer lending in Canada, is returning to the marketplace Monday after being sidelined by regulators in February.

Resuming the business, where lenders can kick in as little as $25 to a pool of money destined for a small business borrower, meant making some changes. Key among them is registration with securities commissions in most provinces, according to Cato Pastoll, chief executive and co-founder of the financial technology firm.

The regulatory oversight means Lending Loop will be bound by a series of regulatory requirements aimed at consumer protection, including ensuring the suitability of its products, preparing offering documents, and issuing notes to lenders.

“We have an offering document which essentially allows investors to purchase notes, and it’s quite a novel structure,” Pastoll said. “It’s a prospectus exempt product with the offering memorandum that allows us to issue securities to the general public…. This is a model we worked with the regulators to create, and it’s got their blessing as well.”

He said the platform, which will be available in all Canadian provinces except Quebec, where Lending Loop doesn’t yet have the blessing of regulators, builds in diversification to ensure lenders aren’t concentrated in a single industry, sector or geography.

“Even if you invest only $2,500, you can spread your risk across 100 different loans,” he said, so even if some go bad, there isn’t an undue concentration. “So we’re matching borrowers and lenders together. That’s really been the strategy for us since day one.”

Pastoll said technology and automation are being employed to keep the process from getting too expensive or bogged down with paper- work. The firm launched in October 2015, soliciting loans of $50 or more to pool and then match with small businesses that also signed up through Lending Loop’s website.

Lending Loop quickly attracted interest from 450 individual lenders, with 100 becoming active participants, Pastoll told the Financial Post in November.

But other online lenders in the fintech space were puzzled by how the firm was able to offer the U.S.-style peer-topeer lending, given warnings from regulators before Lending Loop’s launch that this activity could draw scrutiny because it fell into the regulated arena of dealing in securities.

Firms such as Borrowell and Grouplend (now called Grow) avoided the regulatory burden of having to file costly and cumbersome documents by restricting their lenders to well heeled “accredited” investors who met specific income or asset thresholds.

In February, Lending Loop put a notice to its website that it was ceasing to post new loan requests while officials met with regulators. Some industry insiders thought that would be the end for the business, because they were unable to envision a way to be both compliant with the regulatory interpretation of peer-to-peer lending and costeffective.

But Pastoll says that he and Lending Loop co-founder Brandon Vlarr were committed to finding a way to emulate the success of peer-topeer lenders in the U.S. such as Lending Club and Prosper that tap a broader pool of investors.

If Lending Loop’s new model is successful in Canada, others could follow, but Pastoll isn’t over-concerned.

“I think the market is big enough,” he said. “You can point to international players, like in the U.S., that are doing the exact same thing. And they’re still able to successfully operate this business.”