10-K 1 d450565d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

¨ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

 

x TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from April 1, 2012 to December 31, 2012

Commission File Number: 000-54752

 

 

LendingClub Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   51-0605731

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

71 Stevenson Street, Suite 300  
San Francisco, California   94105
(Address of principal executive offices)   (Zip Code)

(415) 632-5600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

None   None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 28, 2013, there were 12,057,848 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

LENDINGCLUB CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I

     2   

Item 1. Business

     2   

Item 1A. Risk Factors

     30   

Item 1B. Unresolved Staff Comments

     44   

Item 2. Properties

     45   

Item 3. Legal Proceedings

     45   

Item 4. Mine Safety Disclosures

     45   

PART II

     45   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

     45   

Item 6. Selected Financial Data

     46   

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     51   

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     62   

Item 8. Consolidated Financial Statements and Supplementary Data

     62   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     62   

Item 9A. Controls and Procedures

     62   

Item 9B. Other Information

     63   

PART III

     64   

Item 10. Directors, Executive Officers, and Corporate Governance

     64   

Item 11. Executive Compensation

     70   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     74   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     77   

PART IV

     80   

Item 14. Exhibits and Financial Statement Schedule

     80   

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     81   

Consolidated Balance Sheets

     82   

Consolidated Statements of Operations

     83   

Consolidated Statements of Preferred Stock and Stockholders’ Deficit

     84   

Consolidated Statements of Cash Flows

     85   

Notes to Consolidated Financial Statements

     86   

SIGNATURES

     112   

EXHIBIT INDEX

     113   

Exhibit 21.1

  

Exhibit 31.1

  

Exhibit 31.2

  

Exhibit 32.1

  

Note: This Transition Report on Form 10-K is being filed for the nine months ended December 31, 2012 as a result of the Company’s decision to change its fiscal year end from March 31st to December 31st. Consequently, annual reports in the future will report on a calendar year basis.


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Except as the context requires otherwise, as used herein, “LendingClub,” “we,” “us,” “our,” and “the Company” refer to LendingClub Corporation, LC Advisors, LLC, a wholly owned subsidiary of LendingClub and LC Trust I, a Delaware business trust. “LendingClub” is a registered trademark of LendingClub Corporation in the United States.

Cautionary Note Regarding Forward-Looking Statements

This transition report on Form 10-K (“Report”) contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Report regarding LendingClub borrower members, credit scoring, Fair Isaac Corporation (“FICO”) scores, our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

   

our ability to attract potential borrowers to our lending platform;

 

   

the degree to which potential borrowers apply for, are approved for and actually borrow via a Member Loan;

 

   

the status of borrower members, the ability of borrower members to repay Member Loans and the plans of borrower members;

 

   

interest rates and origination fees on Member Loans;

 

   

our ability to service Member Loans and our ability, or the ability of third party collection agents, to pursue collection of delinquent and defaulted Member Loans;

 

   

our ability to retain WebBank or another third party banking institution as the lender of loans originated through our platform;

 

   

expected rates of return provided to investors;

 

   

our ability to attract additional investors to the platform or to our funds or separately managed accounts;

 

   

the availability and functionality of the secondary market trading platform;

 

   

our financial condition and performance, including our ability to remain cash flow positive;

 

   

our ability to retain and hire competent employees and appropriately staff our operations;

 

   

our compliance with applicable local, state and federal laws, including the Investment Advisors Act of 1940, the Investment Company Act of 1940 and other laws; and

 

   

regulatory developments.

We may not actually achieve the plans, intentions or expectations disclosed in forward-looking statements, and you should not place undue reliance on forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in forward-looking statements. We have included important factors in the cautionary statements included in this Report, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from forward-looking statements contained in this report. Forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Report completely and with the understanding that actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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PART I

Item 1. Business

ABOUT THE LOAN PLATFORM

Overview

We are an online marketplace that facilitates loans to qualified borrowers and investments from qualified investors. We were incorporated in Delaware in October 2006, and in May 2007, we began operations. We expanded our operations in August 2007 with the launch of our public website, www.lendingclub.com. Pursuant to a Prospectus that describes a public offering of Member Payment Dependent Notes (“Notes”), self-directed investors have the opportunity to purchase, directly on our website, Notes issued by us, with each series of Notes corresponding to an individual Member Loan facilitated through our platform. The Notes are unsecured, are dependent for payment on the related Member Loan and offer interest rates and credit characteristics that the investors find attractive.

In addition to this public offering, we offer private placements to accredited investors and qualified purchasers. Most private placements are managed by the Company’s wholly-owned subsidiary, LC Advisors, LLC (“LCA”), a registered investment adviser that acts as the general partner for certain private funds (the “Funds”) and separately managed accounts (“SMAs”). The Company established LC Trust I (“Trust”), a Delaware business trust in February 2011 to acquire and hold Member Loans for the sole benefit of investors that purchase through Trust Certificates (“Certificates”) issued by the Trust and which are related to the underlying Member Loans. The Funds each purchase a Certificate from the Trust and the Trust uses these proceeds to acquire and hold Member Loans for the sole benefit of the Certificate holder. The Certificates can only be settled with cash flows from the underlying Member Loans and Certificate holder does not have recourse to the general credit or other assets of the Trust, Company, borrower members or other investors.

We aim to use technology and a more efficient funding process to lower costs so we may provide borrower members with rates that are generally lower, on average, than the rates they obtain from unsecured credit provided through credit cards or traditional banks, and offer interest rates to investors that they find attractive. Our customer acquisition process, registration, underwriting, processing and payment systems are highly automated and electronic. We encourage the use of electronic payments as the preferred means to disburse member loan proceeds, receive payments on outstanding Member Loans, receive funds from investor members, and to disburse payments to applicable investors. We have no physical branches for loan application or payment-taking activities.

All Member Loans are unsecured obligations of individual borrower members with fixed interest rates, three-year or five-year maturities, minimum amounts of $1,000 and maximum amounts up to $35,000. The Member Loans are posted on our website pursuant to a program agreement with WebBank, an FDIC-insured, state-chartered industrial bank organized under the laws of the state of Utah, approved loans are funded and issued by WebBank and sold to us after closing. As a part of operating our lending platform, we verify the identity of members, obtain borrower members’ credit characteristics from consumer reporting agencies such as TransUnion, Experian or Equifax and screen borrower members for eligibility to participate in the platform and facilitate the posting of Member Loans. Also, after acquiring the Member Loans from WebBank, we service the Member Loans on an ongoing basis.

As of December 31, 2012, the platform facilitated 95,902 Member Loans totaling approximately $1.2 billion since the platform’s inception. Our agreement with WebBank enables us to make our platform available to borrower members on a uniform basis nationwide, except that as of December 31, 2012, we do not currently offer Member Loans in Idaho, Indiana, Iowa, Maine, Mississippi, Nebraska and North Dakota. We pay WebBank a monthly service fee based on the amount of loans issued by WebBank in each month, subject to a minimum monthly fee.

To date, we have funded our operations primarily with proceeds from our preferred stock issuances and common stock issuances and now with the operations of the Company, which are described under “Liquidity and Capital Resources” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. From inception of the Company through December 31, 2012, we have raised approximately $102.5 million (net) through preferred equity financings. In June 2012, we issued and sold via private placement a total of 2.5 million shares of Series E convertible preferred stock at $7.00 per share for aggregate cash consideration of $17.5 million, less total transaction expenses of approximately $0.2 million that were recorded as a reduction to gross proceeds.

We have incurred net losses since our inception. Our net loss was approximately $4.2 million for the nine months ended December 31, 2012. We earn revenues from fees, primarily loan fees charged to borrower members, investor servicing fees and management fees charged by LCA. We expect that the number of borrower and investor members and the volume of Member Loans facilitated through our platform will continue to increase, and that we will generate increased revenue from these fees.

 

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For the nine months ended December 31, 2012, we were cash-flow positive on an operating basis. We expect that will continue operating at or near breakeven during calendar year 2013. If our assumptions regarding continued growth and operating plan are incorrect, we may need to slow our investment spending, which could slow our rate of growth or ability to continue operating on a cash-flow positive basis, and our current liquidity resources may be consumed.

Online Lending

Online lending is a new approach to consumer finance. We use an online marketplace to connect borrowers and investors. We provide transactional services including screening borrowers for borrowing eligibility and facilitating payments. Online lending entails significantly lower operating costs compared to traditional banking and consumer finance institutions because there are no physical branches and related infrastructure, no deposit-taking activities and an automated loan underwriting process. We believe that the interest rates offered to borrower members through our platform are generally better, on average, than the rates those borrower members would pay on outstanding credit card balances or an unsecured installment loan from a traditional bank, if they were able to obtain such a loan.

We view consumer finance delivered through an online marketplace as an important new market opportunity. Key drivers of online lending include the following:

 

   

the possibility of lower interest rates for borrowers;

 

   

the possibility of attractive interest rates for investors;

 

   

the possibility for all members to help each other by participating in the platform to their mutual benefit; and

 

   

growing acceptance of the internet as an efficient and convenient forum for consumer transactions.

How the LendingClub Platform Operates

New Member Registration

During registration, members are provided a random online member screen names. New members must agree to the terms and conditions of our website, including agreeing to conduct transactions and receive disclosures and other communications electronically.

New members have the opportunity to register as borrowers or investors. All our borrower members:

 

   

must be U.S. citizens, permanent residents or be in the United States on valid long term visas;

 

   

must be at least 18 years old;

 

   

must have valid email accounts;

 

   

must have U.S. social security numbers; and

 

   

must have an account at a U.S. financial institution with a routing transit number.

We verify the identity of borrower members who complete the loan application process by comparing supplied names, social security numbers, addresses and telephone numbers against the names, social security numbers, addresses and telephone numbers in the records of a consumer reporting agency, as well as other anti-fraud and identity verification databases. We also currently require each new member to supply information about the member’s bank account including routing numbers, after which we transfer between 1 and 99 cents from the bank account to verify that the bank account belongs to the member. Members must then sign in to LendingClub and verify their bank accounts based on the amount transferred.

Borrower members must also enter into a borrower membership agreement with us prior to listing their loan. The borrower membership agreement addresses the registration and loan request processes. In this agreement, the borrower member authorizes us to obtain a consumer report, to use the consumer report for specific purposes, to share certain information about the borrower member with investors, and to issue a loan to the borrower if they have received commitments of 60% or more of the listed loan amount by the expiration of the loan listing. The borrower member also grants us a limited power of attorney to complete on the borrower member’s behalf, one or more promissory notes in the amounts and on the terms made to the borrower member by WebBank. WebBank serves as the true creditor for all Member Loans facilitated through our platform. These agreements set forth the terms and conditions of the Member Loans and allow a borrower member to withdraw a loan request at any time before the Member Loan is funded.

Borrower members enter into a credit profile authorization and a loan agreement with WebBank. In the credit profile authorization, the borrower member authorizes WebBank to obtain and use a consumer report on the borrower member. The loan agreement addresses the application process and the role of investors’ commitments to invest in the underlying borrower loan. The agreement explains that if the loan has received funding of 60% or more of the listed loan amount it will automatically issue unless

 

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withdrawn by the applicant. For applicants whose credit has been pre-screened, 100% funding is guaranteed on loan amounts of $10,000 or less. If a loan is extended to the borrower member, the borrower member agrees to be bound by the terms of a promissory note, the form of which is attached as an exhibit to the loan agreement. The borrower member authorizes LendingClub to debit the borrower member’s designated account by Automated Clearing House, or ACH, transfer for each payment due under the promissory note. The loan agreement also describes the parties’ rights in regard to arbitration. The borrower member agrees that WebBank may assign its right, title and interest in the loan agreement and the borrower member’s promissory notes to others, including LendingClub.

During investor registration, potential investors will have their identify verified, agree to a tax withholding statement and bank account verification, and must enter into an investor and other agreements with us, which will govern all purchases of Notes and Certificates the investor makes. Investors must also be residents of certain states and meet minimum financial suitability requirements. The investor agreement and additional information about eligible states of residency and financial suitability requirements are available on our website (www.lendingclub.com).

Borrower Loan Requests

Borrower members submit loan requests online through our website. Loan requests must be between $1,000 and $35,000. Loans from $1,000 to $15,975 are usually only issued with three year terms, unless the loan request comes from a partner that allows borrower members to select the amount and term, which selections will be honored. Loans from $16,000 to $35,000 are offered with either three or five year terms, to be selected by the borrower. Each loan request is an application to WebBank, which lends to qualified borrower members and allows our platform to be available to borrower members on a uniform basis throughout the United States, except that we do not currently offer Member Loans in Idaho, Indiana, Iowa, Maine, Mississippi, Nebraska and North Dakota. Currently, we allow borrower members to have up to two Member Loans outstanding at any one time, if the borrower member continues to meet our credit criteria. In addition, to apply for a second loan, the borrower member must have already made timely payments on the first Member Loan for at least six months. Borrowers are limited to two concurrent loans with a maximum combined initial loan amount of $50,000.

Borrower members supply a variety of unverified information that is included in the borrower Member Loan listings on our website and in the posting reports and sales reports we file with the SEC. This information may include a borrower Member’s Loan title, description, answers to investor questions and home ownership status. Requested information also includes a borrower member’s income or employment, which may be unverified. If we verify the borrower member’s income, and employment, we will display an icon in the loan listing indicating that we have done so. Investors have no ability to verify borrower member information and we do not verify a borrower’s income or employment solely at the request of an investor. See “Item 1. Business – About the Loan Platform – How the LendingClub Platform Operates – Loan Postings and Borrower Member Information Available on the LendingClub Website.”

Minimum Credit Criteria and Underwriting

In November 2012, we substantially revised our credit model and began grading loans based upon a proprietary algorithm developed internally. This algorithm was based primarily upon the historical loan performance of actual borrowers that meet the requirements of the algorithm, the assumed performance of applicants that would have been approved under the current algorithm but were declined by prior methodologies, and the exclusion of borrowers that were approved under prior methodologies but would have been declined under the new algorithm, in addition to other factors and assumptions.

After we receive a loan request, we evaluate whether the prospective borrower member meets WebBank’s loan criteria. The WebBank credit policy provides the underwriting criteria for all loans listed on our platform, and the credit policy may not be changed without the consent of WebBank. Under the current credit policy, prospective borrower member requirements include the following:

 

   

minimum FICO score of 660 (as reported by a consumer reporting agency);

 

   

debt-to-income ratio (excluding mortgage) below 35%; and

 

   

credit report (as reported by a consumer reporting agency) reflecting:

 

   

at least two revolving accounts currently open;

 

   

6 or less inquiries (or recently opened accounts) in the last 6 months; and

 

   

a minimum credit history of 36 months.

A FICO score is a numeric rating that ranges between 300 and 850 that rates a person’s credit risk based on past credit history and current credit situation. FICO scoring was developed by Fair Isaac Corporation. FICO scores reflect a mathematical formula that is based on information in a consumer’s credit report, compared to information on other consumers. Consumers with higher scores typically represent a lower risk of defaulting on their loans. There are three different FICO scores, each with a separate name, which correspond to each of the three main U.S. consumer reporting agencies. Equifax uses the “BEACON score”; Experian uses the

 

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“Experian/Fair Isaac Risk Model”; and TransUnion uses the “EMPIRICA score.” The score from each consumer reporting agency considers only the credit data available to that agency. Fair Isaac Corporation develops all three FICO scores and makes the scores as consistent as possible across the three consumer reporting agencies. Nevertheless, the three agencies sometimes have different information about a particular borrower member, and that means the three FICO scores for that borrower member will vary by agency. We currently obtain consumer credit information from a single consumer reporting agency, although we may use other consumer reporting agencies in the future.

The FICO scoring model takes into account only five categories of data: historical timeliness of bill payments; total outstanding debt and the total amount of credit the consumer has available; length of credit history; mix of credit; and new credit applications within the last year. Information such as: age; race; sex; job or length of employment; income; whether the consumer has been turned down for credit or information not contained in the consumer’s credit report are not taken into account in calculating a score.

From the relaunch of our platform on October 13, 2008 until December 31, 2012, only 10.7% of individuals seeking Member Loans on our site (95,522 out of a total of 891,382) have met the credit criteria required to post their loan requests on our website and received a loan.

During the loan application process, we also automatically screen borrower members using the U.S. Department of the Treasury Office of Foreign Asset Control’s (“OFAC”) lists, as well as our fraud detection systems. See “Item 1. Business – About LendingClub – Business – Technology – Fraud Detection.”

After submission of the application, we inform potential borrowers whether they qualify to post a loan request on our platform. For qualified borrowers, our proprietary algorithm assigns one of 35 loan grades (A1 to G5) which establishes the borrower’s loan interest rate and origination fee. This initial grade can then be adjusted to reflect the application of modifiers, including the amount and term of loan.

Verification of Borrower Information

Approximately 68% of the listed applicants during the twelve months ended December 31, 2012 had their employment or income verified by us by requiring the borrower to submit paystubs, IRS Forms W-2 or other tax records between the initial posting of a loan request and the issuance of a Member Loan.

We perform targeted income verification primarily in the following situations:

 

   

if we believe there may be uncertainty about the borrower member’s employment or future income;

 

   

if we detect conflicting or unusual information in the loan request;

 

   

if the loan amount is high;

 

   

if the borrower member is highly leveraged;

 

   

if we suspect the borrower member may have obligations not included in the borrower member’s pre-loan or post-loan debt level, such as wage garnishment collection accounts; or

 

   

if we suspect a fraudulent loan request.

We also conduct random testing. From time to time, we also randomly select listings to verify information for the purpose of testing our policies and for statistical analysis.

If the borrower member fails to provide satisfactory information in response to an income or employment verification inquiry, we may remove the borrower Member’s Loan listing or request additional information from the borrower member.

We conduct income or employment verification entirely in our discretion as an additional screening mechanism. We believe that our ability to verify a borrower member’s income may be useful in certain circumstances in screening our platform against exaggerated income and employment representations from borrower members. Investors, however, should not rely on a borrower member’s stated employment or income, except when such income or employment has been verified as indicated on the loan details page, or on our ability to perform income and employment verifications. We cannot assure investors that we will continue performing income and employment verifications. See “Item 1A. Risk Factors – Information supplied by borrower members may be inaccurate or intentionally false.”

Except as discussed above, borrower member information such as loan title, description, and answers to investors’ questions through the Q&A process are unverified and investors should not rely on this information.

 

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Our participation in funding loans on the platform from time to time has had, and will continue to have, no effect on our income or employment verification process, the selection of loan requests verified or the frequency of income and employment verification.

Loan Interest Rates

After the loan grade has been determined under the credit policy, an interest rate is assigned to the loan request.

The interest rates are assigned to borrower loan grades in three steps. First, the base rate is determined. Second, an assumed default rate is determined that attempts to project loan default rates by loan credit grade. Third, the assumed default rate is used to calculate an upward adjustment to the base rates which we call the “Adjustment for Risk and Volatility.”

The base rate is set by the Interest Rate Committee (“Committee”), which is comprised of our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Chief Marketing Officer and General Counsel. The Committee’s objective in setting the base rate is to allocate the interest rate spread that exists between the estimated cost of credit for borrower members and the estimated return on bank deposits we understand are available to investors. We have selected this spread as an appropriate starting place for the base rates for the following reasons:

 

   

For borrower members, we believe the interest rate for unsecured consumer credit published by the Federal Reserve reflects the average interest rate at which our borrower members could generally obtain other unsecured financing. We believe that the difference between that interest rate and the base rate is a relevant measure of the savings that may be achieved by our borrower members.

 

   

For investors, we believe the interest rate on certificates of deposit reflects a widely available risk-free alternative investment for our member investors. We believe the difference between that interest rate and the base rate is a relevant measure of the value that may be delivered to our member investors.

By setting the initial allocation of the base rate in between these two interest rates, we believe roughly equal value may be provided to both our borrower members and our investors. To make this initial base rate calculation, the Committee calculates the average between the interest rate for unsecured consumer credit published by the Federal Reserve, “commercial banks; credit card plans; all accounts,” in Federal Reserve Statistical Release G.19, and the interest rate for 6-month certificates of deposit, “secondary market; monthly,” published by the Federal Reserve in Federal Reserve Statistical Release H.15.

Next, the Committee may modify this initial allocation, based on the following factors:

 

   

general economic environment, taking into account economic slowdowns or expansions;

 

   

the balance of supply of funds and demand for credit on our platform, taking into account whether borrowing requests exceed investor commitments or vice versa; and

 

   

competitive factors, taking into account the consumer credit rates set by other lending platforms and major financial institutions.

The Committee adjusts the base rate from time to time based on this methodology. In applying the adjustment to the base rate, the Committee has established one base rate for all credit grades.

Lastly, the Committee then adjusts the base rate upward to reflect an adjustment based upon the assumed default rate for the particular loan credit grade, volatility factors, investor value and other factors, which we collectively refer to as the “Adjustment for Risk and Volatility.” The final interest rate is then calculated by adding the base rate and the adjustment for risk and volatility.

Standard Terms of the Member Loans

Member Loans are unsecured obligations of individual borrowers with a fixed interest rate and a maturity of three years or five years. Member Loans have an amortizing, monthly repayment schedule and may be repaid in whole or in part at any time without prepayment penalty. In the case of a partial prepayment, we reduce the outstanding principal balance and the term of the loan is effectively reduced as the monthly payment remains unchanged.

Loan Postings and Borrower Member Information Available on our Website

Once a loan request is complete and we have assigned a loan grade and interest rate to the requested loan, the request is subsequently posted on our website and then becomes available for viewing by investors. Investors are also then able to commit to invest in securities that will be dependent for their payments on that Member Loan. Loan requests appear under screen names, not actual borrowers’ names. Investors are able to view:

 

   

the loan amount;

 

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loan grade (determined using the process described above) and interest rate for the Member Loan;

 

   

term, three or five year;

 

   

the borrower member’s self-reported income and employer and whether that income or employment has been verified by us;

 

   

total funding that has been committed to-date;

 

   

the number of investors committed to the loan; and

 

   

the borrower member’s self-reported intended use of funds.

Potential borrowers typically state the use of funds in a short sentence or clause, such as “Consolidate my credit card debt and be rid of it.” We historically have not verified, and do not plan in the future to verify or monitor, a borrower member’s actual use of funds.

Investors are also able to view the following information provided by borrower members, which we typically do not verify:

 

   

home ownership status;

 

   

length of employment with current employer; and

 

   

debt-to-income ratio, as calculated by LendingClub based on (i) the debt, excluding mortgage, reported by a consumer reporting agency including the pending loan request; and (ii) the income reported by the borrower member, which is not verified unless we display an icon in the loan listing indicating otherwise.

We also post the following credit history information from the consumer reporting agency report, and label the information as being provided by a credit bureau:

 

   

numerical range within which the borrower member’s FICO score falls;

 

   

borrower member’s earliest credit line;

 

   

borrower member’s number of open credit lines;

 

   

borrower member’s total number of credit lines;

 

   

borrower member’s revolving credit balance;

 

   

borrower member’s revolving line utilization;

 

   

number of credit inquiries received by the consumer reporting agency with regard to the borrower member within the last six months;

 

   

number of reported delinquencies in the past two years and amount;

 

   

major derogatories and months since last derogatory;

 

   

public records and months since last public record; and

 

   

length of time (in months) since the borrower member’s last reported delinquency.

Although borrower members and investors are anonymous to each other, investors may ask predefined questions on the loan listing and borrower members have the opportunity, but are not required, to post public responses. We do not verify these responses.

Loan posting and borrower member information available on the LendingClub website will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Exchange Act. Loan posting and borrower member information filed in prospectus supplements will be subject to the liability provisions of the Securities Act. In this document, we advise potential investors in the Notes as to the limitations on the reliability of borrower member-supplied information. An investor’s recourse in the event this information is false will be extremely limited.

Loan requests remain open for at least 14 days, during which time investment commitments that will be dependent on the loans may be made by investors. If a borrower Member’s Loan request does not attract sufficient investment commitments to fund at least 60% of the listed loan amount, the applicant is given the opportunity to accept the lesser amount or withdraw the application. The borrower member may request that their loan request be re-listed on our platform.

 

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How to Invest on the Platform

After a loan request has been posted on our website, individual investors who have registered with us and who reside in states in which the Notes are available for sale may commit to purchase Notes dependent on the Member Loan requested by the borrower member. Certificates are sold in private transactions between the Trust and accredited investors or qualified purchasers. The terms of Certificates are substantially identical to those of Notes, except that investors in Certificates pay an asset-based management fee instead of the cash flow-based servicing fee paid by investors in Notes.

Investors navigate our website as follows. Investors may browse all active loan listings and they may also use search criteria to narrow the list of loan listings they are viewing. The available search criteria include loan grade, borrower member credit score range, number of recent delinquencies and loan funding status, as well as a free-search field. The free-search field returns results based on the word entered as the search. As investors browse the loan listings, they can click on any of the listings to view additional detail. The loan detail page includes general information about the borrower member and the loan request that is viewable by non-members, and more detail (including credit data) viewable only by signed-in investors. Once signed-in, investors may select any of the displayed loan listings and add them to their “order,” which is akin to a shopping basket. Investors may add as many Member Loans as they want to their order, provided that the aggregate amount of their order does not exceed the funds available. Once an investor has finished building an order, the investor may click the “check out” button, review the “order” one more time and then click the confirmation button to commit funds to the order. Funds committed represent commitments to purchase Notes or Certificates that are dependent on the chosen Member Loans for payment. From that point on, the funds committed by the investor are no longer available for use by the investor and may no longer be withdrawn or committed to other loans (unless and until loans included in the order are not issued, in which case the corresponding funds become available to the investor again).

A single borrower Member’s Loan request is typically funded by many different investors in various amounts that are in $25 increments. In the event that a borrower Member’s Loan request does not attract sufficient funding commitments for the Member Loan of at least 60% of the listed loan amount by the expiration of the loan listing, the borrower member ceases to be under an obligation to accept the loan, although borrowers may still choose to accept partial funding (less than 60% and $1,000 or over) of their loan requests or may request that their loan request be re-listed on our platform.

Portfolio Tool

In making investment commitments, as of December 31, 2012, approximately 30% of investors used our “Portfolio Tool,” a proprietary tool that creates a listing of Notes that meet all of the investment criteria selected by the investor. Investors may experiment with Portfolio Tool search results on our website without committing to purchase Notes.

The portfolio tool is provided for informational purposes only and should not be considered as investment advice regarding a member’s particular investment situation. Lists may be modified or rejected in whole or in part. Users should always review the list created and modify to suit their particular needs and risk tolerance.

Loan Funding and Treatment of Investor Member Cash Balances

Investors’ funds are held in an account currently maintained by us at Wells Fargo. This account is a pooled account titled in our name “in trust for” LendingClub investors, known as the ITF Account, and is a non-interest bearing demand deposit account. In connection with the ITF account, Wells Fargo is acting in a separate capacity from its role as trustee under the indenture governing the Notes.

Individual LendingClub members have no direct relationship with Wells Fargo. LendingClub is the trustee for the ITF account. In addition to outlining the rights of investors, the trust agreement provides that we disclaim any economic interest in the assets in the ITF account and also provides that each investor disclaims any right, title or interest in the assets of any other investor in the ITF account. No LendingClub monies are ever commingled with the assets of investors in the ITF account.

Under the ITF account, we maintain sub-accounts for each of the investors on our platform to track and report funds committed by investors to purchase Notes dependent on member loans, as well as payments received from borrower members. These record-keeping sub-accounts are purely administrative and reflect balances and transactions concerning the funds in the ITF account.

The ITF account is FDIC-insured on a “pass through” basis to the individual investors, subject to applicable limits. This means that each individual investor’s balance is protected by FDIC insurance, up to the limits established by the FDIC. Other funds the investor has on deposit with Wells Fargo, for example, may count against any applicable FDIC insurance limits.

Funds of an investor may stay in the ITF account indefinitely. Such funds may include:

 

   

funds in the investor’s sub-account never committed to invest;

 

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funds committed to invest for which the underlying Member Loan has not closed; or

 

   

principal and interest payments received from us related to previously purchased securities.

Upon request by the investor, we will transfer investor funds in the ITF account to the investor’s designated and verified bank account by ACH transfer, provided such funds are not already committed to the future investment commitments.

Purchases of Notes or Certificates and Loan Closings

Once investors have committed to invest in Notes or a Certificate, we facilitate the closing of the corresponding Member Loans and subsequent purchase of the Member Loan. An individual Member Loan generally closes the first business day after: (i) we receive commitments in an aggregate amount equal to the amount of the loan request; (ii) we have received at least commitments equal to 60% or more of the amount of the loan request as of the listing expiration date; or (iii) when the borrower member agrees to take a lesser amount equal to the aggregate amount of commitments received up to the expiration date.

At a Note closing, when we issue a Note to an investor and register the Note on our books and records, we transfer an amount equal to the principal amount of the Note from such investor’s sub-account under the ITF account to a funding account maintained by WebBank. At a Certificate closing, we issue or update the Certificate for the investor’s transaction and transfer an amount equal to the principal amount of the Certificate investment from such investor’s sub-account under the custodial account to a funding account maintained by WebBank. These transfers to WebBank represent payments by the investors, which is equal to 100% of the principal amounts of the Member Loans issued. These proceeds are designated for the purchases of the particular Member Loans selected by the investors. WebBank, as the true creditor for all Member Loans, allows our platform to be available on a uniform basis to borrower members throughout the United States, except that we do not currently offer Member Loans in Idaho, Indiana, Iowa, Maine, Mississippi, Nebraska and North Dakota. WebBank uses LendingClub as paying agent for the disbursement of the loan proceeds due to the ACH transfer capability we established with the borrowers in order to service the loans.

At the closing of the borrower Member’s Loan, we execute an electronic promissory note on the borrower member’s behalf for the final loan amount under a power of attorney on behalf of the borrower member. WebBank then sells the loan to us at par, electronically indorses the promissory note to us, and assigns the borrower Member’s Loan agreement to us without recourse to WebBank. To the extent that the purchased loan is to be financed by Certificates issued by the Trust, we resell the loan at par to the Trust.

The promissory note and the loan agreement contain customary agreements and covenants requiring the borrower members to repay their Member Loans and acknowledging our role as servicer for Member Loans.

Investors know only the screen names and do not know the actual names of borrower members. The actual names and addresses of the borrower members are known only to us and WebBank. We maintain custody of the electronically-executed promissory notes in electronic form on our platform.

Borrowers pay an origination fee upon the successful closing of the Member Loan. As requested by WebBank, we deduct and retain the origination fee from the loan amount prior to the disbursement of the net amount to the borrower member. The loan origination fee is determined by the term and credit grade of the loan and ranges from 1.11% to 5.00% of the original principal amount.

Pursuant to the agreement we have with WebBank, we are required to deliver to WebBank and maintain cash collateral to secure our obligations under the agreement. We do not have rights to withdraw restricted funds from this cash collateral account during the term of the agreement. The amount of our funds held by WebBank in the cash collateral account at December 31, 2012 was $3.0 million and these funds are included in Restricted Cash on our consolidated balance sheet at December 31, 2012.

Identity Fraud Reimbursement

We reimburse investors for the unpaid principal balance of a Note or Certificate that is dependent on a Member Loan obtained through identity fraud. We generally recognize the occurrence of identity fraud upon receipt of a police report regarding the identity fraud. This reimbursement for identity fraud only provides an assurance that our borrower identity verification is accurate; in no way is it a guarantee of a borrower’s self-reported information (beyond the borrower’s identity) or a borrower member’s creditworthiness. We expect the incidence of identity fraud on our platform to be low because of our identity verification process. From the time we began issuing Notes in October 2008 through December 31, 2012, we have reimbursed investors in thirty-four cases of confirmed identity fraud.

Post-Closing Loan Servicing and Collection

We begin servicing the Member Loans immediately after we purchase them.

 

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We assess investors a service charge in respect of their Notes. Our service charge is equal to the product of 1.00% and the payments for principal, interest and late fees received by us from borrower members in respect of each corresponding Member Loan (rounded to the next whole cent but to no extent less than $0.01).

LCA charges Certificate investors monthly management fees that are based on the month-end balances of capital accounts, in lieu of a servicing fee.

Our procedures generally involve the automatic debiting of borrower bank accounts by ACH transfer for the scheduled monthly principal and interest payments due on the Member Loan. If a borrower member chooses to make a loan payment by check, we impose a $15.00 check processing fee per payment, subject to applicable law. We retain 100% of any check processing and other processing fees we receive to cover our costs.

Member Loan payments are transferred to a clearing account in our name where they remain for two business days. Thereafter, we make payments on the Notes and Certificates by transferring the appropriate funds to the ITF and custodial accounts and allocating amounts received on specific Member Loans to the appropriate investor’s sub-account. We retain amounts due to us for servicing Notes and then periodically transfer such funds from the clearing account to another operating account of ours. An investor may transfer uncommitted funds out of the investor’s LendingClub sub-account in the ITF or custodial accounts by ACH or wire to the investor’s designated bank account at any time, subject to normal execution times for such transfers (generally 1-3 days).

We disclose on our website to the relevant investors and report to consumer reporting agencies regarding borrower members’ payment performance on our Member Loans. We have also made arrangements for collection procedures in the event of borrower member default. When a Member Loan is past due and payment has not been received, we contact the borrower member to request payment. After a 15-day grace period, we may, in our discretion, assess a late payment fee. The amount of the late payment fee is the greater of 5.00% of the unpaid payment amount or $15.00, or such lesser amount as may be provided by applicable law. This fee may be charged only once per late payment. Amounts equal to any late payment fees we receive are paid to holders of the Notes and Certificates that are dependent on the relevant Member Loans, net of our service charge, if applicable. We often choose not to assess a late payment fee when a borrower promises to return a delinquent loan to current status and fulfills that promise. See “About the Loan Platform – Historical Information about Our Borrower Members and Outstanding Loans.” We may also work with a borrower member to structure a new payment plan in respect of the Member Loan without the consent of any holder of the Notes or Certificates related to that Member Loan. Under the indenture for the Notes, we are required to use commercially reasonable efforts to service and collect Member Loans, in good faith, accurately and in accordance with industry standards customary for servicing loans such as the Member Loans.

Each time a payment request is denied due to insufficient funds in the borrower’s account or for any other reason, we may assess an unsuccessful payment fee to the borrower in an amount of $15.00 per unsuccessful payment, or such lesser amount as may be provided by applicable law. We retain 100% of this unsuccessful payment fee to cover our costs incurred because of the denial of the payment.

If a Member Loan becomes 31 days overdue, we identify the loan on our website as “Late (31-120),” and we either refer the Member Loan to an outside collection agent or to our in-house collections department. Currently, we generally use our in-house collections department as a first step when a borrower member misses a Member Loan payment. In the event that our initial in-house attempts to contact a borrower member are unsuccessful, we generally refer the delinquent account to the outside collection agent. Amounts equal to any recoveries we receive from the collection process are payable to Note and Certificate investors on a pro rata basis, subject to our deduction of our service charge, if applicable, and an additional collection fee. The investor is only charged the additional collection fee if we or the collection agency are able to collect a payment.

Investors are able to monitor the status of collections as the status of a Member Loan switches from “Late (15-30 days)” to “Late (31-120 days)” to “current” for example, but cannot participate in or otherwise intervene in the collection process.

 

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The following table summarizes the fees that we charge and how these fees affect investors:

 

Description of Fee

 

Fee Amount

 

When Fee is Charged

 

Effect on Investors

Service charge on Notes   1.00% of the principal, interest and late fees received by LendingClub from borrower members in respect of each corresponding member loan (in each case excluding any payments due to LendingClub on account of portions of the corresponding member loan, if any, funded by LendingClub itself)   At the time of any payments on the Notes, including Note payments resulting from prepayments or partial payments on corresponding member loans   The service charge will reduce the effective yield on your Notes below their stated interest rate
Management fee, charged to Certificate holders   Up to 1.25% annualized fee, based on month-end capital balance.   Management fee is charged monthly.   The management fee reduces the net return from investments in Certificates.
Member Loan late fee   Assessed in our discretion; if assessed, the late fee is the greater of 5.00% of the unpaid installment amount, or $15.00, or such lesser amount as may be provided by applicable law, and may be charged only once per late payment   In our discretion, when a member loan is past due and payment has not been received after a 15-day grace period   Amounts equal to any late payment fees we receive are paid to holders of the Notes corresponding to the relevant member loan, net of our 1.00% service charge
Member Loan unsuccessful payment fee   $15.00 per unsuccessful payment, or such lesser amount as may be provided by applicable law   May be assessed each time a payment request is denied, due to insufficient funds in the borrower’s account or for any other reason   We retain 100% of this unsuccessful payment fee to cover our costs incurred because of the denial of the payment
Member loan collection fee (accounts prior to October 2012)   Only charged after a member loan becomes 31 days overdue if the collection agency or LendingClub is able to collect an overdue payment; collection fee is up to 35%, excluding litigation   At the time of successful collection after a member loan becomes 31 days overdue   Collection fees charged by us or a third-party collection agency will reduce payments and the effective yield on the related Notes; collection fees will be retained by us or the third-party collection agency as additional servicing compensation
Member Loan collection fee   Pre-charged off Member Loan: up to 20% (for a actions taken after April 2012) Post charge-off Member Loan up to 25% (for a actions taken after October 2012); excluding litigation in both cases   At the time of a successful collection after a member loan becomes at least 31 days over due   Collection fees charged by us or a third-party collection agency will reduce payments and the effective yield on the related Notes; collection fees will be retained by us or the third-party collection agency as additional servicing compensation
Check processing fee   $15.00 per check processed for any payments made by check   At the time a payment by check is processed   We retain 100% of this check processing fee to cover our costs.

If a borrower member dies while a Member Loan is in repayment, we require the executor or administrator of the estate to send a death certificate to us. We then file a claim against the borrower member’s estate to attempt to recover the outstanding loan balance. Depending on the size of the estate, we may not be able to recover the outstanding amount of the loan. If the estate does not include sufficient assets to repay the outstanding Member Loan in full, we will treat the unsatisfied portion of a Member Loan as defaulted with zero value. In addition, if a borrower member dies near the end of the term of a Member Loan, it is unlikely that any further payments will be made on any Notes corresponding to such Member Loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.

 

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Our normal collection process changes in the event of a borrower member bankruptcy filing. When we receive notice of the bankruptcy filing, as required by law, we cease all automatic monthly payments on the Member Loan. We also defer any other collection activity. The status of the Member Loan, which the relevant investors may view, switches to “bankruptcy.” We next determine what we believe to be an appropriate approach to the member’s bankruptcy. If the proceeding is a Chapter 7 bankruptcy filing, seeking liquidation, we attempt to determine if the proceeding is a “no asset” proceeding, based on instructions we receive from the bankruptcy court. If the proceeding is a “no asset” proceeding, we take no further action and assume that no recovery will be made on the Member Loan.

In all other cases, we will file a proof of claim involving the borrower member. The decision to pursue additional relief beyond the proof of claim in any specific matter involving a LendingClub borrower member will be entirely within our discretion and will depend upon certain factors including:

 

   

if the borrower member used the proceeds of a LendingClub Member Loan in a way other than that which was described the borrower’s loan application;

 

   

if the bankruptcy is a Chapter 13 proceeding, whether the proceeding was filed in good faith and if the proposed plan reflects a “best effort” on the borrower member’s behalf; and

 

   

our view of the costs and benefits to us of any proposed action.

Participation in the Funding of Loans by LendingClub and Its Affiliates

Occasionally, qualified loan requests on our platform are not fully committed to by investors at the time of loan origination. For the nine months ended December 31, 2012, the Company has funded loans in an aggregate amount of approximately $10,000. We are obligated to ensure funding for the lessor of $10,000 or the amount of the loan request for loans originated through direct mail marketing campaigns and thus we will fund these loans as needed. While we are not obligated to fund the loans not originated through direct mail marketing campaigns, we may choose to fund portions of loan requests in the future. If we were to invest in any member loan, it would be on the same terms and conditions as other investors. For the nine months ended December 31, 2012, the Company has funded one loan for $0.01 million.

Our executive officers, directors and 5% stockholders, also have funded portions of loans requests from time to time in the past, and may do so in the future. For the nine months ended December 31, 2012, these affiliates made investments totaling $1.7 million that funded new Member Loan requests and their outstanding principal balance was $3.1 million as of December 31, 2012. For the twelve months ended March 31, 2012, these affiliates made investments totaling $1.3 million that funded new Member Loan requests and their outstanding principal balance was $2.2 million as of March 31, 2012.

Trading Platform

Investors may not transfer their Notes except through the resale trading platform operated by FOLIOfn Investments, Inc. (“FOLIOfn”), an unaffiliated registered broker-dealer. This trading platform is an internet-based trading platform on which LendingClub investors who establish a brokerage relationship with the registered broker-dealer operating the trading platform may offer their Notes for sale. In this section, we refer to our investors who have established such brokerage relationships as “subscribers.” Only transactions involving resales of previously issued Notes can be affected through the trading platform; the trading platform does not handle any aspect of transactions involving the initial offer and sale of Notes by us. The trading platform does not handle transfers or resales of Certificates. Subscribers may post orders to sell their Notes on the trading platform at prices established by the subscriber. Other subscribers will have the opportunity to view these prices, along with historical information from the original loan posting for the Member Loan corresponding to the Note, an updated credit score range of the borrower member and the payment history for the Note.

Currently, the only fees payable by subscribers in respect of the trading platform is the 1% fee charged by the registered broker-dealer to subscribers who sell Notes. All Notes traded through the trading platform will continue to be subject to our ongoing fees, including the ongoing service charge.

We are not a registered national securities exchange, securities information processor, clearing agency or broker-dealer. All securities services relating to the trading platform are provided by FOLIOfn. Neither we nor FOLIOfn will make any recommendations with respect to transactions on the trading platform. There is no assurance that investors will be able to establish a brokerage relationship with the registered broker-dealer. Furthermore, we cannot assure subscribers that they will be able to sell Notes they offer for resale through the trading platform at the offered price or any other price nor can we offer any assurance that the trading platform will continue to be available to subscribers. The trading platform is not available to residents of all states. As of December 31, 2012, it has taken an average of 3.8 days to sell a Note with an offer price at or below par.

 

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Customer Support

We provide customer support to our borrower members and investors. For many of our members, their experience is entirely web-based. We include detailed frequently asked questions on our website. We also post detailed fee information and the full text of our member legal agreements.

We make additional customer support available to members by email and phone. Our customer support team is located at our headquarters in San Francisco, California.

Statistical Information on our Loan Portfolio

In regards to the following historical information, prior performance is no guarantee of future results or outcomes.

From inception to December 31, 2012, we had facilitated Member Loans with an average original principal amount of approximately $12,286 and an aggregate original principal amount of $1.2 billion. Out of 95,902 facilitated Member Loans, 15,853 Member Loans with an aggregate original principal amount of $162 million, or 13.73%, had fully paid. Including loans which were fully paid, 89,836 loans representing $1.1 billion of the original principal balance of loans facilitated through the platform through December 31, 2012 had been through at least one billing cycle.

Of this $1.1 billion of original principal balance at December 31, 2012 that had been through at least one billing cycle, $24.2 million of outstanding principal balance less interest and fees received, or 2.57%, was either in default or had been charged off. The defaulted or charged off loans were comprised of 3,922 Member Loans, of which 2,834 loans representing $19.2 million in outstanding principal balance less interest and fees received, were defaults and charge offs due to delinquency, while the remaining 874 loans were loans in which the borrower members filed for a Chapter 7 bankruptcy seeking liquidation. A Member Loan is considered defaulted when at least one payment is more than 120 days late and it is charged-off no later than when it reaches 150 days late.

Of remaining loans that had been through at least one billing cycle as of December 31, 2012, $711.4 million of principal remained outstanding of which 97.70% was current, 0.36% was 16 to 30 days late, 1.57% was between 31 and 120 days late and 0.37% was on a performing payment plan. During the nine months ended December 31, 2012, of the 53,521 Member Loans which were not delinquent prior to the start of the year, 1,785 Member Loans became delinquent for some amount of time during the nine months, excluding those that entered the 0 to 15 day grace period.

 

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The following table presents aggregated information about loans for the period from inception to December 31, 2012, grouped by the loan grade assigned by us:

 

Loan Grade

   Number of
Loans
     Average
Interest Rate
    Total Amount
Issued
 

A1

     2,826         5.94   $ 24,111,875   

A2

     3,181         6.51     27,354,850   

A3

     3,572         7.38     33,419,725   

A4

     6,073         7.79     64,277,100   

A5

     5,432         8.57     57,570,750   

B1

     4,420         10.01     46,787,225   

B2

     5,380         10.80     59,766,525   

B3

     8,326         11.69     96,356,500   

B4

     6,462         12.40     76,640,025   

B5

     6,308         12.93     73,739,200   

C1

     5,814         13.65     69,349,550   

C2

     5,467         14.35     66,774,675   

C3

     3,356         14.61     39,504,725   

C4

     3,149         15.18     36,948,750   

C5

     2,829         15.79     33,881,300   

D1

     2,751         16.47     31,756,425   

D2

     3,223         16.86     40,865,375   

D3

     2,778         17.13     39,553,275   

D4

     2,489         17.50     37,879,500   

D5

     2,098         17.99     33,832,750   

E1

     1,672         18.39     28,335,325   

E2

     1,521         18.82     26,660,400   

E3

     1,261         19.20     22,417,625   

E4

     1,152         19.80     21,695,450   

E5

     973         20.18     19,140,000   

F1

     796         20.74     16,414,400   

F2

     634         21.02     12,760,650   

F3

     481         21.44     9,879,500   

F4

     385         21.50     7,911,950   

F5

     320         21.91     7,270,100   

G1

     262         22.16     5,708,500   

G2

     175         22.01     3,601,850   

G3

     110         21.77     2,150,350   

G4

     123         21.38     2,353,325   

G5

     103         21.03     1,569,250   
  

 

 

      

 

 

 

Total Portfolio

     95,902         12.98   $ 1,178,238,775   
  

 

 

      

 

 

 

 

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The following table presents aggregated information for the period from inception to December 31, 2012, reported by a consumer reporting agency about our borrower members at the time of their loan applications, grouped by the loan grade assigned by us. As used in this table, “Delinquencies in the Last Two Years” means the number of 30+ days past-due incidences of delinquency in the borrower member’s credit file for the past two years. We do not independently verify this information. All figures other than loan grade are agency reported:

 

Loan Grade

   Average
FICO
     Average
Open Credit
Lines
     Average
Total Credit
Lines
     Average
Revolving
Credit Balance
     Average
Revolving
Line
Utilization
    Average
Inquiries
in the Last
Six
Months
     Average
Delinquencies
in the Last Two
Years
     Average
Months
Since Last
Delinquency
 

A1

     778         10         25       $ 10,850         20.98     0         0         41   

A2

     762         10         24         10,840         26.07     1         0         40   

A3

     753         10         23         11,869         30.68     1         0         39   

A4

     741         10         23         13,268         38.21     1         0         39   

A5

     732         10         23         14,531         42.74     1         0         39   

B1

     725         10         23         13,616         46.99     1         0         38   

B2

     719         10         23         14,059         49.37     1         0         39   

B3

     710         10         22         14,409         54.61     1         0         37   

B4

     707         10         23         14,700         54.39     1         0         38   

B5

     703         10         22         14,543         57.04     1         0         37   

C1

     697         10         22         14,709         59.55     1         0         36   

C2

     694         10         22         14,818         61.15     1         0         36   

C3

     694         10         23         15,024         58.54     1         0         35   

C4

     689         10         23         14,910         60.97     2         0         35   

C5

     687         10         22         14,448         61.78     2         0         34   

D1

     678         10         22         14,704         67.20     1         0         34   

D2

     684         10         22         14,882         65.22     1         0         35   

D3

     686         10         22         16,159         65.60     1         0         35   

D4

     685         10         23         15,919         66.52     1         0         36   

D5

     685         10         24         17,379         67.10     1         0         35   

E1

     685         10         24         16,594         67.46     1         0         35   

E2

     683         11         24         17,602         67.95     1         0         34   

E3

     681         11         24         18,585         69.78     1         0         33   

E4

     679         11         25         19,020         69.91     1         0         34   

E5

     678         11         25         19,336         70.42     1         0         33   

F1

     677         11         26         19,450         69.33     1         0         32   

F2

     675         11         25         20,263         72.66     1         0         33   

F3

     674         12         26         20,630         72.15     1         0         31   

F4

     671         11         27         19,263         72.24     1         0         30   

F5

     670         12         27         22,195         74.30     1         0         32   

G1

     669         12         27         18,718         71.47     2         1         30   

G2

     670         13         27         24,893         75.39     2         0         30   

G3

     668         12         26         18,774         77.98     2         0         28   

G4

     666         14         30         29,989         73.62     2         0         31   

G5

     663         15         32         41,261         70.88     3         0         27   

Total Portfolio

     709         10         23       $ 14,749         54.01     1         0         36   

 

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The following table presents additional aggregated information for the period from inception to December 31, 2012, about borrower current and paid off loans, grouped by the loan grade assigned by us.

 

Loan Grade

   Number
of
Current
loans
     Current loan
Outstanding
Principal ($)
     Number
of Loans
Fully Paid
     Fully Paid ($)      Fully Paid
(%) of
Originated
Issued
Loans
    Number
of All
Issued
Loans
     Total Origination
Amount for All
Issued Loans
 

A1

     2,277       $ 14,586,875         368       $ 2,439,375         10.12     2,826       $ 24,111,875   

A2

     2,399         15,945,531         592         3,514,225         12.85     3,181         27,354,850   

A3

     2,513         17,742,130         799         5,554,825         16.62     3,572         33,419,725   

A4

     4,538         37,093,249         1,137         9,564,775         14.88     6,073         64,277,100   

A5

     3,647         27,946,752         1,188         10,975,475         19.06     5,432         57,570,750   

B1

     3,221         26,589,646         767         7,478,150         15.98     4,420         46,787,225   

B2

     3,686         31,267,600         867         9,303,825         15.57     5,380         59,766,525   

B3

     6,474         60,324,637         1,034         11,945,775         12.40     8,326         96,356,500   

B4

     4,713         44,984,905         918         9,907,625         12.93     6,462         76,640,025   

B5

     4,686         44,325,895         1,002         10,411,475         14.12     6,308         73,739,200   

C1

     4,303         43,089,465         840         8,605,550         12.41     5,814         69,349,550   

C2

     4,008         41,420,004         771         8,116,700         12.16     5,467         66,774,675   

C3

     2,052         19,084,119         660         6,712,125         16.99     3,356         39,504,725   

C4

     1,940         18,384,304         628         6,385,175         17.28     3,149         36,948,750   

C5

     1,774         17,499,387         516         4,997,375         14.75     2,829         33,881,300   

D1

     1,832         17,246,925         446         4,566,425         14.38     2,751         31,756,425   

D2

     2,217         24,583,162         508         5,650,975         13.83     3,223         40,865,375   

D3

     1,883         24,193,599         464         5,372,675         13.58     2,778         39,553,275   

D4

     1,695         23,696,791         392         4,523,900         11.94     2,489         37,879,500   

D5

     1,401         20,689,926         365         4,568,150         13.50     2,098         33,832,750   

E1

     1,109         17,315,563         269         3,473,675         12.26     1,672         28,335,325   

E2

     1,004         16,811,480         249         2,982,450         11.19     1,521         26,660,400   

E3

     830         14,169,191         220         2,914,425         13.00     1,261         22,417,625   

E4

     771         14,159,262         169         2,319,775         10.69     1,152         21,695,450   

E5

     667         12,433,356         145         1,864,325         9.74     973         19,140,000   

F1

     541         10,904,053         111         1,456,850         8.88     796         16,414,400   

F2

     415         8,143,105         87         1,211,575         9.49     634         12,760,650   

F3

     317         6,446,644         66         917,775         9.29     481         9,879,500   

F4

     247         5,047,478         56         742,350         9.38     385         7,911,950   

F5

     199         4,556,561         49         848,550         11.67     320         7,270,100   

G1

     167         3,626,719         46         811,775         14.22     262         5,708,500   

G2

     107         2,088,669         23         290,700         8.07     175         3,601,850   

G3

     48         962,187         27         401,675         18.68     110         2,150,350   

G4

     52         962,483         32         518,025         22.01     123         2,353,325   

G5

     28         481,240         42         458,500         29.22     103         1,569,250   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total

     67,761       $ 688,802,892         15,853       $ 161,807,000         13.73     95,902       $ 1,178,238,775   
  

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

The following table presents additional aggregated information for the period from inception to December 31, 2012, about delinquencies and default loans, grouped by the loan grade assigned by us. The default and delinquency information presented in the table includes data only for Member Loans that had been through at least one billing cycle as of March 31, 2012. With respect to late Member Loans, the following table shows the entire amount of the principal remaining due, not just that particular payment. The third and fifth columns show the late Member Loan amounts as a percentage of Member Loans that have been through at least one billing cycle. Member Loans are placed on nonaccrual status and considered as defaulted when they become 120 days late. The data presented in the table below comes from a set of Member Loans that have been outstanding, on average, for approximately twelve months.

 

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The data in the following table regarding loss experience may not be representative of the loss experience that will develop over time as additional Member Loans are facilitated through our platform and the Member Loans already facilitated through our platform have longer payment histories.

 

Loan Grade

  16-30 Days
Late ($)
    16-30
Days

Late
(%)
    31+ Days
Late ($)
    31+
Days

Late
(%)
    Charged-Off /
Default ($ )
    Charged-Off /
Default  of
Through At
Least One
Billing Cycle
(%)
    Number of
Loans excl
Issued /
Fully Paid
    Number
of All
Issued
Loans
    Total Origination
Amount for All
Issued Loans
    Charged-Off /
Default of
All Issued
(%)
 

A1

  $ 16,794        0.11   $ 32,407        0.22   $ 120,038        0.55     2,313        2,826      $ 24,111,875        0.50

A2

    11,815        0.07     99,359        0.61     184,540        0.72     2,472        3,181        27,354,850        0.67

A3

    34,237        0.19     115,219        0.63     270,625        0.88     2,619        3,572        33,419,725        0.81

A4

    69,407        0.18     262,950        0.69     478,709        0.79     4,714        6,073        64,277,100        0.74

A5

    63,298        0.22     271,508        0.93     656,328        1.27     3,859        5,432        57,570,750        1.14

B1

    64,138        0.23     262,968        0.94     694,733        1.59     3,412        4,420        46,787,225        1.48

B2

    109,706        0.33     317,067        0.96     803,591        1.57     3,923        5,380        59,766,525        1.34

B3

    141,261        0.22     618,358        0.98     1,541,773        1.71     6,830        8,326        96,356,500        1.60

B4

    145,656        0.31     374,390        0.79     1,384,176        2.00     5,041        6,462        76,640,025        1.81

B5

    107,663        0.23     483,341        1.03     1,463,149        2.09     5,036        6,308        73,739,200        1.98

C1

    132,897        0.29     630,180        1.37     1,495,264        2.32     4,654        5,814        69,349,550        2.16

C2

    46,102        0.10     523,511        1.19     1,462,070        2.37     4,356        5,467        66,774,675        2.19

C3

    50,980        0.24     339,665        1.58     1,411,655        4.14     2,359        3,356        39,504,725        3.57

C4

    51,827        0.26     322,804        1.60     996,575        3.20     2,170        3,149        36,948,750        2.70

C5

    108,554        0.56     287,888        1.48     1,073,108        3.68     2,039        2,829        33,881,300        3.17

D1

    119,201        0.63     254,245        1.34     920,421        3.25     2,067        2,751        31,756,425        2.90

D2

    104,332        0.38     694,044        2.54     1,262,877        3.25     2,543        3,223        40,865,375        3.09

D3

    176,039        0.65     609,567        2.26     1,336,602        3.55     2,161        2,778        39,553,275        3.38

D4

    115,091        0.44     556,005        2.12     1,181,637        3.33     1,951        2,489        37,879,500        3.12

D5

    175,995        0.77     408,025        1.78     1,090,376        3.46     1,613        2,098        33,832,750        3.22

E1

    67,774        0.34     548,364        2.78     1,129,565        4.22     1,331        1,672        28,335,325        3.99

E2

    34,658        0.19     328,963        1.76     926,172        3.75     1,175        1,521        26,660,400        3.47

E3

    100,018        0.64     317,973        2.03     732,988        3.50     969        1,261        22,417,625        3.27

E4

    103,956        0.65     406,126        2.55     814,880        3.97     919        1,152        21,695,450        3.76

E5

    55,173        0.39     434,561        3.10     689,157        3.81     783        973        19,140,000        3.60

F1

    24,132        0.20     358,018        2.90     750,168        4.86     638        796        16,414,400        4.57

F2

    57,660        0.62     229,644        2.46     589,853        4.94     506        634        12,760,650        4.62

F3

    63,639        0.85     309,839        4.15     375,692        4.02     384        481        9,879,500        3.80

F4

    22,061        0.37     147,072        2.47     499,990        6.65     310        385        7,911,950        6.32

F5

    69,519        1.30     218,944        4.08     383,257        5.56     255        320        7,270,100        5.27

G1

    36,745        0.89     92,532        2.24     204,311        3.74     206        262        5,708,500        3.58

G2

    63,650        2.32     127,172        4.63     302,428        8.65     147        175        3,601,850        8.40

G3

    1,771        0.12     108,518        7.50     209,406        9.92     81        110        2,150,350        9.74

G4

    22,785        1.66     77,769        5.68     183,146        7.98     89        123        2,353,325        7.78

G5

    —          0.00     19,869        2.48     206,148        13.72     58        103        1,569,250        13.14
 

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

Total

  $ 2,568,536        0.35   $ 11,188,863        1.50   $ 27,825,408        2.57     73,983        95,902      $ 1,178,238,775        2.36
 

 

 

     

 

 

     

 

 

     

 

 

   

 

 

   

 

 

   

The following table presents aggregated information for the period from inception to December 31, 2012, on the results of our collection efforts for all corresponding Member Loans that became more than 30 days past due at any time, grouped by credit grade. For purposes of this inception-to-date analysis, we have excluded 64 loans that we classified as identity fraud. In these cases, we wrote-off the uncollectible loan and repaid holders of any related Notes an amount equal to the unpaid principal balances due on the Notes less any applicable servicing fees.

 

Loan Grade

   Number of Loans
In Collection (1)
     Total
Origination
Amount (1)
     Aggregate
Amount Sent
to Collectons (1)
     Gross Amount
Collected on
Accounts Sent
to Collections (2)
     Number of Loans
Charged-Off Due
to Delinquency (3)
     Aggregate
Principal
Balance of
Loans Charged-
Off Due to
Delinquency (3)
     Gross
Amount
Recovered

on Loans
Charged-Off (4)
 

A

     1,065       $ 7,552,650       $ 705,739       $ 256,952         248       $ 1,164,271       $ 44,744   

B

     1,848         17,737,725         2,158,827         889,811         571         3,608,790         73,006   

C

     1,999         18,901,050         2,521,379         1,040,569         710         4,269,872         112,118   

D

     1,574         16,446,575         2,307,509         967,276         622         4,231,629         94,150   

E

     914         11,061,275         1,561,491         670,198         366         2,912,703         67,367   

F

     387         6,012,650         907,035         344,561         190         1,930,472         63,468   

G

     202         2,878,375         488,112         225,686         93         811,256         21,776   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7,989       $ 80,590,300       $ 10,650,093       $ 4,395,053         2,800       $ 18,928,994       $ 476,628   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1) Represents accounts 31 to 120 days past due.
2) Represents the gross amounts collected on corresponding Member Loans while such accounts were in collection during the 31 to 120 days past-due period. This amount does not represent payments received after an account has been sent to collection, cured and returned to current status.

 

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3) Represents accounts that have been delinquent for 120 days at which time the account is charged-off. Any money recovered after charge-off is no longer included as amounts collected on accounts sent to collection. Through December 31, 2012, a total of 2,800 loans have been charged off due to delinquency, none of which were on a payment plan as of December 31, 2012.
4) Represents the gross amounts we received on charged-off accounts after the accounts were charged-off (i.e., a payment received on an account after 120 days past due).

The following graph presents the dollar weighted average interest rate for Member Loans originated from inception to December 31, 2012, by grade.

 

LOGO

Actual Loss Rates

Loan performance is reviewed on a monthly basis to determine how loss rate estimates compare to the actual performance of loans. As part of our monthly review, the processes for calculating and assigning loss rates and LendingClub grades are reassessed to ensure continued accuracy. The graph below shows the actual cumulative net charge-offs by LendingClub grades for Member Loans booked from January 1, 2008 through December 31, 2012, as a percentage of originations. Performance is as of December 31, 2012. The loss performance is tracked by vintage, meaning each line represents all loans originated in a given period.

 

LOGO

 

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Table of Contents

The graphs below show cumulative net charge-offs for Member Loans as a percentage of originations for each LendingClub grade presented by vintage from January 1, 2008 to December 31, 2012. Performance is as of December 31, 2012.

 

LOGO

 

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LOGO

 

20


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LOGO

 

21


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LOGO

ABOUT LENDINGCLUB

We are the operator of an online financial community that provides a number of benefits to our borrower and investor members. We believe the key features of our experience are the following:

 

   

Better interest rates than those generally available from traditional banks and credit cards;

 

   

24-hour online availability to initiate a loan request;

 

   

Convenient, electronic payment processing; and

 

   

Amortizing fixed-rate loans, which represent a more responsible way for consumers to borrow than revolving credit facilities.

Business Strengths

We believe that the following business strengths differentiate us from competitors and are key to our success:

 

   

Focus on high quality borrowers. To satisfy WebBank’s credit criteria, a potential borrower must have certain credit attributes including:

 

   

minimum FICO score of 660 (as reported by a consumer reporting agency);

 

   

debt-to-income ratio (excluding mortgage) below 35%; and

 

   

credit report (as reported by a consumer reporting agency) reflecting:

 

   

at least two revolving accounts currently open;

 

   

6 or less inquiries in the last 6 months; and

 

   

a minimum credit history of 36 months.

 

   

Efficient distribution channels. We attract members to our website, www.lendingclub.com, through a variety of sources. We drive traffic through referrals from customers and other parties, search engine results, and online and offline advertising. We are not dependent on any one source of traffic to our website.

 

   

Management team. We have a management team with experience in broad set of areas that are essential to the operation of our business.

 

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Corporate History

We were incorporated in Delaware in October 2006 under the name SocBank Corporation. We changed our name to LendingClub Corporation in November 2006. In May 2007, we began operations and in September 2007, we expanded our operations with the launch of our public web site, www.lendingclub.com. We have been operating since December 2007 pursuant to agreements with WebBank who serves as the lender for all loans listed on our platform.

Change in Fiscal Year

On December 19, 2012, our Board of Directors approved a change in our fiscal year-end from March 31 to December 31. The change was effective as of December 31, 2012. We are filing the accompanying consolidated financial statements in connection with a transition report filed with the Securities and Exchange Commission which covers the nine month period beginning April 1, 2012 and ending December 31, 2012 and the historical activities of the periods ended March 31, 2012 and nine month period ended December 31, 2011. Our next fiscal year will cover the period from January 1, 2013 through December 31, 2013.

Marketing

Our marketing efforts are designed to attract visitors to our website, to enroll them as members and to close transactions with them. We employ a combination of paid and unpaid sources to market our platform. We also invest in public relations to build our brand and visibility. We measure website visitor-to-member conversion and test graphics and layout alternatives to improve website conversion. We also seek to customize our website to meet our members’ needs whenever possible. Our marketing expense totaled approximately $10.2 million for the nine months ended December 31, 2012 and $8.2 million for the fiscal year ended March 31, 2012.

From time to time, we may conduct special promotions to increase the participation of existing members on our platform or to attract new members. These promotions could include offering special incentives for registering as a lender or a borrower, posting a loan listing, or moving money onto our platform. These promotions may be offered to all customers for all products or could be restricted to particular products or types of customers.

Technology

Our system hardware for the platform is colocated in a data center hosting facility in Nevada. The facility provides around-the-clock security personnel, video surveillance and biometric access screening and is serviced by onsite electrical generators, fire detection and suppression systems. The facility has multiple Tier 1 interconnects to the Internet. We also maintain a “near” real time disaster recovery data center colocated in a hosting facility in Northern California.

We own all of the hardware deployed in support of our platform. We continuously monitor the performance and availability of our platform.

We have developed our own cash management software to process electronic cash movements, record book entries and calculate cash balances in our members’ funding accounts. We process electronic deposits and payments by originating ACH transactions.

We have a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”). Pursuant to this agreement, PFSC will prepare and then stand ready to service the Member Loans. Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the Member Loans. Pursuant to our agreement with PFSC, we have agreed to pay PFSC monthly start-up preparation fees and a one-time preparation fee, and then to pay PFSC a monthly standby fee. Upon PFSC becoming the servicer of the Member Loans, we will pay PFSC a one-time declaration fee, and PFSC will be entitled to retain a servicing fee up to 5% of the amounts it collects as servicer. Our agreement with PFSC was renewed as of September 2011 for a three year term with automatic annual renewals thereafter unless advance notice of non-renewal is provided by either party. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.

Scalability

We have a scalable infrastructure that utilizes standard techniques such as load-balancing and redundancies. Our application and database tiers are designed to be scaled horizontally by adding new servers as needed. The application tier is accessed through a load-balancer which routes requests to the least busy server. We monitor and record system performance parameters and regularly perform capacity planning to anticipate capacity requirements.

 

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Data Integrity and Security

All data received from end users or from our business counterparties are transported in a secure manner; for example, we only expose data or action pages of our application in SSL mode. We have received a SSL certification from VeriSign. For communication with our banking counterparties, we require a dedicated, fully authenticated connection (“VPN”), in addition to the SSL encryption of the data. Data storage follows specific rules for specific cases. For example, the most sensitive information is stored using one-way encryption, which makes it impossible to read in the clear, and for regular data, a set of access control rules have been created to limit the visibility of the data and to protect the privacy of each user.

We utilize a state of the art network firewall technology for perimeter level threat protection. The philosophy of least privilege is used throughout the infrastructure. In short, each person has access to only what they require to do their job. We follow security best practices for provisioning, hardening servers, logging and monitoring.

Fraud Detection

We consider fraud detection to be of utmost importance to the successful operation of our business. We employ a combination of proprietary technologies and commercially available licensed technologies and solutions to prevent and detect fraud. We employ techniques such as knowledge based authentication, out-of-band authentication and notification, behavioral analytics and digital fingerprinting to prevent identity fraud. We use services from third-party vendors for user identification, credit checks and OFAC compliance. In addition, we use specialized third-party software to augment our fraud detection systems. In addition to our identity fraud detection system, we also have a dedicated team which conducts additional investigations of cases flagged for high fraud risk by verifying the income and employment data reported by borrower members. See “Item 1. Business – About the Platform – How the LendingClub Platform Operates – Verification of Borrower.”

Engineering

We have made substantial investments in software and technology development and we expect to continue or increase the level of this investment as part of our strategy to continually improve the platform. In addition to developing additional platform and website functionality and maintaining an active online deployment, the engineering department also performs technical competitive analysis as well as systematic product usability testing. As of December 31, 2012, we had an engineering team of 20 permanent employees and 27 contractors working on designing and implementing the ongoing releases of our platform. Our engineering expense totaled approximately $4.0 million for the nine months ended December 31, 2012 and $2.7 million for the fiscal year ended March 31, 2012.

Competition

The market for lending is competitive and rapidly evolving. We believe the following are the principal competitive factors in the lending market:

 

   

pricing and fees;

 

   

website attractiveness;

 

   

member experience, including borrower full funding rates and investor returns;

 

   

branding; and

 

   

ease of use.

We face competition from major banking institutions, credit unions, credit card issuers and other consumer finance companies.

We may also face future competition from new companies entering our market, which may include large, established companies. These companies may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their consumer lending platforms. These potential competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. These potential competitors may have more extensive potential borrower bases than we do. In addition, these potential competitors may have longer operating histories and greater name recognition than we do. Moreover, if one or more of our competitors were to merge or partner with another of our competitors or a new market entrant, the change in competitive landscape could adversely affect our ability to compete effectively.

Intellectual Property

We rely on a combination of copyright, trade secret, trademark, and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property.

 

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Although the protection afforded by copyright, trade secret, trademark and patent law, written agreements and common law may provide some advantages, we believe that the following factors help us to maintain a competitive advantage:

 

   

technological skills of our software and website development personnel;

 

   

frequent enhancements to our platform; and

 

   

high levels of member satisfaction.

Our competitors may develop products that are similar to our technology. We enter into agreements with our employees, consultants and partners, and through these and other written agreements, we attempt to control access to and distribution of our software, documentation and other proprietary technology and information. Despite our efforts to protect our proprietary rights, third parties may, in an authorized or unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our solution. Policing all unauthorized use of our intellectual property rights is nearly impossible. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.

“LendingClub” is a registered trademark in the United States.

We have developed our own software and do not use software licensed to us by third parties for processing electronic cash movements and calculating cash balances in lender members’ accounts.

Employees

As of December 31, 2012, we had 138 full-time employees. Of these employees:

 

   

89 were in sales, marketing and customer service, which includes the employees who conduct our collections, credit, operations and member support activities;

 

   

20 were in engineering;

 

   

23 were in general and administration; and

 

   

6 were in LCA.

None of our employees are represented by labor unions. We have not experienced any work stoppages and believe that our relations with our employees are good.

Facilities

In July 2012, we entered into a lease agreement for approximately 16,900 square feet of additional space in our corporate headquarters location in San Francisco, CA, which includes our principal administrative, marketing, technical support and engineering functions. The lease commenced on September 15, 2012 and expires in June 2017. The average monthly rent expense for the additional space in our corporate headquarters is approximately $68,000 and we pledged $58,000 as a security deposit.

In April 2011, we entered into a lease agreement for approximately 18,200 square feet of space in San Francisco, CA for our corporate headquarters. The lease began on May 1, 2011 and expires in June 2017. We can terminate the lease upon nine months’ notice prior to the third anniversary of the lease. The average monthly rent expense for this space in our corporate headquarters is approximately $42,000 and we pledged $200,000 as a security deposit.

Since July 2010, we entered into several month-to-month or short-term lease agreements for the lease of office space, ranging from 250 to 400 square feet, in New York City. In December 2012, we renewed the lease for approximately 250 square feet for a New York City office for a one year term that expires on January 31, 2014.

Facilities rental expense for the nine months ended December 31, 2012 was $0.6 million. Facilities rental expense for fiscal year ending March 31, 2012 was $0.5 million.

Legal

The Company may be subject to legal proceedings and regulatory actions in the ordinary course of business. After consultation with legal counsel, the Company does not anticipate that the ultimate liability, if any, arising out of any such matter will have a material effect on its financial condition or results of operations.

 

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Government Regulation

Overview

The consumer loan industry is highly regulated. We, and the Member Loans made through our platform, are subject to extensive and complex rules and regulations, licensing and examination by various federal, state and local government authorities. These authorities impose obligations and restrictions on our activities and the Member Loans made through our platform. In particular, these rules limit the fees that may be assessed on the Member Loans, require extensive disclosure to, and consents from, our participants, prohibit discrimination and impose multiple qualification and licensing obligations on platform activities. Failure to comply with these requirements may result in, among other things, revocation of required licenses or registration, loss of approved status, voiding of the loan contracts, class action lawsuits, administrative enforcement actions and civil and criminal liability. While compliance with such requirements is at times complicated by our novel business model, we believe we are in substantial compliance with these rules and regulations. These rules and regulations are subject to continuous change, however, and a material change could have an adverse effect on our compliance efforts and ability to operate.

Licensing and Consumer Protection Laws

State Licensing Requirements

We hold licenses in a number of states and are otherwise authorized to conduct activities on a uniform basis in all other states and the District of Columbia, with the exceptions of Idaho, Indiana, Iowa, Maine Mississippi, Nebraska and North Dakota. State licensing statutes impose a variety of requirements and restrictions, including:

 

   

recordkeeping requirements;

 

   

restrictions on loan origination and servicing practices, including limits on finance charges and fees;

 

   

disclosure requirements;

 

   

examination requirements;

 

   

surety bond and minimum net worth requirements;

 

   

financial reporting requirements;

 

   

notification requirements for changes in principal officers, stock ownership or corporate control;

 

   

restrictions on advertising; and

 

   

review requirements for loan forms.

The statutes also subject us to the supervisory and examination authority of state regulators in certain cases.

State Usury Limitations

Section 521 of the Depository Institution Deregulation and Monetary Control Act of 1980 (12 U.S.C. § 1831d) and Section 85 of the National Bank Act (NBA) (12 U.S.C. § 85), federal case law interpreting the NBA such as Tiffany v. National Bank of Missouri and Marquette National Bank of Minneapolis v. First Omaha Service Corporation, and FDIC advisory opinion 92-47 permit FDIC-insured depository institutions, such as WebBank, to “export” the interest rate permitted under the laws of the state where the bank is located, regardless of the usury limitations imposed by the state law of the borrower’s residence unless the state has chosen to opt out of the exportation regime. WebBank is located in Utah, and Title 70C of the Utah Code does not limit the amount of fees or interest that may be charged by WebBank on loans of the type offered through our platform. Only Iowa and Puerto Rico have opted out of the exportation regime under Section 525 of DIDA and we do not operate in either jurisdiction. However, we believe that if a state in which we did operate opted out of rate exportation that judicial interpretations support the view that such opt outs only apply to loans “made” in those states. As the loan document states that “…the [Promissory] Note will be entered into in the state of Utah,” we believe that the “opt-out” of any state would not affect the ability of our platform to benefit from the exportation of rates. If a loan made through our platform was deemed to be subject to the usury laws of a state that has opted-out of the exportation regime, we could become subject to fines, penalties, possible forfeiture of amounts charged to borrowers and we may decide not to originate loans in that applicable jurisdiction, which may adversely impact our growth.

State Disclosure Requirements and Other Substantive Lending Regulations

We are subject to state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt collection and unfair or deceptive business practices. Our ongoing compliance program seeks to comply with these requirements.

 

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Truth in Lending Act

The Truth in Lending Act (“TILA”), and Regulation Z, which implements it, require lenders to provide consumers with uniform, understandable information concerning certain terms and conditions of their loan and credit transactions. These rules apply to WebBank as the creditor for Member Loans facilitated through our platform, but because the transactions are carried out on our hosted website, we facilitate compliance. For closed-end credit transactions of the type provided through our platform, these disclosures include providing the annual percentage rate, the finance charge, the amount financed, the number of payments and the amount of the monthly payment. The creditor must provide the disclosures before the loan is closed. TILA also regulates the advertising of credit and gives borrowers, among other things, certain rights regarding updated disclosures and the treatment of credit balances. Our platform provides borrowers with a TILA disclosure at the time a borrower member posts a loan request on the platform. If the borrower member’s request is not fully funded and the borrower chooses to accept a lesser amount offered, we provide an updated TILA disclosure. We also seek to comply with TILA’s disclosure requirements related to credit advertising.

Equal Credit Opportunity Act

The federal Equal Credit Opportunity Act (“ECOA”) prohibits creditors from discriminating against credit applicants on the basis of race, color, sex, age, religion, national origin, marital status, or the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act or any applicable state law. Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from loan applicants and from making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application. These requirements apply both to a lender such as WebBank as well as to a party such as ourselves that regularly participates in a credit decision. Investors may also be subject to the ECOA in their capacity as purchasers of Notes, if they are deemed to regularly participate in credit decisions. In the underwriting of Member Loans on the platform, both WebBank and us seek to comply with ECOA’s provisions prohibiting discouragement and discrimination. As further measures, borrowers are instructed not to provide the type of information that creditors are not permitted to request from applicants under the ECOA and the investor agreement requires investors to comply with the ECOA in their selection of Member Loans they designate for funding. The ECOA also requires creditors to provide consumers with timely notices of adverse action taken on credit applications. WebBank and us provide prospective borrowers who apply for a loan through the platform but are denied credit with a joint adverse action notice in compliance with the ECOA requirements (see also below regarding “Fair Credit Reporting Act”).

Fair Credit Reporting Act

The Federal Fair Credit Reporting Act (“FCRA”), administered by the Federal Trade Commission, promotes the accuracy, fairness and privacy of information in the files of consumer reporting agencies. FCRA requires a permissible purpose to obtain a consumer credit report, and requires persons to report loan payment information to credit bureaus accurately. FCRA also imposes disclosure requirements on creditors who take adverse action on credit applications based on information contained in a credit report. Effective August 1, 2009, we must also develop and implement an identity theft prevention program for combating identity theft. WebBank and ourselves have a permissible purpose for obtaining credit reports on potential borrowers and also obtain explicit consent from borrowers to obtain such reports. As the servicer for the Member Loans, we accurately report member loan payment and delinquency information to consumer reporting agencies. We provide a combined ECOA/FCRA adverse action notice to a rejected borrower on WebBank’s behalf at the time the borrower is rejected that includes the required disclosures. We have implemented an identity theft prevention program.

Fair Debt Collection Practices Act

The Federal Fair Debt Collection Practices Act (“FDCPA”) provides guidelines and limitations on the conduct of third-party debt collectors in connection with the collection of consumer debts. The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA applies to third-party debt collectors, debt collection laws of certain states impose similar requirements on creditors who collect their own debts. Our agreement with its investors prohibits investors from attempting to directly collect on the Member Loans. Actual collection efforts in violation of this agreement are unlikely given that investors do not learn the identity of borrower members. We use our internal collection team and a professional third-party debt collection agent to collect delinquent accounts. They are required to comply with the FDCPA and all other applicable laws in collecting delinquent accounts of our borrower members.

Privacy and Data Security Laws

The federal Gramm-Leach-Bliley Act (“GLBA”) limits the disclosure of nonpublic personal information about a consumer to nonaffiliated third parties and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information. A number of states have similarly enacted privacy and data security laws requiring safeguards to protect the privacy and security of consumers’

 

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personally identifiable information and to require notification to affected customers in the event of a breach. We have a detailed privacy policy, which complies with GLBA and is accessible from every page of our website. We maintain participants’ personal information securely, and we do not sell, rent or share such information with third parties for marketing purposes unless previously agreed to by the participant . In addition, we take a number of measures to safeguard the personal information of our members and protect against unauthorized access.

Servicemembers Civil Relief Act

The federal Servicemembers Civil Relief Act (“SCRA”) allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires we adjust the interest rate of borrowers who qualify for and request relief. If a borrower member with an outstanding Member Loan is called to active military duty and can show that such military service has materially affected the member’s ability to make payments on the loan, we will reduce the interest rate on the loan to 6% for the duration of the borrower member’s active duty. During this period, the investors who have purchased Notes dependent on such Member Loan will not receive the difference between 6% and the loan’s original interest rate. For a borrower member to obtain an interest rate reduction on a Member Loan due to military service, we require the borrower member to send us a written request and a copy of the borrower member’s mobilization orders. We do not take military service into account in assigning loan grades to borrower Member Loan requests and we do not disclose the military status of borrowers to investors.

The Dodd-Frank Wall Street Reform and Consumer Protection Act.

In July 2010 the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law. The Dodd-Frank Act is extensive and significant legislation that, among other things:

 

   

created a liquidation framework under which the Federal Deposit Insurance Corporation (“FDIC”) may be appointed as receiver following a “systemic risk determination” by the Secretary of Treasury (in consultation with the President) for the resolution of certain nonbank financial companies and other entities, defined as “covered financial companies,” and commonly referred to as “systemically important entities,” in the event such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability in the United States, and also for the resolution of certain of their subsidiaries;

 

   

created a new framework for the regulation of over-the-counter derivatives activities;

 

   

strengthened the regulatory oversight of securities and capital markets activities by the SEC;

 

   

created the Consumer Financial Protection Bureau (“CFPB”), a new agency responsible for administering and enforcing the laws and regulations for consumer financial products and services; and

 

   

increased the regulation of the securitization markets through, among other things, a mandated risk retention requirement for securitizers and a direction to the SEC to regulate credit rating agencies and adopt regulations governing these organizations and their activities.

The various requirements of the Dodd-Frank Act, including the many implementing regulations which have yet to be released, may substantially impact our facilitation, servicing or securitization activities. With respect to the new liquidation framework for systemically important entities, no assurances can be given that such framework would not apply to us. Guidance from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws, which is the insolvency regime which would otherwise apply to us. The SEC has proposed significant changes to the rules applicable to issuers and sponsors of asset-backed securities under the Securities Act and the Securities Exchange Act of 1934, as amended, or the Exchange Act. With the proposed changes we could potentially see an adverse impact in our access to the asset-backed securities capital markets and lessened effectiveness of our financing programs.

Other Regulations

Electronic Fund Transfer Act and NACHA Rules

The federal Electronic Fund Transfer Act (“EFTA”), and Regulation E, which implements it, provides guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts. In addition transfers performed by ACH electronic transfers are subject to detailed timing and notification rules and guidelines administered by the National Automated Clearinghouse Association (“NACHA”). Most transfers of funds in connection with the origination and repayment of the Member Loans are performed by ACH. We obtain necessary electronic authorization from members for such transfers in compliance with such rules. Transfers of funds through the platform are executed by Wells Fargo and conform to the EFTA, its regulations and NACHA guidelines.

 

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Electronic Signatures in Global and National Commerce Act/Uniform Electronic Transactions Act

The federal Electronic Signatures in Global and National Commerce Act (“ESIGN”) and similar state laws, particularly the Uniform Electronic Transactions Act (“UETA”), authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures. ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions to obtain the consumer’s consent to receive information electronically. When a borrower or investor registers on the platform, we obtain his or her consent to transact business electronically and maintain electronic records in compliance with ESIGN and UETA requirements.

Bank Secrecy Act

In cooperation with WebBank, we implement the various anti-money laundering and screening requirements of applicable federal law. With respect to new borrower members, we apply the customer verification program rules and screen names against the list of Specially Designated Nationals maintained by OFAC pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act (“BSA”) and its implementing regulation. We also have an anti-money laundering policy and procedures in place to voluntarily comply with the anti-money laundering requirements of the USA PATRIOT Act and the BSA.

New Laws and Regulations

From time to time, various types of federal and state legislation are proposed and new regulations are introduced that could result in additional regulation of, and restrictions on, the business of consumer lending. We cannot predict whether any such legislation or regulations will be adopted or how this would affect our business or our important relationships with third parties. In addition, the interpretation of existing legislation may change or may prove different than anticipated when applied to our novel business model. Compliance with such requirements could involve additional costs, which could have a material adverse effect on our business. As a consequence of the extensive regulation of commercial lending in the United States, our business is particularly susceptible to being affected by federal and state legislation and regulations that may increase the cost of doing business.

In addition, see “Risk Factors – Financial regulatory reform could result in restrictions, oversight and costs that have an adverse effect on our business” regarding the risks of government financial regulatory reform plans.

Foreign Laws and Regulations

We do not permit non-U.S. based individuals to register as member borrowers on the platform and the lending platform does not operate outside the United States. It is, therefore, not subject to foreign laws or regulations for borrower applicants.

ABOUT THE FUNDS AND TRUST

Business Description

In October 2010, we formed LCA, which is wholly-owned by LendingClub. LCA is registered with the SEC as an investment advisor. LCA commenced operations after January 1, 2011 and, as of December 31, 2012, was the general partner to three private investment funds for accredited investors and qualified purchasers with differing investment strategies. In connection with the funds, we formed the Trust, a Delaware business trust, to act as a bankruptcy remote vehicle for holding portions of Member Loans related to Certificates purchased by the funds and separately managed accounts (“SMAs”) separate and apart from the Member Loans and other assets of ours. An independent third party acts as trustee of the Trust. We and the Trust have entered into a purchase agreement in which the Trust purchases Member Loans from us and servicing agreement whereby we service the loans acquired by the Trust in a manner identical to other loans; the Trust earns a fee equal to 40 basis points, which is paid by LCA, the general partner of the funds.

LCA earns a management fee paid by the limited partners of the funds, which is based on the month-end capital account balances of each of the limited partners of each fund.

Beginning January 2012, LCA also began offering SMAs to individual investors. Funds in the SMA are invested in Certificates issued by the Trust. As of December 31, 2012, the SMAs had approximately $166 million in assets. LCA earns management fees paid by SMA investors, monthly in arrears, based on the month-end balances in the SMA accounts.

Fund Growth

We believe that the principal driver of the funds’ ability to increase assets is the investment performance track record of the Member Loans facilitated through our platform. We have a historical ability to generate consistent, positive returns for our investors who purchased Notes from our platform. We also believe that our performance history is a key point of competitive differentiation for us.

 

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Assets Under Management

LCA’s contribution to the Company’s overall consolidated financial results will be primarily driven by the combination of assets under management, the investment performance of the funds and the ability to attract additional investors. Competitive investment performance in rising markets and preservation of fund investor capital during periods of market volatility or decline are key determinates of the long term success of LCA’s business.

As of December 31, 2012, the funds had approximately $261.3 million in total assets under management by LCA with $28.3 million in escrow, which was contributed to the funds on January 1, 2013.

As of December 31, 2012, the SMAs had approximately $166 million in assets. LCA earns management fees paid by SMA investors, monthly in arrears, based on the month-end balances in the SMA accounts.

Item 1A. Risk Factors

The Notes involve a high degree of risk. In deciding whether to purchase Notes, you should carefully consider the following risk factors. Any of the following risks could have a material adverse effect on the value of the Notes you purchase and could cause you to lose all or part of your initial purchase price or future principal and interest payments you expect to receive.

RISKS RELATING TO THE NOTES, AND THE CORRESPONDING MEMBER LOANS

ON WHICH THE NOTES ARE DEPENDENT

You may lose some or all of your initial purchase price for the Notes because the Notes are highly risky and speculative. Only investors who can bear the loss of their entire purchase price should purchase.

Notes are highly risky and speculative because payments on Notes depend entirely on payments to us of unsecured consumer finance obligations of individual borrowers and contemporaneous payments on the Notes, which are special, limited obligations of LendingClub. Notes are suitable purchases only for investors of adequate financial means. If you cannot afford to lose all of the money you plan to invest in Notes, you should not purchase Notes.

Payments on each Note depend entirely on the payments, if any, we receive on the corresponding Member Loan related to that Note. If a borrower member fails to make any payments on the corresponding Member Loan related to your Note, you will not receive any payments on your Note.

We will make payments pro rata on a series of Notes, net of our service charge, only if we receive the borrower member’s payments on the corresponding Member Loan and such payments clear and therefore become available for distribution to investors. We will not pay to investors any unsuccessful payment fees, check processing fees, collection fees we or our third-party collection agency charge. If we do not receive payments on the corresponding Member Loan related to your Note, you will not be entitled to any payments under the terms of the Notes, and you will not receive any payments. The failure of a borrower member to repay a loan is not an event of default under the terms of the Notes.

The Notes are special, limited obligations of ours only, and the Notes are not secured by any collateral or guaranteed or insured by any third party.

The Notes will not represent an obligation of borrower members or any other party except by us, and are special, limited obligations of ours. The Notes are not secured by any collateral and are not guaranteed or insured by any governmental agency or instrumentality or any third party.

Member Loans are unsecured obligations and as such are not backed by any collateral or guaranteed nor are they insured by any third party, and you must rely on us and our designated third-party collection agency to pursue collection against any borrower member.

Member Loans are unsecured obligations of borrower members. They are not secured by any collateral, not guaranteed or insured by any third party and not backed by any governmental authority in any way. We and our designated third-party collection agency will, therefore, be limited in our ability to collect Member Loans.

Moreover, unsecured Member Loans are obligations of borrower members to us as assignee of the loan’s promissory note from WebBank, or obligations of borrower members to the Trust as assignee of the loan’s promissory note from us. Member Loans are not

 

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obligations to holders of Notes. Holders of Notes will have no recourse against borrower members and no ability to pursue borrower members to collect payments under Member Loans. Holders of Notes may look only to us and the Trust, respectively, for payment of the Notes, and our obligation to pay the Notes is limited as described in this document. Furthermore, if a borrower member fails to make any payments on the Member Loan corresponding to a Note, the holder of that Note will not receive any payments on that Note. The holder of that Note will not be able to obtain the identity of the borrower member in order to contact the borrower member about the defaulted Member Loan.

If payments on the corresponding Member Loans become overdue, it is likely you will not receive the full principal and interest payments that you expect due to collection fees and other costs, and you may not recover any of your original purchase price.

If the borrower member fails to make a required payment on a Member Loan within 30 days of the due date, we will pursue reasonable collection efforts in respect of the Member Loan. We may handle collection efforts in respect of a delinquent Member Loan ourselves, or we may refer a delinquent Member Loan to a collection agency on the 31st day of its delinquency. These efforts will be considered reasonable collection efforts. If we refer a loan to a collection agency, we will have no other obligation to attempt to collect on that delinquent loan.

If payment amounts on a delinquent Member Loan are received from a borrower member more than 30 days after their due date, then we, or, if we have referred the delinquent loan to an outside collection agency, that collection agency, will retain a percentage of any funds recovered from such borrower member as a service fee before any principal or interest becomes payable to you from recovered amounts in respect of Notes related to the corresponding Member Loan.

We or the collection agency may be unable to recover some or all of the unpaid balance of a non-performing Member Loan. You must rely on the collection efforts from us and the designated collection agency, and you are not permitted to attempt to collect payments on the Member Loans in any manner.

Borrowers may not view or treat their obligations to us as having the same significance as loans from traditional lending sources, such as bank loans and borrower loans may have a higher risk of default than loans of borrowers with similar credit scores to other lenders.

The investment return on the Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding Member Loan. Borrowers may not view our lending obligations facilitated through our platform as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions. If a borrower neglects his or her payment obligations on a Member Loan upon which payment of the corresponding Note is dependent or chooses not to repay his or her borrower loan entirely, you may not be able to recover any portion of your investment in a Note.

The initial maturity date and final maturity date for five year term loans is the same date. As such, you will not receive any payments we may receive after the maturity date of five year term loans.

The initial maturity date of all five year term loans will not be extended to a later date, so the initial maturity date of a five year term Member Loan will equal its initial maturity date, which is unlike the three year term loans where the initial maturity date may be extended. If a five year term loan was extended beyond five years, a portion of the interest paid would likely not be deductible by us. As a result, if we receive any principal and interest payments from a borrower after the maturity date of a five year term loan, we may retain 100% of these payments and are not obligated to distribute those payments to you.

Given the fact that we are not obligated to deliver any funds received by us after the final maturity date of a Note and we are responsible for collection efforts, a conflict of interest could exist as any delay in receiving borrower funds would result in additional money coming to us. There is, however, a significant mitigating factor to this potential conflict of interest. Without diligent collection efforts and success, fewer potential lenders will have the confidence to participate on the site, limiting our growth and long term profitability.

Our loan grading algorithm is based upon historical credit performance of certain populations and as a result the actual performance of a loan may not be consistent within or across loan grades and may result in an unanticipated loss of capital.

Our proprietary pricing algorithm is based primarily upon the historical loan performance of actual borrowers that meet the requirements of the algorithm, the assumed performance of applicants that would have been approved under the current algorithm but were declined by prior methodologies, and the exclusion of borrowers that were approved under prior methodologies but would have been declined under the new algorithm, in addition to other factors and assumptions. Because the algorithm is based upon these assumed performances and the assumptions of management, the actual performance of a graded loan may differ materially versus previously issued, similarly graded loans or other grades that may result in a greater loss of your investment capital than anticipated.

 

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Credit Information that we receive about a borrower member may be inaccurate or may not accurately reflect the borrower member’s creditworthiness, which may cause you to lose part or all of the purchase price you pay for a Note.

We obtain borrower member credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and assign one of 35 loan grades to loan requests, from A1 through G5, based on the reported credit score, other information reported by the consumer reporting agencies and the requested loan amount. A credit score or loan grade assigned to a borrower member may not reflect that borrower member’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data, and we do not verify the information obtained from the borrower member’s credit report. Additionally, there is a risk that, following the date of the credit report that we obtain and review, a borrower member may have:

 

   

become delinquent in the payment of an outstanding obligation;

 

   

default on a pre-existing debt obligation;

 

   

take on additional debt; or

 

   

sustain other adverse financial events.

Moreover, investors do not, and will not, have access to consolidated financial statements of borrower members, or to other detailed financial information about borrower members.

Information supplied by borrower members may be inaccurate or intentionally false and should generally not be relied upon.

Borrower members supply a variety of information that is included in the borrower Member Loan listings on our website and in the posting reports and sales reports we file with the SEC. Other than as described below, we do not verify this information, and it may be inaccurate or incomplete. For example, we do not verify a borrower member’s stated tenure, job title, home ownership status or intention for the use of loan proceeds, and the information borrower member’s supply may be inaccurate or intentionally false. . Unless we have specifically indicated otherwise in a loan listing, we do not verify a borrower member’s stated income. For example, we do not verify borrower member paystubs, IRS Forms W-2, federal or state income tax returns, bank and savings account balances, retirement account balances, letters from employers, home ownership or rental records, car ownership records or any records related to past bankruptcy and legal proceedings. In the limited cases in which we have selected borrower members for income or employment verification, for the twelve months ended December 31, 2012, approximately 68.0% of requested borrower members provided us with satisfactory responses to verify their income or employment; approximately 8.3% of requested borrower members withdrew their applications for loans, and approximately 32.1% of requested borrower members either failed to respond to our request in full or provided information that failed to verify their stated information, and we therefore removed those borrower Members’ Loan postings. The identity of borrower members is not revealed to investors, and investors also have no ability to obtain or verify borrower member information either before or after they purchase a Note. Potential investors may only communicate with borrower members through our website postings, and then only on an anonymous basis. While we may monitor website posting for appropriate content, we do not verify any information in the postings nor do we respond to requests from investor or borrower members in any posting and any response to the contrary should not be seen as accurate.

If you rely on false, misleading or unverified information supplied by borrower members in deciding to purchase Notes, you may lose part or all of the purchase price you pay for a Note. Loan posting and borrower member information available on our website will be statements made in connection with the purchase and sale of securities, and therefore subject to Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Loan posting and borrower member information filed in prospectus supplements will be subject to the liability provisions of the Securities Act. In this document, we advise potential investors as to the limitations on the reliability of this information, and an investor’s recourse in the event this information is false will be extremely limited. Consequently, investors should rely on loan grade, which we determine based on third-party credit report information, and the size of the loan request, and should not rely on unverified information provided by borrower members.

You should not assume that a Note is appropriate for you as an investment vehicle just because it corresponds to a loan listed on our platform or is included in a portfolio built based upon your investment criteria through any of the portfolio tool.

While we take precautions to prevent borrower member identity fraud, it is possible that identity fraud may still occur and adversely affect your ability to receive the principal and interest payments that you expect to receive on Notes.

We use identity checks with a third-party provider to verify each borrower member’s identity and credit history. Notwithstanding our efforts, there is a risk that identity fraud may occur without our detecting it, and a loan obtained by identity fraud may simply default.. While we will repurchase Notes in limited identity fraud circumstances involving the corresponding Member Loan, we are not otherwise obligated to repurchase a Note from you for any other reason. From October 2008, when we commenced the issuance

 

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of Notes, through December 31, 2012, we had repurchased Notes relating to thirty four corresponding Member Loans in which identity fraud occurred. If we repurchase a Note based on identity fraud involving the corresponding Member Loan, you will only receive an amount equal to the outstanding principal balance of the Note.

We have the exclusive right to investigate claims of identity theft and determine, in our sole discretion, whether verifiable identity theft has occurred. As we are the sole entity with the ability to investigate and determine verifiable identity theft, which triggers our repurchase obligation, a conflict of interest exists as the denial of a claim under our identity theft guarantee would save us from the repurchase obligation. There are, however, three factors that mitigate the risk of this conflict. Without the protection offered by this guarantee, fewer potential lenders will have the confidence to participate on the site, limiting our growth and long term profitability. In addition, our relationship with WebBank includes a requirement – and accompanying audit function – to insure that claims of identity theft are thoroughly investigated and accurately reported. Finally, California statutes include severe penalties owed to the victim of identity theft if it is shown that a claim of identity theft was not adequately investigated or frivolously dismissed.

Our performance data about borrower member performance on our Member Loans is just over five years old. Default and charge-off rates on Member Loans may increase.

Due to our limited operational and loan origination history, we have limited historical performance data regarding borrower member performance on the Member Loans, and we do not yet know what the long-term loan loss experience may be. As of December 31, 2012, for only those loans that meet our current credit policy, our aggregate default and charged-off rate was 2.29% of the principal balance of loans. As of December 31, 2012, for all loans, our default and charged-off rate was 2.57% of the principal balanced of loans. These default and charge-off rates may increase in the future. In addition, as we do not have significant experience in the performance of five-year unsecured consumer loans, the future default rates on these loan types is uncertain and may exceed our current expectations. As actual loan loss experience increases on our platform, we may change how loan interest rates are set, and investors who have purchased Notes prior to any such changes will not benefit from these changes.

Default rates on Member Loans may increase as a result of economic conditions beyond our control and beyond the control of borrower members.

Member Loan default rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrower members. In particular, default rates on Member Loans on which the Notes are dependent may increase due to factors such as prevailing interest rates, the rate of unemployment, the level of consumer confidence, residential real estate values, the value of the U.S. dollar, energy prices, changes in consumer spending, the number of personal bankruptcies, disruptions in the credit markets and other factors. The significant downturn in the United States economy that occurred in the past several years caused default rates on consumer loans to increase, and a continuation of the downturn will likely result in continued high or increased Member Loan default rates.

If you decide to invest through the platform and concentrate your investment in a single Note (or a small number of Notes), your entire return will depend on the performance of a single Member Loan.

Member Loans facilitated through our platform have a wide range of credit grades, and we expect that some borrower members at all credit grades will default on their Member Loans. If you decide to invest through the platform and concentrate your investment in a single Note (or a small number of Notes) your entire return will depend on the performance of that single Member Loan (or that concentrated small number of Notes). For example, if you plan to purchase $100 of Notes, and choose to invest the entire $100 in a single Note instead of in four $25 Notes corresponding to the Member Loans of four different borrowers, you would lose your entire $100 investment if that single borrower defaulted. Failing to diversify your investment increases the risk of losing your entire investment due to a single borrower member’s default, or a small number of borrower member defaults. Diversification, however, will not eliminate the risk that you may lose some, or all, of the expected principal and interest payments on the Notes.

In the unlikely event that we receive payments on the corresponding Member Loans relating to the Notes after the final maturity date, you will not receive payments on the Notes after final maturity.

Each Note will mature on its initial maturity date of either three or five years from its issuance date, unless any principal or interest payments in respect of the corresponding borrower loan remain due and payable to us upon the initial maturity date. For three year loans, if the loan remains due and payable on the initial maturity date, the maturity of the Note will be automatically extended to the five year anniversary of the loan, which will be its final maturity date. In contrast, the maturity date of a five year loan is never extended, so the initial maturity date of a five year Member Loan will equal its final maturity date. If there are any amounts under the corresponding Member Loan still due and owing to us after the final maturity, we will have no further obligation to make payments on the Notes of the series, even if we receive payments on the corresponding Member Loan after the final maturity.

Given the fact that we are not obligated to deliver any funds received by us after the final maturity date of a Note and are responsible for collection efforts, a conflict of interest could exist as any delay in receiving borrower funds would result in additional money coming to us. There is, however, a significant mitigating factor to this potential conflict. Without diligent collection efforts and success, fewer potential lenders will have the confidence to participate on the site, limiting our growth and long term profitability.

 

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The Member Loans on which the Notes are dependent do not restrict borrower members from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrower members during the term of the Member Loan, which may increase the likelihood that a borrower member may default on their loan.

All Member Loans are credit obligations of individual borrower members. If a borrower member incurs additional debt after obtaining a Member Loan through our platform, that additional debt may adversely affect the borrower member’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower member. This circumstance could ultimately impair the ability of that borrower member to make payments on the borrower’s Member Loan and your ability to receive the principal and interest payments that you expect to receive on Notes dependent on those loans. . To the extent that the borrower member has or incurs other indebtedness and cannot pay all of its indebtedness, the borrower member may choose to make payments to other creditors, rather than to us.

As to these Member Loans, to the extent borrower members incur other indebtedness that is secured, such as mortgage, home equity or auto loans, the ability of the secured creditors to exercise remedies against the assets of the borrower member may impair the borrower member’s ability to repay the borrower loan on which your Note is dependent for payment, or it may impair our ability to collect on the loan if it goes unpaid. Since the Member Loans are unsecured, borrower members may choose to repay obligations under other indebtedness before repaying Member Loans facilitated through our platform because the borrower members have no collateral at risk. An investor will not be made aware of any additional debt incurred by a borrower member, or whether such debt is secured.

Member Loans do not contain any cross-default or similar provisions. If borrower members default on their debt obligations other than the Member Loans, the ability to collect on Member Loans on which the Notes are dependent may be substantially impaired.

The Member Loans do not contain cross-default provisions. A cross-default provision makes a default under certain debt of a borrower member an automatic default on other debt of that borrower member. The effect of this can be to allow other creditors to move more quickly to claim any assets of the borrower member. Because the Member Loans do not contain cross-default provisions, a Member Loan will not be placed automatically in default upon that borrower member’s default on any of the borrower member’s other debt obligations, unless there are relevant independent grounds for a default on the Member Loan.

In addition, the Member Loans will not be referred to a third-party collection agency for collection because of a borrower member’s default on debt obligations other than the Member Loan. If a borrower member defaults on debt obligations owed to a third party and continues to satisfy payment obligations under the Member Loan, the third party may seize the borrower’s assets or pursue other legal action against the borrower member before the borrower member defaults on the Member Loan. Payments on Notes may be substantially reduced if the borrower member subsequently defaults on the Member Loans and you may be unable to recoup any or all of your expected principal and interest payments on those Notes.

Borrower members may seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of the Notes.

Borrower members may seek protection under federal bankruptcy law or similar laws. If a borrower member files for bankruptcy (or becomes the subject of an involuntary petition), a stay will go into effect that will automatically put any pending collection actions, on hold and prevent further collection action absent bankruptcy court approval. If we receive notice that a borrower member has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, we will put the borrower Member’s Loan account into “bankruptcy status.” When we put a Member Loan into bankruptcy status, we terminate automatic monthly Automated Clearing House (“ACH”) debits and do not undertake collection activity without bankruptcy court approval. Whether any payment will ultimately be made or received on a Member Loan after a bankruptcy status is declared, depends on the borrower member’s particular financial situation and the determination of the court. It is possible that the borrower member’s personal liability on the Member Loan will be discharged in bankruptcy. In most cases involving the bankruptcy of a borrower member with an unsecured loan, unsecured creditors, including us and the Trust as holders of the Member Loans, will receive only a fraction of any amount outstanding on their Member Loans, if anything.

Federal law entitles borrower members who enter active military service to an interest rate cap and certain other rights that may inhibit the ability to collect on loans and reduce the amount of interest paid on the corresponding Notes.

Federal law provides borrower members on active military service with rights that may delay or impair our ability to collect on a borrower Member Loan corresponding to your Note. The Service members Civil Relief Act (“SCRA”) requires that the interest rate on preexisting debts, such as Member Loans, be set at no more than 6% while the qualified service member or reservist is on active duty. A holder of a Note that is dependent on such a Member Loan will not receive the difference between 6% and the original stated interest rate for the Member Loan during any such period.

 

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This law also permits courts to stay proceedings and execution of judgments against service members and reservists on active duty, which may delay recovery on any Member Loans in default, and, accordingly, payments on Notes that are dependent on these Member Loans. If there are any amounts under such a Member Loan still due and owing to us after the final maturity of the Notes that correspond to the Member Loan, we will have no further obligation to make payments on the Notes, even if we later receive payments after the final maturity of the Notes. We do not take military service into account in assigning loan grades to borrower Member Loan requests. In addition, as part of the borrower member registration process, we do not request our borrower members to confirm if they are a qualified service member or reservists within the meaning of the SCRA.

The death of a borrower member may substantially impair your ability to recoup the full purchase price of Notes that are dependent on the Member Loan to that borrower member or to receive the interest payments that you expect to receive on the Notes.

All borrower members are individuals. If a borrower member with outstanding obligations under a Member Loan dies while the Member Loan is outstanding, we will generally seek to work with the executor of the estate of the borrower member to obtain repayment of the Member Loan. However, the borrower member’s estate may not contain sufficient assets to repay the Member Loan on which your Note is dependent. In addition, if a borrower member dies near the end of the term of an unsecured Member Loan, it is unlikely that any further payments will be made on the Notes corresponding to such Member Loan, because the time required for the probate of the estate may extend beyond the initial maturity date and the final maturity date of the Notes.

The LendingClub platform allows a borrower member to prepay a Member Loan at any time without penalty. Borrower member loan prepayments will extinguish or limit your ability to receive additional interest payments on a Note.

Borrower Member Loan prepayment occurs when a borrower member decides to pay some or all of the principal amount on a Member Loan earlier than originally scheduled. A borrower member may decide to prepay all or a portion of the remaining principal amount at any time without penalty. In the event of a prepayment of the entire remaining unpaid principal amount of a Member Loan on which the Notes are dependent, you will receive your share of such prepayment, net of our 1.00% service fee applicable to Notes, but further interest will not accrue after the date on which the payment is made. If a borrower member prepays a portion of the remaining unpaid principal balance on a Member Loan on which the Notes are dependent, we will reduce the outstanding principal amount and interest will cease to accrue on the prepaid portion.

The combination of the reduced principal amount and the unchanged monthly payment cause the effective term of the Member Loan to decline. If a borrower member prepays a Member Loan in full or in part, you will not receive all of the interest payments that you originally expected to receive on Notes that are dependent on that Member Loan, and you may not be able to find a similar rate of return on another investment at the time at which the Member Loan is prepaid. Prepayments of loans passed onto Note holders are subject to our 1.00% service charge, even if the prepayment occurs immediately after issuance of your Note. The return on the Note may actually be negative if prepayment occurs within the first few months after issuance.

We permit borrowers who have remained in good standing for a period of at least six months the ability to take out a second loan through our platform. We do not prohibit such borrowers from using the proceeds of a second loan to repay the first loan and there are circumstances in which a borrower will take out a second loan on our platform to repay the first loan. We will benefit from receiving a loan origination fee and servicing fees on each of the two loans, but an investor may not enjoy the benefit of investing in the Notes related to the two loans.

Prevailing interest rates may change during the term of the Member Loan on which your Note is dependent. If this occurs, you may receive less value from your purchase of the Note in comparison to other investment opportunities. Additionally, borrower members may prepay their Member Loans due to changes in interest rates, and you may not be able to redeploy the amounts you receive from prepayments in a way that offers you the return you expected to receive from the Notes.

The Member Loans on which the Notes are dependent have a term of three or five years and bear fixed, not floating, rates of interest. If prevailing interest rates increase, the interest rates on Notes you purchased might be less than the current rate of return you could earn if you invested your purchase price in other investments. While you may still receive a return on your purchase price for the Notes through the receipt of amounts equal to the interest portion of a borrower member’s payments on the Member Loan, if prevailing interest rates exceed the rate of interest payable on the Member Loan, the payments you receive during the term of the Note may not reflect the full opportunity cost to you when you take into account factors such as the time value of money.

There is no prepayment penalty for borrower members who prepay their Member Loans. If prevailing interest rates on consumer loans decrease, borrower members may choose to prepay their Member Loans with money they borrow from other sources or other resources, and you may not receive the interest payments on Notes dependent on those Member Loans that you expect to receive or be able to find an alternative use of your money to realize a similar rate of return at the time at which the Note is prepaid.

 

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Investor funds in an investor account do not earn interest.

Your investor account that enables you to purchase Notes represents an interest in a pooled demand deposit account maintained by us “in trust for” investors (“ITF account”) that does not earn interest. Similarly your investor account that enables you to purchase represents either a discrete or pooled demand deposit account maintained by an independent custodian “as custodian for” investors that does not earn interest. Investor funds committed to purchase Notes represent binding commitments, and such committed funds may not be withdrawn from member investor accounts (unless and until corresponding Member Loans included in the order are not funded, in which case the corresponding funds become available to the investor again). Funds committed to purchase Notes will not earn interest in the ITF account or custodial accounts, respectively, and interest will not begin to accrue on a Note until the corresponding Member Loan has closed and the Note is issued.

The Notes will not be listed on any securities exchange, will not be transferable except for Notes transferable through the Note Trading Platform by FOLIOfn, and must be held only by LendingClub investors. You should be prepared to hold the Notes you purchase until they mature.

The Notes will not be listed on any securities exchange. All Notes must be held by LendingClub members. The Notes will not be transferable except through the Note Trading Platform by FOLIOfn Investments, Inc. (“FOLIOfn”), a registered broker-dealer and the trading platform is not available to residents of all states. There can be no assurance that an active market for Notes will develop on the trading platform, that there will be a buyer for any particular Notes listed for resale on the trading platform or that the trading platform will continue to operate. Therefore, investors must be prepared to hold their Notes to maturity.

The U.S. federal income tax consequences of an investment in the Notes are uncertain.

There are no statutory provisions, regulations, published rulings, or judicial decisions that directly address the characterization of the Notes, or instruments similar to the Notes, for U.S. federal income tax purposes. However, although the matter is not free from doubt, we intend to treat the Notes as our indebtedness for U.S. federal income tax purposes. As a result of such treatment, the Notes will have original issue discount, or OID, for U.S. federal income tax purposes because payments on the Notes are dependent on payments on the corresponding Member Loan. Further, a holder of a Note, other than a holder that is holding the Note in a tax deferred account such as an IRA, will be required to include the OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues (which may be in advance of interest being paid on the Note), regardless of such holder’s regular method of accounting. This characterization is not binding on the IRS, and the IRS may take contrary positions.

Any differing treatment of the Notes for U.S. federal income tax purposes could significantly affect the amount, timing and character of income, gain or loss in respect of an investment in the Notes. Accordingly, all prospective purchasers of the Notes are advised to consult their own tax advisors regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase and ownership of Notes (including any possible differing treatments of the Notes).

RISKS RELATED TO LENDINGCLUB AND THE LENDINGCLUB PLATFORM

We have a limited operating history. As an online company in the early stages of development, we face increased risks, uncertainties, expenses and difficulties.

To be successful, the number of borrower members and its investors and the volume of member loans originated through our platform will need to increase, which will require us to increase our facilities, personnel and infrastructure to accommodate the greater servicing obligations and demands on our platform. Our platform is dependent upon our website to maintain current listings and transactions in the member loans and Notes. We must constantly add new hardware and update our software and website, expand our customer support services and retain an appropriate number of employees to maintain the operations of our platform, as well as to satisfy our servicing obligations on the member loans and make payments on the Notes. If we are unable to increase the capacity of our platform and maintain the necessary infrastructure, you may experience delays in receipt of payments on the Notes and periodic downtime of our systems.

We have incurred net losses in the past and have only recently become operating cash flow positive. If we are unable to sustain our positive growth and become insolvent or bankrupt, you may lose your investment.

As of December 31, 2012, our accumulated deficit was $57.6 million and our total stockholders’ deficit was $50.8 million. Our net loss for the nine month period ended December 31, 2012, was $4.2 million. For the nine month period ended December 31, 2012 we were operating cash-flow positive and we believe that will continue operating at or near breakeven between now and the end of our current fiscal year. However, if our assumptions regarding our growth and operating plan are incorrect, we may need to slow our

 

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investment spending and/or find new funding to continue to operate our business. We currently believe that such funding would be available to us on terms that we would find acceptable. Any delay in securing, or failing to secure, any necessary funding could result in delays and operational slowdowns that could adversely affect the regularity of our processing payments, the cash flows on your investment and ultimately the value of your investment.

If we are unable to increase transaction volumes, our business and results of operations will be affected adversely.

To succeed, we must increase transaction volumes on our platform by attracting a large number of borrower members and investors in a cost-effective manner, many of whom have not previously participated in an online financial community. We have experienced a high number of inquiries from potential borrower members who do not meet our criteria for submitting a Member Loan request. We have also experienced, from time to time, Member Loan requests for amounts that exceed the aggregate amount of investor purchase commitments. If there are not sufficient qualified loan requests, investors may be unable to deploy their capital in a timely or efficient manner. If there are not sufficient investor purchase commitments, borrowers may be unable to obtain funding for their loans and become discouraged from using our platform for their borrowing needs.

If we are not able to attract qualified borrower members and sufficient investor purchase commitments, we will not be able to increase our transaction volumes. Additionally, we rely on a variety of methods to drive traffic to our website. If we are unable to use any of our current or future marketing initiatives or the cost of these initiatives were to significantly increase, we may not be able to attract new members in a cost-effective manner and, as a result, our revenue and results of operations would be affected adversely, which may impair our ability to maintain our platform.

The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.

The consumer lending market is competitive and rapidly changing. We expect competition to persist and intensify in the future, which could harm our ability to increase volume on our platform.

Our principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other online lending platforms. Competition could result in reduced volumes, reduced fees or the failure of our online lending platform to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, in the future we may experience new competition from more established internet companies who possess large, existing customer bases, substantial financial resources and established distribution channels. If any of these companies or any major financial institution decided to enter the online lending business, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed.

Most of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels. Our potential competitors may also have longer operating histories, more extensive customer bases, greater brand recognition and broader customer relationships than we have. These competitors may be better able to develop new products, to respond quickly to new technologies and to undertake more extensive marketing campaigns. Our industry is driven by constant innovation. If we are unable to compete with such companies and meet the need for innovation, the demand for our platform could stagnate or substantially decline.

If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.

We believe that developing and maintaining awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our online financial community and attracting new members. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the member experience on our platform. Historically, our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These brand promotion activities may not yield increased revenues and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing members to our competitors or be unable to attract new members, which would cause our revenue to decrease and may impair our ability to maintain our platform.

 

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Our arrangements for backup servicing are limited. If we fail to maintain operations, you will experience a delay and increased cost in respect of your expected principal and interest payments on the Notes, and we may be unable to collect and process repayments from borrower members.

We have made arrangements for only limited backup servicing. If our platform were to fail or we became insolvent, we would attempt to transfer our Member Loan servicing obligations to our third party back-up servicer. There can be no assurance that this back-up servicer will be able to adequately perform the servicing of the outstanding Member Loans. If this back-up servicer assumes the servicing of the Member Loans, the back-up servicer will impose additional servicing fees, reducing the amounts available for payments on the Notes. Additionally, transferring these servicing obligations to our back-up servicer may result in delays in the processing and recovery of information with respect to amounts owed on the Member Loans or, if our platform becomes inoperable, may prevent us from servicing the Member Loans and making principal and interest payments on the Notes. If our back-up servicer is not able to service the Member Loans effectively, investors’ ability to receive principal and interest payments on their Notes may be substantially impaired.

If we were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited and suspended or stopped. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Member Loans or the proceeds of those corresponding Member Loans. The recovery, if any, of a holder on a Note may be substantially delayed and substantially less than the principal and interest due and to become due on the Note. Even funds held by us in accounts “in trust for” the holders of Notes may potentially be at risk.

If we were to become subject to a bankruptcy or similar proceeding, the recovery, if any, of a holder of a Note may be substantially delayed in time and may be substantially less in amount than the principal and interest due and to become due on the Note.

A bankruptcy or similar proceeding of us may cause delays in borrower member payments. Borrower members may delay payments to us on account of Member Loans because of the uncertainties occasioned by a bankruptcy or similar proceeding of ua, even if the borrower members have no legal right to do so, and such delay would reduce, at least for a time, the funds that might otherwise be available to pay the Notes corresponding to those Member Loans.

A bankruptcy or similar proceeding of us may cause delays in payments on Notes. The commencement of the bankruptcy or similar proceeding may, as a matter of law, prevent us from making regular payments on the Notes, even if the funds to make such payments are available. Because a bankruptcy or similar proceeding may take months or years to complete, the suspension of payment may effectively reduce the value of any recovery that a holder of a Note may receive (and no such recovery can be assured) by the time any recovery is available.

Interest accruing upon and following a bankruptcy or similar proceeding of us may not be paid. In bankruptcy or similar proceeding of us, interest accruing on the Notes during the preceding may not be part of the allowed claim of a holder of a Note. If the holder of a Note receives a recovery on the Note (and no such recovery can be assured), any such recovery may be based on, and limited to, the claim of the holder of the Note for principal and for interest accrued up to the date of the bankruptcy or similar proceeding, but not thereafter. Because a bankruptcy or similar proceeding may take months or years to complete, a claim based on principal and on interest only up to the start of the bankruptcy or similar proceeding may be substantially less than a claim based on principal and on interest through the end of the bankruptcy or similar proceeding.

In a bankruptcy or similar proceeding of us there may be uncertainty regarding whether a holder of a Note has any priority right to payment from the corresponding Member Loan. The Notes are unsecured and holders of the Notes do not have a security interest in the corresponding Member Loans or the proceeds of those corresponding Member Loans. Accordingly, the holder of a Note may be required to share the proceeds of the corresponding Member Loan with any other creditor of ours that has rights in those proceeds. If such sharing of proceeds is deemed appropriate, those proceeds that are either held by us in the clearing account at the time of the bankruptcy or similar proceeding of ours, or not yet received by us from borrower members at the time of the commencement of the bankruptcy or similar proceeding, may be at greater risk than those proceeds that are already held by us in the “in trust for,” or ITF, account at the time of the bankruptcy or similar proceeding. To the extent that proceeds of the corresponding Member Loan would be shared with other creditors of ours, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before, or ratably with, any distribution made to you on your Note.

In a bankruptcy or similar proceeding of us, there may be uncertainty regarding whether a holder of a Note has any right of payment from assets of ours other than the corresponding Member Loan. In a bankruptcy or similar proceeding of us, it is possible that a Note could be deemed to have a right of payment only from proceeds of the corresponding Member Loan and not from any other assets of us, in which case the holder of the Note may not be entitled to share the proceeds of such other assets of us with other creditors of ours, whether or not, as described above, such other creditors would be entitled to share in the proceeds of the Member loan corresponding to the Note. Alternatively, it is possible that a Note could be deemed to have a right of payment from both the Member loan corresponding to the Note and from some or all other assets of ours, for example, based upon the automatic acceleration of the principal obligations on the Note upon the commencement of a bankruptcy or similar proceeding, in which case the holder of the Note may be entitled to share the proceeds of such other assets of ours with other creditors of us, whether or not, as described above, such other creditors would be entitled to share in the proceeds of the Member Loan corresponding to the Note. To the extent that proceeds of such other assets would be shared with other creditors of ours, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before, or ratably with, any distribution made to you on your Note.

 

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In a bankruptcy or similar proceeding of us, there may be uncertainty regarding the rights of a holder of a Note, if any, to payment from funds in the clearing account. If a borrower member has paid us on a Member Loan corresponding to a Note before a bankruptcy or similar proceeding of us is commenced, and those funds are held in the clearing account and have not been used by us to make payments on the Note as of the date the bankruptcy or similar proceeding is commenced, there can be no assurance that we will or will be able to use such funds to make payments on the Note. Other creditors of ours may be deemed to have, or actually have, rights to such funds that are equal to or greater than the rights of the holder of the Note.

In a bankruptcy or similar proceeding of us, there may be uncertainty regarding the rights of a holder of a Note, if any, to access funds in the ITF account. If a borrower has paid us on a Member Loan corresponding to a Note before a bankruptcy or similar proceeding of us is commenced, and those funds have been used by us to make payments on the Note prior to the date the bankruptcy or similar proceeding is commenced, but the payments on the Note continue to be held by us in an ITF account, there can be no assurance that the holder of the Note will have immediate access to the funds constituting the payment or that the funds constituting the payment will ultimately be released to the holder of the Note. While the Trust Agreement states that funds in the ITF account are trust property and are not intended to be property of ours or subject to claims of our creditors generally, there can be no assurance that, if the matter were to be litigated, such litigation would not delay or prevent the holder of a Note from accessing the portion of those funds in which the holder has an interest.

In a bankruptcy or similar proceeding of us, there may be uncertainty regarding the rights of a holder of a Note, if any, to the return of the purchase price of a Note if the corresponding Member Loan has not been funded. If the purchase price of a Note is paid to us and a bankruptcy or similar proceeding of us is commenced, the holder of the Note may not be able to obtain a return of the funds constituting the purchase price, even if the Member Loan corresponding to the Note has not been funded as of the date that the bankruptcy or similar proceeding is commenced and even if the funds are held by us in the ITF account.

In a bankruptcy or similar proceeding of us, the holder of a Note may be delayed or prevented from enforcing our repurchase obligations in cases of confirmed identity fraud. In a bankruptcy or similar proceeding of us, any right of a holder of Note to require us to repurchase the Note as a result of a confirmed identity fraud incident may not be specifically enforced, and such holder’s claim for such repurchase may be treated less favorably than a general unsecured obligation of ours as described and subject to the limitations in this “Risks Related to LendingClub and the LendingClub Platform – If we were to become subject to a bankruptcy or similar proceeding” section.

In a bankruptcy or similar proceeding of us, the implementation of back-up servicing arrangements may be delayed or prevented. In a bankruptcy or similar proceeding of us, our ability to transfer servicing obligations to our back-up servicer may be limited and subject to the approval of the bankruptcy court or other presiding authority. The bankruptcy process may delay or prevent the implementation of back-up servicing, which may impair the collection of Member Loans to the detriment of the Notes.

We rely on third-party banks to disburse Member Loan proceeds and process Member Loan payments, and we rely on third-party computer hardware and software. If we are unable to continue utilizing these services, our business and ability to service the Member Loans on which the Notes are dependent may be adversely affected.

We rely on a third-party bank to disburse the net proceeds of newly originated Member Loans. Additionally, because we are not a bank, we cannot belong to and directly access the ACH payment network, and we must rely on an FDIC-insured depository institution to process our transactions, including loan payments and remittances to holders of the Notes. We currently use Wells Fargo Bank, N.A. for these purposes. Under the ACH rules, if we experience a high rate of reversed transactions (known as “chargebacks”), we may be subject to sanctions and potentially disqualified from using the system to process payments. We also rely on computer hardware purchased and software licensed from third parties to operate our platform. This purchased or licensed hardware and software may not continue to be available on commercially reasonable terms, or at all. If we cannot continue to obtain such services from this institution or elsewhere, or if we cannot transition to another processor quickly, our ability to process payments will suffer and your ability to receive principal and interest payments on the Notes will be delayed or impaired.

If the security of our members’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, your secure information may be stolen, our reputation may be harmed, and we may be exposed to liability.

Our platform stores our borrower members’ and investors’ bank information and other personally-identifiable sensitive data. Any accidental or willful security breaches or other unauthorized access could cause your secure information to be stolen and used for criminal purposes. Security breaches or unauthorized access to secure information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any of our members’ data, our relationships with our members will be severely damaged, and we could incur significant liability.

 

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Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and often lead to widespread negative publicity, which may cause our members to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose members.

Our ability to service the Member Loans or maintain accurate accounts may be adversely affected by computer viruses, physical or electronic break-ins and similar disruptions.

The highly automated nature of our platform may make it an attractive target and potentially vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. If a “hacker” were able to infiltrate our platform, you would be subject to an increased risk of fraud or borrower identity theft, and may experience losses on, or delays in the recoupment of amounts owed on, a fraudulently induced purchase of a Note and Certificates. Additionally, if a hacker were able to access our secure files, he or she might be able to gain access to your personal information. While we have taken steps to prevent such activity from affecting our platform, if we are unable to prevent such activity, the value in the Notes and our ability to fulfill our servicing obligations and to maintain our platform would be adversely affected.

Any significant disruption in service on our website or in our computer systems could reduce the attractiveness of our platform and result in a loss of members.

If a catastrophic event resulted in a platform outage and physical data loss, our ability to perform our servicing obligations would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new members and retain existing members. Our system hardware is hosted in a hosting facility located in Las Vegas, Nevada, owned and operated by SwitchNet. We also maintain a real time backup system located in Santa Clara, CA owned and operated by SAVVIS. SwitchNet does not guarantee that our members’ access to our website will be uninterrupted, error-free or secure. Our operations depend on SwitchNet’s ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. If our arrangement with SwitchNet is terminated, or there is a lapse of service or damage to SwitchNet facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.

Any interruptions or delays in our service, whether as a result of SwitchNet other third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our members and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage at a SwitchNet facility. These factors could prevent us from processing or posting payments on the Member Loans or the Notes, damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause members to abandon our platform, any of which could adversely affect our business, financial condition and results of operations.

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees whom we need to support our business.

Competition for highly skilled technical and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve our members could diminish, resulting in a material adverse effect on our business.

 

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Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Our growth in headcount and operations since our inception has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management and our administrative, operational and financial reporting infrastructure. Our success will depend in part on the ability of our senior management to manage the growth we achieve effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems. The addition of new employees and the system development that we anticipate will be necessary to manage our growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key personnel, each of whom would be difficult to replace. In particular, our Founder/Chief Executive Officer is critical to the management of our business and operations and the development of our strategic direction. The loss of the services of Mr. Laplanche or other executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

It may be difficult and costly to protect our intellectual property rights, and we may not be able to ensure their protection.

Our ability to maintain our platform and arrange Member Loans depends, in part, upon our proprietary technology.We may be unable to protect our proprietary technology effectively, however, which would allow competitors to duplicate our products and adversely affect our ability to compete with them. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. In addition, our platform may infringe upon claims of third-party patents, and we may face intellectual property challenges from such other parties. We may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. Furthermore, our technology may become obsolete, and there is no guarantee that we will be able to successfully develop, obtain or use new technologies to adapt our platform to compete with other person-to-person lending platforms as they develop. If we cannot protect our proprietary technology from intellectual property challenges, or if the platform becomes obsolete, our ability to maintain the platform, arrange Member Loans or perform our servicing obligations on the Member Loans could be adversely affected.

Purchasers of Notes will have no control over us and will not be able to influence our corporate matters.

The Notes offered through our platform grant no equity interest in LendingClub to the purchaser nor grant the purchaser the ability to vote on or influence our corporate decisions. As a result, our stockholders will continue to exercise 100% voting control over all our corporate matters, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets.

Neither the Notes or the related indenture restrict our ability to incur additional indebtedness. Any additional debt we incur may increase our risk of bankruptcy, which could impair your ability to receive the principal and interest payments you expect to receive on your Notes.

If we incur additional debt after the Notes are issued, it may adversely affect our creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of LendingClub. As discussed above, the financial distress, insolvency or bankruptcy of LendingClub could impair your ability to receive the principal and interest payments you expect to receive on your Notes.

Events beyond our control may damage our ability to maintain adequate records, maintain our platform or perform our servicing obligations. If such events result in a system failure, your ability to receive principal and interest payments on the Notes would be substantially harmed.

If a catastrophic event resulted in our platform outage and physical data loss, our ability to perform our servicing obligations would be materially and adversely affected. Such events include, but are not limited to, fires, earthquakes, terrorist attacks, natural disasters, computer viruses and telecommunications failures. We store back-up records in offsite facilities located in Las Vegas, Nevada and Santa Clara, California. If our electronic data storage and back-up storage system are affected by such events, we cannot guarantee that you would be able to recoup your investment in the Notes.

 

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RISKS RELATING TO COMPLIANCE AND REGULATION

Our platform is a novel approach to borrowing that may fail to comply with borrower protection laws such as state usury laws, other interest rate limitations or federal and state consumer protection laws such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and the Fair Debt Collection Practices Act and their state counterparts. Borrower members may make counterclaims regarding the enforceability of their obligations after collection actions have commenced, or otherwise seek damages under these laws. Compliance with such regimes is also costly and burdensome.

Our platform operates a novel program that must comply with regulatory regimes applicable to all consumer credit transactions. The novelty of our platform means compliance with various aspects of such laws is untested. Certain state laws generally regulate interest rates and other charges and require certain disclosures. In addition, other state laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of the Member Loans. Our platform is also subject to other federal and state laws, such as:

 

   

Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrower members regarding the terms of their Member Loans;

 

   

Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit;

 

   

Federal Fair Credit Reporting Act, which regulates the use and reporting of information related to each borrower member’s credit history; and

 

   

Federal Fair Debt Collection Practices Act and similar state debt collection laws, which regulate debt collection practices by “debt collectors” and prohibit debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans.

We may not always have been, and may not always be, in compliance with these laws. Compliance with these requirements is also costly, time-consuming and limits our operational flexibility.

If our platform was found to violate a state’s usury laws, your investment may lose substantial value and you may lose all of the interest due on your Note.

The interest rates that are charged to borrowers and that form the basis of payments to investors on our Notes are based upon the ability of WebBank, the issuer of the loan, to export the interest rates of Utah to provide for uniform rates to all borrowers. Federal law provides WebBank the authority to charge these interest rates. The current rates offered by WebBank though our platform range from approximately 6.78% to 27.99%. Of the forty-four jurisdictions whose residents may obtain loans (including the District of Columbia), only seven states (Arizona, Nevada, New Hampshire, New Mexico, South Carolina, South Dakota and Utah) have no interest rate limitations on consumer loans, while all other jurisdictions have a maximum rate less than the current maximum rate offered by WebBank through our platform. If a borrower were to successfully bring a claim against us for a state usury law violation and the rate on the loan and Note underlying that borrower was greater than that allowed under applicable state law, the value of your investment may decline as you would not receive the total amount of interest you expected from your investment, and in some cases you may not receive any interest or principal. We may also be subject to fines and penalties. Moreover, such a finding could substantially harm our ability to operate our business in the manner currently contemplated.

Non-compliance with laws and regulations may impair our ability to arrange or service Member Loans.

Failure to comply with the laws and regulatory requirements applicable to our business may, among other things, limit our, or a collection agency’s, ability to collect all or part of the principal amount of or interest on the Member Loans on which the Notes are dependent for payment. In addition, our non-compliance could subject us to damages, revocation of required licenses or other authorities, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business and ability to maintain our platform and may result in borrower members rescinding their Member Loans.

Where applicable, we seek to comply with state small loan, loan broker, servicing and similar statutes. Currently, we do not provide services to borrowers in Idaho, Indiana, Iowa, Maine, Mississippi, Nebraska and North Dakota. In all other U.S. jurisdictions with licensing or other requirements we believe may be applicable to make loans, we have obtained any necessary licenses or comply with the relevant requirements. Nevertheless, if we are found to not comply with applicable laws, we could lose one or more of our licenses or authorizations or face other sanctions or be required to obtain a license in such jurisdiction, which may have an adverse effect on our ability to continue to facilitate the origination of Member Loans through our platform, perform our servicing obligations or make our platform available to borrower members in particular states, which may impair your ability to receive the payments of principal and interest on the Notes that you expect to receive.

 

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We rely on our agreement with WebBank to lend to qualified borrower members on a uniform basis throughout the United States. If our relationship with WebBank were to end, we may need to rely on individual state lending licenses to arrange Member Loans.

Borrower Member Loan requests take the form of an application to WebBank, which currently makes all loans to our borrower members who request loans through our platform, and allows our platform to be available to borrowers on a uniform basis throughout the United States. If our relationship with WebBank were to end or if WebBank were to cease operations, we may need to rely on individual state lending licenses to originate Member Loans. Because we do not currently possess state lending licenses in every U.S. state, we may be required to discontinue lending or limit the rates of interest charged on Member Loans in some states. We may face increased costs and compliance burdens if our agreement with WebBank is terminated.

Several lawsuits have sought to re-characterize certain loan marketers and other originators as lenders. If litigation on similar theories were successful against us, borrower loans facilitated through our platform could be subject to state consumer protection laws in a greater number of states.

Several lawsuits have brought under scrutiny the association between high-interest “payday loan” marketers and out-of-state banks. These lawsuits assert that payday loan marketers use out-of-state lenders in order to evade the consumer protection laws imposed by the states where they do business. Such litigation has sought to re-characterize the loan marketer as the lender for purposes of state consumer protection law restrictions. Similar civil actions have been brought in the context of gift cards. We believe that our activities are distinguishable from the activities involved in these cases.

Additional state consumer protection laws would be applicable to the Member Loans facilitated through our platform if we were re-characterized as a lender, and the borrower loans could be voidable or unenforceable. In addition, we could be subject to claims by borrower members, as well as enforcement actions by regulators. Even if we were not required to cease doing business with residents of certain states or to change our business practices to comply with applicable laws and regulations, we could be required to register or obtain licenses or regulatory approvals that could impose a substantial cost on us. To date, no actions have been taken or threatened against us on the theory that we have engaged in unauthorized lending; however, such actions could have a material adverse effect on our business.

As internet commerce develops, federal and state governments may draft and propose new laws to regulate internet commerce, which may negatively affect our business.

As internet commerce continues to evolve, increasing regulation by federal and state governments becomes more likely. Our business could be negatively affected by the application of existing laws and regulations or the enactment of new laws applicable to lending. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our members in the form of increased fees. In addition, federal and state governmental or regulatory agencies may decide to impose taxes on services provided over the Internet. These taxes could discourage the use of the Internet as a means of consumer lending, which would adversely affect the viability of our platform.

Our legal compliance burdens and costs have significantly increased as a result of operating as a public company. Our management is required to devote substantial time to compliance matters.

The Notes are publicly registered thereby making us subject to certain reporting requirements of the Securities Act of 1934. Accordantly, we face costly compliance burdens, requiring significant legal, accounting and other expenses. Our management and other personnel devote a substantial amount of time to SEC reporting compliance requirements. In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for our fiscal year ending December 31, 2012, we performed system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404A of the Sarbanes-Oxley Act. Although through such testing we discovered no material weaknesses in internal control over financial reporting at December 31, 2012, subsequent testing by us or our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. To comply with Section 404A, we may incur substantial accounting expense, expend significant management time on compliance-related issues, and hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404A in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

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If we discover a material weaknesses in our internal control over financial reporting which we are unable to remedy, or otherwise fail to maintain effective internal control over financial reporting, our ability to report our financial results on a timely and accurate basis may be adversely affected.

We are not currently required to have an audit of our internal control over financial reporting, and our independent registered public accounting firm has not performed such an audit. Should such a requirement arise and should we or our auditors discover a material weakness in our internal controls, our ability to report our financial results on a timely and accurate basis may be adversely affected.

If we are required to register under the Investment Company Act, our ability to conduct our business could be materially adversely affected.

The Investment Company Act of 1940, or the “Investment Company Act,” contains substantive legal requirements that regulate the manner in which “investment companies” are permitted to conduct their business activities. We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in our company being characterized as an investment company. If, however, we are deemed to be an investment company under the Investment Company Act, we may be required to institute burdensome compliance requirements and our activities may be restricted, which would materially adversely affect our business, financial condition and results of operations. If we were deemed to be an investment company, we may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on our business.

If our registered investment adviser, LC Advisors, LLC, were found to have violated tine Investment Company Act, our ability to raise sufficient investor purchase commitments to meet borrower demand could be impaired.

Our subsidiary, LC Advisors, LLC, acts as an advisor to certain private funds and accredited investors who make large investor purchase commitments to invest in Trust certificates, representing borrower loans. Our ability to continue to advise these private funds and accredited investors depends on the continuing operation of LC Advisors. We believe we have conducted, and we intend to continue to conduct, the business of LC Advisors in substantial compliance with the Investment Company Act. If, however, we are deemed to have breached any of our obligations under the Investment Company Act, the activities of LC Advisors could be restricted, suspended or event terminated. If this were to occur, our ability to raise investor purchase commitments through these vehicles could be severely curtailed, and we may not be able to sufficiently meet demand for borrower loans. This could harm our business and make it difficult for both borrowers and investors to meet demand.

We have not reviewed our compliance with foreign laws regarding the participation of non-U.S. residents on our platform.

From time to time, non-U.S. residents purchase Notes directly on our platform. As of December 31, 2012, the percentage of Notes held (based upon dollar amounts) by such persons against all Notes issued since inception was approximately 3.0%. As we have not reviewed, the compliance of these sales with applicable foreign law, these sales of Notes could result in fines and penalties payable by us.

Recent Legislative and Regulatory Initiatives Have Imposed Restrictions and Requirements on Financial Institutions That Could Have an Adverse Effect on Our Business.

The financial industry is becoming more highly regulated. Legislation has been introduced recently by both U.S. and foreign governments relating to financial institutions and markets, including alternative asset management funds that would result in increased oversight and taxation. There has been, and may continue to be, a related increase in regulatory investigations of the trading and other investment activities of alternative investment funds. Such investigations may impose additional expenses by us, may require the attention of senior management and may result in fines if any of our funds are deemed to have violated any regulations.

Partly in response to the recent financial crisis, the President signed into law the Dodd-Frank Act. Few provisions of the Dodd-Frank Act were effective immediately, with various provisions becoming effective in stages. Many of the rules required to be implemented by governmental agencies still have not been promulgated or implemented. These rules have or expect to increase regulation of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices. We cannot predict the substance or impact of pending or future legislation or regulation. Compliance with such legislation or regulation may, among other effects, significantly increase our costs, limit our product offerings and operating flexibility, require significant adjustments in our internal business processes, and possibly require us to maintain our regulatory capital at levels above historical practices.

Item 1B. Unresolved Staff Comments

Not applicable.

 

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Item 2. Properties

The information set forth in Item 1 under the caption “Item 1. Business – About LendingClub – Facilities” is incorporated herein by reference.

Item 3. Legal Proceedings

The information set forth in Item 1 under the caption “Item 1. Business – About LendingClub – Legal Proceedings” is incorporated herein by reference.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

On October 13, 2008, we commenced a public offering of up to $600 million in principal amount of the Notes pursuant to the Registration Statement (Registration Statement No. 333-151827) that was declared effective by the SEC on October 10, 2008. The offering was a continuous offering. On October 7, 2011, we filed a new Registration Statement registering $1,000,000,000 in principal amount of Notes (Registration Statement No. 333-177230) that was declared effective by the SEC on July 31, 2012. From October 13, 2008 to December 31, 2012, we sold $681.1 million in total principal amount of Notes at 100% of their principal amount. The Notes were offered only through our website, and there were no underwriters or underwriting discounts. In connection with the offering, we incurred estimated expenses of approximately $6.0 million, none of which were paid by us to our directors, officers, persons owning 10% or more of any class of our equity securities or affiliates. As set forth in the prospectus for the offering, we are using the proceeds of each series of Notes to fund a corresponding Member Loan at fair value through our platform designated by the lender members purchasing such series of Notes. None of the proceeds from the Notes are paid by us to our directors, officers, persons owning 10% or more of any class of our equity securities or affiliates.

We have no publicly traded equity securities. At December 31, 2012, there were 62 holders of record of our common stock. We have not paid cash dividends since our inception, and we do not anticipate paying cash dividends in the foreseeable future.

On June 1, 2012, we issued and sold 2.5 million shares of Series E Convertible Preferred Stock, par value $0.01 per share, for aggregate gross proceeds of $17.5 million pursuant to Section 4(2) of the Securities Act of 1933. In connection with our private placement of Series E convertible preferred stock, we incurred transaction expenses of $153,733 that were recorded as an offset to the gross proceeds.

From July 2011 through January 2012, we issued and sold 9,007,678 shares of our Series D Convertible Preferred Stock, par value $0.01 per share, for aggregate gross proceeds to LendingClub of approximately $32.0 million. In connection with our private placement of Series D convertible preferred stock, we incurred transaction expenses of approximately $0.1 million that were recorded as an offset to gross proceeds.

 

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Item 6. Selected Financial Data

The following tables summarize certain selected financial data and should be read in conjunction with our consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included at Items 8 and 7, respectively, of this Filing. The financial data for the nine month ended December 31, 2012 and the fiscal year ended March 2012 are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The financial data for the years ended March 31, 2011, 2010 and 2009 are derived from audited, consolidated financial statements which are not included in this Form 10-K.

 

    

Nine Months

Ended

December 31,

    Year Ended March 31,  
     2012     2012     2011     2010     2009  
           (in thousands, except share and per share data)        

Statement of Operations Data:

          

Origination fees

   $ 26,013      $ 13,701      $ 5,940      $ 2,074      $ 221   

Servicing fees and other revenue

     2,914        1,835        923        105        54   

Interest income

     56,861        32,660        12,744        4,343        1,221   

Interest expense

     (56,642     (32,030     (12,715     (4,261     (1,625

(Provision) Credit for loan losses on Member Loans at amortized cost

     42        (368     (431     (1,423     (946

Fair valuation adjustments, net

     (595     (1     (15     (1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenue

     28,593        15,797        6,446        837        (1,075

Total Operating Expenses

     (32,831     (27,741     (17,746     (11,092     (10,994
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (4,238     (11,944     (11,300     (10,255     (12,069

Provision for income taxes

       —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (4,238     (11,944     (11,300     (10,255     (12,069

Amortization of beneficial conversion feature on convertible preferred stock

     —          —          —          —          156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (4,238   $ (11,944   $ (11,300   $ (10,255   $ (11,913
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

          

Basic and diluted net loss per share

   $ (0.41   $ (1.36   $ (1.32   $ (1.23   $ (1.45

Weighted-average shares of common stock used in computing basic and diluted net loss per share

     10,339,919        8,781,407        8,562,005        8,350,219        8,191,906   

Balance Sheet Data:

          

Cash and cash equivalents

   $ 52,551      $ 31,244      $ 13,336      $ 2,572      $ 11,999   

Restricted cash

     7,484        4,862        862        1,352        452   

Member Loans at Fair Value

     781,215        360,293        149,972        56,056        8,240   

Member Loans at Amortized Cost

     —          2,298        5,253        7,545        9,918   

Total assets

     850,830        403,330        169,868        68,024        31,087   

Notes and Certificates

     785,316        360,800        149,778        56,042        8,239   

Total liabilities

     798,620        366,993        154,361        65,825        18,997   

Preferred Stock

     103,023        84,806        52,850        28,462        28,262   

Total stockholders’ deficit

     (50,813     (48,469     (37,343     (26,264     (16,373

Other Data:

          

Loan originations

   $ 608,200      $ 321,100      $ 148,800      $ 67,100      $ 17,200   

Assets under management

     261,300        104,500        5,700        —          —     

 

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Table of Contents

Quarterly Financial Information:

Quarterly financial information for the nine months ended December 31, 2012 and the fiscal year ended March 31, 2012 is presented below (in thousands, except share and per share data):

 

     Three Months Ended  
     December 31,
2012
    September 30,
2012
    June 30,
2012
 
           (unaudited)        

Nine Months Ended December 31, 2012

      

Statement of Operations Data:

      

Origination fees

   $ 11,174      $ 8,973      $ 5,866   

Servicing fees and other revenue

     1,381        842        691   

Interest income

     24,817        18,490        13,554   

Interest expense

     (24,935     (18,259     (13,448

(Provision) Credit for loan losses on Member Loans at amortized cost

     1        (7     48   

Fair valuation adjustments, net

     (406     (141     (48
  

 

 

   

 

 

   

 

 

 

Total Net Revenue

     12,032        9,898        6,663   

Total Operating Expenses

     (12,862     (10,780     (9,189
  

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (830     (882     (2,526

Provision for income taxes

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (830   $ (882   $ (2,526
  

 

 

   

 

 

   

 

 

 

Per Share Data:

      

Basic and diluted net loss per share

   $ (0.08   $ (0.09   $ (0.25

Weighted-average shares of common stock used in computing basic and diluted net loss per share

     10,759,542        10,300,351        9,954,190   

Balance Sheet Data:

      

Cash and cash equivalents

   $ 52,551      $ 52,409      $ 47,276   

Restricted cash

     7,484        5,726        4,862   

Member Loans at Fair Value

     781,215        603,169        454,263   

Member Loans at Amortized Cost

     —          221        863   

Total assets

     850,830        669,350        512,571   

Notes and Certificates

     785,316        605,416        453,110   

Total liabilities

     798,620        617,799        460,954   

Preferred Stock

     103,023        102,526        102,160   

Total stockholders’ deficit

     (50,813     (50,975     (50,543

Other Data:

      

Loan originations

   $ 263,800      $ 207,200      $ 137,400   

Assets under management

     261,300        211,300        149,600   

 

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Table of Contents
     Three Months Ended  
     March 31,
2012
    December 31,
2011
    September 30,
2011
    June 30,
2011
 
           (unaudited)        

Fiscal Year Ended March 31, 2012

        

Statement of Operations Data:

        

Origination fees

   $ 4,579      $ 3,738      $ 2,940      $ 2,444   

Servicing fees and other revenue

     539        476        495        325   

Interest income

     12,660        8,377        6,438        5,185   

Interest expense

     (12,516     (8,126     (6,294     (5,094

(Provision) Credit for loan losses on Member Loans at amortized cost

     (8     (205     (80     (75

Fair valuation adjustments, net

     (40     134        (95     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenue

     5,214        4,394        3,404        2,785   

Total Operating Expenses

     (7,838     (7,261     (6,750     (5,892
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (2,624     (2,867     (3,346     (3,107

Provision for income taxes

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (2,624   $ (2,867   $ (3,346   $ (3,107
  

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

        

Basic and diluted net loss per share

   $ (0.29   $ (0.32   $ (0.38   $ (0.36

Weighted-average shares of common stock used in computing basic and diluted net loss per share

     8,957,563        8,839,063        8,727,389        8,611,959   

Balance Sheet Data:

        

Cash and cash equivalents

   $ 31,244      $ 24,712      $ 32,206      $ 9,600   

Restricted cash

     4,862        4,022        1,022        1,022   

Member Loans at Fair Value

     360,293        293,555        227,423        183,118   

Member Loans at Amortized Cost

     2,298        2,545        2,767        4,825   

Total assets

     403,330        326,797        264,483        199,438   

Notes and Certificates

     360,800        290,768        225,005        182,950   

Total liabilities

     366,993        294,262        229,162        186,795   

Preferred Stock

     84,806        78,763        78,764        52,850   

Total stockholders’ deficit

     (48,469     (46,228     (43,443     (40,207

Other Data:

        

Loan originations

   $ 109,600      $ 86,800      $ 68,500      $ 56,100   

Assets under management

     104,500        64,700        25,200        9,500   

 

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Table of Contents

Annual Calendar Financial Information:

Annual calendar financial information for the twelve months ended December 31, 2012, 2011, 2010, 2009 and 2008 is presented below (in thousands, except share and per share data):

 

     Year Ended December 31,  
     2012     2011     2010     2009     2008  
                 (unaudited)              

Statement of Operations Data:

          

Origination fees

   $ 30,592      $ 10,996      $ 4,984      $ 1,307      $ 170   

Servicing fees and other revenue

     3,453        1,534        739        65        50   

Interest income

     69,521        24,223        10,172        3,106        925   

Interest expense

     (69,158     (23,588     (10,273     (3,069     (1,322

(Provision) Credit for loan losses on Member Loans at amortized cost

     34        (445     (598     (1,587     (904

Fair valuation adjustments, net

     (635     32        (9     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenue

     33,807        12,752        5,015        (178     (1,081
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     (40,669     (25,021     (15,822     (10,077     (11,220
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (6,862     (12,269     (10,807     (10,255     (12,301

Provision for income taxes

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (6,862     (12,269     (10,807     (10,255     (12,301

Amortization of beneficial conversion feature on convertible preferred stock

     —          —          —          —          179   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (6,862   $ (12,269   $ (10,807   $ (10,255   $ (12,122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

          

Basic and diluted net loss per share

   $ (0.69   $ (1.41   $ (1.26   $ (1.24   $ (1.48

Weighted-average shares of common stock used in computing basic and diluted net loss per share

     9,996,219        8,686,215        8,550,075        8,273,324        8,190,000   

Balance Sheet Data:

          

Cash and cash equivalents

   $ 52,551      $ 24,712      $ 17,265      $ 4,730      $ 3,187   

Restricted cash

     7,484        4,022        862        1,252        452   

Member Loans at Fair Value

     781,215        293,555        122,621        39,729        2,607   

Member Loans at Amortized Cost

     —          2,545        5,620        9,068        9,573   

Total assets

     850,830        326,797        146,743        55,304        16,379   

Notes and Certificates

     785,316        290,768        122,532        39,718        2,607   

Total liabilities

     798,620        (50,801     128,221        50,698        13,781   

Preferred Stock

     103,023        78,763        52,851        28,462        16,579   

Total stockholders’ deficit

     (50,813     (46,228     (34,329     (23,856     (13,981

Other Data:

          

Loan originations

   $ 717,900      $ 257,300      $ 102,200      $ 51,800      $ 20,000   

Assets under management

     261,300        64,700        —          —          —     

 

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Table of Contents

Quarterly Calendar Financial Information:

Quarterly calendar financial information for the twelve months ended December 31, 2012 and 2011 is presented below (in thousands, except share and per share data):

 

     December 31,
2012
    September 30,
2012
    June 30,
2012
    March 31,
2012
    December 31,
2011
    September 30,
2011
    June 30,
2011
    March 31,
2011
 
                       (unaudited)                    

Statement of Operations Data:

                

Origination fees

   $ 11,174      $ 8,973      $ 5,866      $ 4,579      $ 3,738      $ 2,940      $ 2,444      $ 1,874   

Servicing fees and other revenue

     1,381        842        691        539        476        495        325        238   

Interest income

     24,817        18,490        13,554        12,660        8,377        6,438        5,185        4,223   

Interest expense

     (24,935     (18,259     (13,448     (12,516     (8,126     (6,294     (5,094     (4,074

(Provision) Credit for loan losses on Member Loans at amortized cost

     1        (7     48        (8     (205     (80     (75     (85

Fair valuation adjustments, net

     (406     (141     (48     (40     134        (95     —          (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Net Revenue

     12,032        9,898        6,663        5,214        4,394        3,404        2,785        2,169   

Total Operating Expenses

     (12,862     (10,780     (9,189     (7,838     (7,261     (6,750     (5,892     (5,118
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision for income taxes

     (830     (882     (2,526     (2,624     (2,867     (3,346     (3,107     (2,949

Provision for income taxes

     —          —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (830   $ (882   $ (2,526   $ (2,624   $ (2,867   $ (3,346   $ (3,107   $ (2,949