S-1 1 pfllcdsd1d3d2012.htm FORM S-1 pfllcdsd1d3d2012.htm
 
 
As filed with the Securities and Exchange Commission on March 7, 2012
Registration No. 333-                      


UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549 

FORM S-1
 REGISTRATION STATEMENT
 UNDER
 THE SECURITIES ACT OF 1933 

Prosper Funding LLC
(Exact name of registrant as specified in its charter) 

Delaware
 
6199
 
45-4526070
(State or other jurisdiction of
 incorporation or organization)
 
(Primary Standard Industrial
 Classification Code Number)
 
(I.R.S. Employer
 Identification Number)

111 Sutter Street, 22nd Floor
San Francisco, CA  94104
(415) 593-5400
 (Address, including zip code, and telephone number, including
 area code, of registrant’s principal executive offices) 

Sachin Adarkar, Esq.
Secretary
111 Sutter Street, 22nd Floor
San Francisco, CA  94104
(415) 593-5400
 (Name, address, including zip code, and telephone number, including
 area code, of agent for service) 

Copies to:
Keir D. Gumbs, Esq.
Covington & Burling LLP
1201 Pennsylvania Avenue, NW
Washington, DC 20004
(202) 662-6000

          Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

          If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x
          If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
          If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
          If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
CALCULATION OF REGISTRATION FEE
 
 
Title of Securities being Registered
 
Proposed Maximum
 Aggregate
 Offering Price (1)(2)
 
Amount of
 Registration
 Fee
Prosper Funding LLC Borrower Payment Dependent Notes
 
$500,000,000
 
$57,300
 
(1)The Securities registered hereby consist of Prosper Funding LLC Borrower Payment Dependent Notes (the “Notes”).  The Notes represent special, limited obligations of the registrant.  Each Note corresponds to a single consumer loan originated through the platform that the registrant operates under license from its parent entity, Prosper Marketplace, Inc.  The registrant will only be obliged to make payments on a Note if and to the extent it receives payments on the consumer loan corresponding to that Note.  Each Note may have a separate term, principal amount and applicable interest rate.
(2)Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.

          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 under the Securities Exchange Act of 1934. (Check one):
             
Large Accelerated Filer o
 
Accelerated Filer o
 
Non-accelerated Filer ý
 
Smaller Reporting Company o
 
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 

 
 
 
The information in this prospectus is not complete and may be changed.  We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective.  This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MARCH 7, 2012

PROSPER FUNDING LLC
$500,000,000 Borrower Payment Dependent Notes

This is a public offering to lender members of Prosper Funding LLC of up to $500,000,000 in principal amount of Borrower Payment Dependent Notes, or “Notes”.

Each series of Notes will be dependent for payment on payments we receive on a specific borrower loan described in a listing posted on our peer-to-peer online credit platform, which we refer to as the “platform.”  All listings on the platform are posted by individual consumer borrower members of Prosper Funding LLC requesting individual consumer loans, which we refer to as “borrower loans.”

Important terms of the Notes include the following, each of which is described in detail in this prospectus:
 
·
 
The Notes are special, limited obligations of Prosper Funding LLC only and are not obligations of its parent company, Prosper Marketplace, Inc., or “PMI”, or the borrowers under the corresponding borrower loans.
 
·
 
Our obligation to make payments on a Note will be limited to an amount equal to the Note holder’s pro rata share of amounts we receive with respect to the corresponding borrower loan, net of any servicing fees.   Neither we nor PMI guarantees payment of the Notes or the corresponding borrower loans.

·
The Notes will bear interest from the date of issuance, have a fixed rate, be payable monthly and have an initial maturity of one, three or five years from issuance.  We may add additional Note terms from time to time.

·
A Note holder’s recourse will be extremely limited in the event that borrower information is inaccurate for any reason.

We will offer the Notes to our lender members at 100% of their principal amount.  The Notes will be offered only through our website, and there will be no underwriters or underwriting discounts.

The Notes will be issued in electronic form only and will not be listed on any securities exchange.  The Notes will not be transferable except through the Folio Investing Note Trader platform, or the “Note Trader Platform,” operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer.  There can be no assurance, however, that a market for Notes will develop on the Note Trader platform.  Therefore, note purchasers must be prepared to hold their Notes to maturity.

This offering is highly speculative and the Notes involve a high degree of risk.  Investing in the Notes should be considered only by persons who can afford the loss of their entire investment.  See “Risk Factors” on page 10.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.

The date of this prospectus is _____, 2012

 
 

 

PROSPER FUNDING LLC
TABLE OF CONTENTS
PART I
   
 
ii
     
 
iv
     
 
1
     
 
3
     
 
8
     
 
10
     
 
10
     
 
16
     
 
18
     
 
25
     
 
30
     
 
30
     
 
30
     
 
31
     
 
63
      
 
73
     
 
79
     
 
84
     
 
87
     
 
90
     
 
90
     
 
90
     
 
91
     
 
95
     
 
95
     
INDEX TO FINANCIAL STATEMENTS  
F-1



PART II
   
 
II-1
     
 
II-1
     
 
II-1
     
 
II-2
     
 
II-3
     
 
S-1
     
 
E-1
   
   
   EX -10.4   Form of Servicing Agreement between Prosper Funding LLC and Prosper Marketplace, Inc., date __________, 2012    
   



 
ABOUT THIS PROSPECTUS

This prospectus describes our offering of Borrower Payment Dependent Notes, or “Notes.”  This prospectus is part of a registration statement filed with the Securities and Exchange Commission, which we refer to as the “SEC.” This prospectus, and the registration statement of which it forms a part, speak only as of the date of this prospectus.   We will supplement this registration statement from time to time as described below.
 
Unless the context otherwise requires, we use the terms “the Company,” “our company,” “we,” “us” and “our” in this prospectus to refer to Prosper Funding LLC, a Delaware limited liability company.  We are a wholly-owned subsidiary of Prosper Marketplace, Inc., a Delaware corporation, or “PMI”.
 
The offering described in this prospectus is a continuous offering pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”).  We offer Notes continuously, and sales of Notes through the platform occur on a daily basis.  When we post a loan request on our website, that posting constitutes an offer by us to sell the series of Notes corresponding to that request.  We refer to a posted loan request as a “loan listing” or a “listing”.  We prepare regular supplements to this prospectus, which we refer to as “listing reports”.  In each listing report, we provide information about the most recent loan listings posted on our website and the series’ of Notes that correspond to those listings.  We will also regularly file prospectus supplements that we refer to as “sales reports”, describing the bidding history and maturity date for each series of Notes sold through the platform.  These prospectus supplements will provide information about the Notes that will correspond to the information contained in the corresponding borrower listings.  We will also post these listing and sales reports on our website.

We will prepare prospectus supplements to update this prospectus for other purposes, such as to disclose changes to the terms of our offering of the Notes, provide quarterly updates of our financial and other information included in this prospectus and disclose other material developments.  We will file these prospectus supplements with the SEC pursuant to Rule 424(b) and post them on our website.  When required by SEC rules, such as when there is a “fundamental change” in our offering or the information contained in this prospectus, or when an annual update of our financial information is required by the Securities Act or SEC rules, we will file post-effective amendments to the registration statement of which this prospectus forms a part, which will include either a prospectus supplement or an entirely new prospectus to replace this prospectus.  We currently anticipate that post-effective amendments will be required, among other times, when we change material terms of the Notes.
 
The Notes are not available for offer and sale to residents of every state.  Our website will indicate the states where residents may purchase Notes.  We will post on our website any special suitability standards or other conditions applicable to purchases of Notes in certain states that are not otherwise set forth in this prospectus.
 
 

WHERE YOU CAN FIND MORE INFORMATION
 
We have filed a registration statement on Form S-1 with the SEC in connection with this offering.  In addition, we are required to file annual, quarterly and current reports and other information with the SEC.  You may read and copy the registration statement and any other documents we have filed at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C.  20549.  Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.  Our SEC filings are also available to the public at the SEC’s Internet site at http://www.sec.gov.
 
This prospectus is part of the registration statement and does not contain all of the information included in the registration statement and the exhibits, schedules and amendments to the registration statement.  Some items are omitted in accordance with the rules and regulations of the SEC.  For further information with respect to us and the Notes, we refer you to the registration statement and to the exhibits and schedules to the registration statement filed as part of the registration statement.  Whenever a reference is made in this prospectus to any of our contracts or other documents, the reference may not be complete and, for a copy of the contract or document, you should refer to the exhibits that are a part of the registration statement.

 
 
 


PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus.  You should read the following summary together with the more detailed information appearing in this prospectus, including our financial statements and related notes, and the risk factors beginning on page 10, before deciding whether to purchase our Notes.

Prosper Funding LLC operates a peer-to-peer online credit platform, which we refer to as the “platform”, that enables its borrower members to borrow money and its lender members to purchase Borrower Payment Dependent Notes, or Notes, issued by Prosper Funding LLC, the proceeds of which facilitate the funding of the loans made to borrower members.  Prosper Funding LLC is a wholly-owned subsidiary of Prosper Marketplace, Inc.  We use the terms “we”, “us” and “our” to refer to Prosper Funding LLC, and we use the term “PMI” to refer to Prosper Marketplace, Inc.
 
About the Platform
 
PMI developed the platform and owns the proprietary technology that makes operation of the platform possible.   We have entered into a Servicing Agreement with PMI pursuant to which PMI has licensed to us the right to operate the platform, and we have appointed PMI to provide certain administrative services relating to the platform (the “Servicing Agreement”).     Prior to the commencement of this offering, PMI operated the platform directly, facilitated the origination of loans by WebBank through the platform and issued and sold notes corresponding to those loans.  We refer to borrower loans originated and notes issued and sold through the platform prior to the commencement of this offering as “PMI Borrower Loans” and “PMI Notes”, respectively.
 
Loan Listings.    A loan listing, or a listing, is a request by a borrower member for a borrower loan in a specified amount that is posted on the platform by the borrower member.    We refer to a borrower member who posts a loan listing as an “applicant” and an applicant who obtains a loan through the platform as a “borrower”.  Each listing sets forth the desired loan amount, interest rate and corresponding yield percentage, the minimum amount of total bids required for the loan to fund, the Prosper Rating and estimated loss rate for the listing, the applicant’s debt-to-income ratio, certain credit information from the applicant’s credit report, the applicant’s numerical credit score range, and the applicant’s self-reported annual income range, occupation and employment status.  

The Prosper Rating  is  a proprietary credit rating that we assign to each listing.  The Prosper Rating is a letter that indicates the level of risk associated with a listing and corresponds to an estimated average annualized loss rate range for the listing.  There are currently seven Prosper Ratings, represented by seven letter scores, but this, as well as the loss ranges associated with each, may change over time as the marketplace dictates.  The estimated loss rate for each listing is based on two scores: a consumer reporting agency score and an in-house custom score calculated using the historical performance of previous borrower loans with similar characteristics.  We will use these two scores to determine an estimated loss rate for each listing, which correlates to a Prosper Rating.  This rating system allows us to maintain consistency when assigning a rating to a listing.  See “About the Platform – Risk Management.” for more information.

Bidding on Listings.    A bid on a listing is a lender member’s commitment to purchase a Note in the principal amount of the lender member’s bid that will be dependent for payment on the payments we receive on the borrower loan described in the listing.  After a listing is posted, lender members can place bids on that listing until the listing has received bids totaling the requested loan amount.    Currently, a bid may be between $25 and the full amount of the requested loan amount.  A lender member who wishes to bid on a listing must have funds in the amount of the bid in his lender member account at the time the bid is made. See “About the Platform - Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.  Once a bid is placed, it is irrevocable, and the amount of the bid may not be withdrawn from the lender member’s account, unless the bidding period expires without the listing having received enough bids to be funded. Once the listing has received bids totaling the requested loan amount, no further bids can be placed.    The maximum length of the bidding period is 14 days.    If the listing does not receive bids equal to or exceeding the minimum amount required for the listing to fund by the close of the fourteenth day after the listing is posted, the listing will terminate and will not be funded.


Borrower Loans.    If at the end of the bidding period the listing has received bids equal to or exceeding the minimum amount required to fund, a loan will be made to the applicant in an amount equal to the total amount of all winning bids.  All borrower loans are unsecured obligations of individual borrower members with a fixed interest rate set by us and a loan term currently set at one, three or five years, although we may expand the range of available loan terms in the future to between three months and seven years.  The minimum and maximum principal amounts for borrower loans are currently $2,000 and $25,000, respectively.  All borrower loans are funded by WebBank, a Federal Deposit Insurance Corporation (“FDIC”) insured, Utah-chartered industrial bank.    After funding a loan, WebBank sells and assigns the loan to us, without recourse to WebBank, in exchange for the principal amount of the borrower loan.    WebBank has no obligation to Note holders.  

For all borrower loans, we verify the applicant’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  Loan listings can be posted without our obtaining any documentation of the applicant’s ability to afford the loan.    In some instances, we verify the income or employment information provided by applicants in listings.    This verification is normally done after the listing has been created but before the loan is funded, and therefore the results of the verification process are not reflected in the loan listings.    See “About the Platform – Borrower Identity and Financial Information Verification.”

The Notes. We issue and sell a series of Notes for each borrower loan that is funded on the platform.  The Notes are sold to the lender members who successfully bid on the corresponding loan listing in the principal amounts of their respective bids.  Each series of Notes is dependent for payment on payments we receive on the corresponding borrower loan.  We use the proceeds of each series of Notes to purchase that loan from Web Bank.

We will pay each Note holder principal and interest on the Note in an amount equal to each such Note’s pro rata portion of the principal and interest payments, if any, we receive on the corresponding borrower loan, net of our servicing fee, which is currently set at 1%, but which we may increase in the future to an amount that is greater than 1% but less than or equal to 3%.  We will pay Note holders any other amounts we receive on the corresponding borrower loans, including late fees and prepayments, subject to our servicing fee, except that we will not pay to Note holders any non-sufficient funds fees for failed borrower payments that we receive.  In addition, the funds available for payment on the Notes will be reduced by the amount of any collection fees a third-party collection agency charges for services rendered in connection with the corresponding borrower loan..  Notwithstanding the foregoing, no payments will be made on any Note after its final maturity date.  See “The Offering - Final maturity date/Extension of maturity date.”
 
Under our lender member registration agreement, in the event of a material default under a series of Notes due to verifiable identity theft of the named borrower’s identity, we will repurchase such Notes from the relevant lender members.  In the event we breach any of our other representations and warranties in the lender registration agreement pertaining to the Notes, and such breach materially and adversely affects a series of Notes, we will either indemnify the lender members, repurchase that series of Notes or cure the breach.  See “About the Platform—Our Note Repurchase and Indemnification Obligations.”  
 
Servicing.    We are responsible for servicing the borrower loans and Notes.  We refer borrower loans that become more than 30 days past-due to a third party collection agency for collection proceedings. See “About the Platform – Loan Servicing and Collection.”

Quick Invest.  The platform includes a loan search tool, Quick Invest, that makes it easier for lender members to identify Notes that meet their investment criteria.  A lender member using Quick Invest is asked to indicate (i) the Prosper Rating or Ratings she wishes to use as search criteria, (ii) the total amount she wishes to invest and (iii) the amount she wishes to invest per Note. Quick Invest then compiles a basket of Notes for her consideration that meet her search criteria.  If the pool of Notes that meet her criteria exceeds the total amount she wishes to invest, Quick Invest selects Notes from the pool based on how far the listings corresponding to the Notes have progressed through the loan verification process, i.e.,  Notes from the pool that correspond to listings for which we have completed the verification process will be selected first.  If the pool of Notes that meet the lender member’s criteria and for which we have completed verification still exceeds the amount she wishes to invest, Quick Invest selects Notes from that pool based on the principle of first in, first out, i.e.,  the Notes from the pool with the corresponding listings that were posted earliest will be selected first.  If the lender member’s search criteria include multiple Prosper Ratings, Quick Invest divides the lender’s basket into equal portions, one portion representing each Prosper Rating selected.


To the extent available Notes with these Prosper Ratings are insufficient to fill the lender member’s order, the lender member is advised of this shortfall and given an opportunity either to reduce the size of her order or to modify her search criteria to make her search more expansive.  The Auto Quick Invest feature allows lender members (i) to have Quick Invest searches run on their designated criteria automatically each time new listings are posted on the platform, and (ii) to have bids placed automatically on any Notes identified by each such search.  See “About the Platform—How to Bid to Purchase Notes—Quick Invest.”
 
Corporate Information
 
 
PMI was incorporated in the State of Delaware in March 2005, and formed Prosper Funding LLC in the State of Delaware in February 2012.  Our principal executive offices are located at 111 Sutter Street, 22nd Floor, San Francisco, California 94104.  Our telephone number at this location is (415) 593-5400.  Our website address is www.prosper.com.  The information contained on our website is not incorporated by reference into this prospectus.

We have been organized and will be operated in a manner that is intended (i) to minimize the likelihood that we will become subject to bankruptcy proceedings, and (ii) to minimize the likelihood that we would be substantively consolidated with PMI, and thus having our assets subject to claims by PMI’s creditors, if PMI files for bankruptcy.  This is achieved by placing certain restrictions on our activities and implementing certain formalities designed to expressly reinforce our status as a distinct corporate entity from PMI. See “Information About Prosper Funding LLC.”
 
THE OFFERING
 
Issuer
 
Prosper Funding LLC
     
Securities offered
 
Borrower Payment Dependent Notes, or “Notes,” issued in series, with each series dependent for payment on payments we receive on a specific borrower loan.
     
Offering price
 
100% of the principal amount of each Note.
     
Initial maturity date
 
Maturities are for one, three or five years and match the maturity date of the corresponding borrower loan. We may in the future extend the range of available loan terms to between three months and seven years, at which time the Notes will have terms between three months and seven years.
     
Final maturity date/Extension of maturity date
 
The final maturity date of each Note is the date that is one year after the initial maturity date. Each Note will mature on the initial maturity 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, in which case the maturity of the Note will be automatically extended to the final maturity date. If there are any amounts under the corresponding borrower loan still due and owing to us after the final maturity date, we will have no further obligation to make payments on the Notes even if we receive payments on the corresponding borrower loan after the final maturity date. However, because we may, in our sole discretion and subject to our servicing standard, amend, modify, sell to a third-party debt purchaser or charge-off the borrower loan at any time after the 31st day of its delinquency, and because we generally charge-off a loan after it becomes more than 120 days past due, a borrower loan may never reach its final maturity date.
     
Interest rate
 
Each series of Notes will have a stated, fixed interest rate equal to its yield percentage determined by us, which is the interest rate for the corresponding borrower loan, net of servicing fees.
     



Setting interest rate for
Notes
Interest rates vary among the Notes, but each series of Notes that corresponds to a single borrower loan will have the same interest rate. We set the interest rates for borrower loans based on their Prosper Ratings, as well as additional factors such as loan terms, group affiliations, the economic environment and competitive conditions.  The interest rate on each Note is equal to the interest rate on the corresponding borrower loan, net of servicing fees. See “About the Platform—Setting Interest Rates.”
 
   
Payments on the Notes
We will pay principal and interest on any Note a lender member purchases in an amount equal to the lender member’s pro rata portion of the principal and interest payments, if any, we receive on the corresponding borrower loan, net of servicing fees and other charges.
See “—Servicing Fees and Other Charges.” Each Note will provide for monthly payments over a term equal to the corresponding borrower loan. The payment dates for the Notes will fall on the sixth business day after the due date for each installment of principal and interest on the corresponding borrower loan. See “Summary of Material Agreements—Indenture as Form of Notes” for more information.
 
 
Borrower loans
Lender members will designate us to apply the proceeds from the sale of each series of Notes to our purchase of the corresponding borrower loan from WebBank. Each borrower loan is a fully amortizing consumer loan made by WebBank to an individual borrower member. Borrower loans currently have a term of one, three or five years, but we may in the future extend the range of available loan terms to between three months and seven years. Borrower members may request loans within specified minimum and maximum principal amounts (currently between $2,000 and $25,000), which are subject to change from time to time. WebBank subsequently sells and assigns the borrower loans to us without recourse in exchange for the principal amount of the borrower loan. Borrower loans are repayable in monthly installments and are unsecured and unsubordinated. Borrower loans may be repaid at any time by the borrowers without prepayment penalty. We verify each applicant’s identity against data from consumer reporting agencies and other identity and anti-fraud verification databases.  Loan listings can be posted without our obtaining any documentation of the applicant’s ability to afford the loan. We sometimes verify the income or employment information provided by applicants. This verification is normally done after the listing has been created but before the loan has funded, and therefore the results of the verification are not reflected in the listings. See “About the Platform – Borrower Identity and Financial Information Verification” for more information.
 
 



Security Interest—Ranking
The Notes will not be contractually senior or contractually subordinated to other indebtedness, if any, that we incur. All Notes will be special, limited obligations of Prosper Funding LLC. We were formed by PMI so that, in the event of PMI’s bankruptcy, the borrower loans we own should be shielded from claims by PMI’s creditors, thereby protecting the interests of Note holders in those borrower loans.  This is achieved by placing certain restrictions on our activities, including restrictions in our organizational documents on our ability to incur additional indebtedness, and implementing certain formalities designed to expressly reinforce our status as a distinct corporate entity from PMI. Nevertheless, the Notes themselves do not restrict our incurrence of other indebtedness or the grant or imposition of liens or security interests on our assets, and holders of the Notes do not themselves have a security interest in the corresponding borrower loan or the proceeds of that loan.  Accordingly, in the event of a bankruptcy or similar proceeding of Prosper Funding LLC, the relative rights of a holder of a Note may be uncertain. To further limit the risk of our insolvency, we have therefore granted the indenture trustee, for the benefit of the Note holders, a security interest in all of the borrower loans,, all payments and proceeds we receive on the borrower loans and in the bank account in which the borrower loan payments are deposited. The indenture trustee may exercise its legal rights to the collateral only if an event of default has occurred under the indenture, which would include our becoming subject to a bankruptcy or similar proceeding. Only the indenture trustee, not the holders of the Notes, has a security interest in the above collateral. If the indenture trustee were to exercise its legal rights to the collateral, the indenture provides that amounts collected on a borrower loan (minus allowable fees and expenses) are to be applied to amounts due and owing on the corresponding Note.  There can be no assurance, however, that the indenture trustee, or ultimately the Note holders, would realize any amounts from the collateral.  See “Risk Factors—Risks Related to Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.
 
Servicing fees and Other
Charges
 
We subtract a servicing fee from every loan payment we receive. The amount of the servicing fee with respect to a particular payment is calculated by (a) multiplying the applicable annual servicing fee rate by a fraction, the numerator of which is equal to the number of days since the borrower’s last payment and the denominator of which is 365, and (b) multiplying the product obtained by the outstanding principal balance of the loan prior to applying the current payment.  The annual servicing fee rate is currently set at 1%, but we may increase that in the future to a rate greater than 1% but less than or equal to 3%. Listings set forth the applicable servicing fee.  Because servicing fees reduce the effective yield to lenders, the yield percentage displayed in each listing is net of servicing fees.
 
Any non-sufficient funds fees charged to a borrower’s account will be retained by us as additional servicing compensation. If a borrower loan enters collection, the collection agency will charge a collection fee of between 17% and 30% of any amounts that are obtained, in addition to any legal fees incurred in the collection effort. The collection fee will vary depending on the collection agency used. The collection fees charged by the various collection agencies can be accessed through hyperlinks from the bidding page on the platform. These fees will correspondingly reduce the amounts of any payments lender members receive on the corresponding Notes and are not reflected in the yield percentage displayed in listings.
 
We will pay lender members any late fees we receive on borrower loans.
     
Use of proceeds
 
We will use the proceeds of each series of Notes to purchase the corresponding borrower loan.
     
Electronic form and transferability
 
The Notes will be issued in electronic form only and will not be listed on any securities exchange. The Notes will not be transferable except through the Folio Investing Note Trader platform operated and maintained by FOLIOfn Investments, Inc., a registered broker-dealer. There can be no assurance that a market for the Notes will develop on the Note Trader platform and, therefore, lender members must be prepared to hold their Notes to maturity. See “About the Platform—Note Trader Platform” for more information.

 
     
U.S. federal income tax consequences
 
Although the matter is not free from doubt, we intend to treat the Notes as our debt instruments that have original issue discount (“OID”) for U.S. federal income tax purposes. Accordingly, if you hold a Note, you will be required to include OID currently as ordinary interest income for U.S. federal income tax purposes (which may be in advance of interest payments on the Note) if the Note has a maturity date of more than one year, regardless of your regular method of tax accounting. If the Note has a maturity of one year or less, (1) if you are a cash-method taxpayer, in general, you will not have to include OID currently in income on your Note unless you elect to do so, and (2) if you are an accrual-method taxpayer, in general, you will have to include OID currently in income on your Note. You should consult your own tax advisor regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership, and disposition of the Notes (including any possible differing treatments of the Notes). See “Material U.S. Federal Income Tax Considerations” for more information..
     
Financial suitability
 
To purchase Notes, lender members located in Idaho or Missouri must meet one or more of the following suitability requirements:
 
a) (i) You must have an annual gross income of at least $70,000; (ii) your net worth must be at least $70,000; and (iii) the total amount of Notes you purchase cannot exceed 10% of your net worth; or
 
b) (i) Your net worth must be at least $250,000; and (ii) the total amount of Notes you purchase cannot exceed 10% or your net worth.
 
For purposes of these suitability requirements, you and your spouse are considered to be a single person.  In addition, the following definitions apply:
 
 "annual gross income" means the total amount of money you earn each year, before deducting any amounts for taxes, insurance, retirement contributions or any other payments or expenses;
 
"net worth" means the total value of all your assets, minus the total value of all your liabilities. The value of an asset is equal to the price at which you could reasonably expect to sell it. In calculating your net worth, you should only include assets that are liquid, meaning assets that consist of cash or something that could be quickly and easily converted into cash, such as a publicly-traded stock. You shouldn't include any illiquid assets, such as homes, home furnishings or cars;
 
"net investment" means the principal amount of Notes purchased, minus principal payments received on the Notes.
 
Lender members should be aware that we may apply more restrictive financial suitability standards or maximum investment limits to residents of certain states. If established, before making commitments to purchase Notes, each lender member will be required to represent and warrant that he or she meets these minimum financial suitability standards and maximum investment limits. See “Financial Suitability Requirements” for more information.
 



The following diagram illustrates the basic structure of the platform for a single series of Notes.  This graphic does not demonstrate many details of the platform, including the effect of prepayments, late payments, late fees or collection fees.  See “About the Platform” for more information.




 FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “intend,” “anticipate,” “plan,” “continue” or similar expressions. In particular, information appearing under “About the Platform,” “Risk Factors” or “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management and is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

·
the performance of our Borrower Payment Dependent Notes or “Notes”, which, in addition to being speculative investments, are special, limited obligations that are not guaranteed or insured;
 
·
our ability to make payments on the Notes, including in the event that borrowers fail to make payments on the corresponding loans;
 
·
the reliability of the information about borrowers that is supplied by borrowers;
 
·
our ability to service the loans, and our ability or the ability of a third party debt collector to pursue collection against any borrower, including in the event of fraud or identity theft;
 
·
credit risks posed by the creditworthiness of borrowers, the lack of a maximum debt-to-income ratio for borrowers, and the effectiveness of our credit rating systems;
 
·
actions by some borrowers to defraud lender members and risks associated with identity theft;
 
·
our limited operational history and lack of significant historical performance data about borrower performance;
 
·
the impact of current economic conditions on the performance of the Notes and loss rates of the Notes;
 
·
payments by borrowers on the loans in light of the facts that the loans do not impose restrictions on additional borrower debt and do not include cross-default provisions;
 
·
our compliance with applicable local, state and federal law, including the Investment Advisers Act of 1940, the Investment Company Act of 1940 and other laws;
 
·
potential efforts by state regulators or litigants to characterize us or PMI, rather than WebBank, as the lender of the borrower loans;
 
·
the application of federal and state bankruptcy and insolvency laws to borrowers, us and PMI;
 
·
the impact of borrower defaults and prepayments on the returns on the Notes;
 
·
the lack of a public trading market for the Notes and any inability to resell the Notes on the Note Trader platform;
 
·
the federal income tax treatment of an investment in the Notes;
 

 
·
our ability to prevent security breaches, disruptions in service, and comparable events that could compromise the personal and confidential information held on our data systems, reduce the attractiveness of the platform or adversely impact our ability to service loans;
 
·
the resolution of pending litigation involving PMI, including any state or federal securities litigation; and
 
·
our ability to compete successfully in the peer-to-peer and consumer lending industry.
 
       There may be other factors that may cause our actual results to differ materially from the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the “Risk Factors” section of this prospectus for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.

     All forward-looking statements speak only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
 
 

 

RISK FACTORS

Our Notes involve a high degree of risk.  You should carefully consider the risks described below before making a decision to invest in the Notes.  If any of the following risks actually occurs, you might lose all or part of your investment in the Notes.  

Risks Related to Borrower Default

The Notes are risky and speculative investments for suitable investors only.
 
You should be aware that the Notes offered through the platform are risky and speculative investments.  The Notes are special, limited obligations of ours and depend entirely on payments to us of obligations of borrower members under the corresponding borrower loans.  Notes are suitable only for lender members of adequate financial means.  If you cannot afford to lose the entire amount of your investment in the Notes you purchase, you should not invest in the Notes.  
 
Payments on the Notes depend entirely on payments we receive on corresponding borrower loans.  If a borrower fails to make any payments on the corresponding borrower loan related to your Note, you will not receive any payments on your Note.
 
We will only make payments pro rata on a series of Notes after we receive a borrower’s payment on the corresponding borrower loan, net of our servicing fees.  We will not pay lender members any non-sufficient funds fees we receive, and the funds available for payment on the Notes will be reduced by the amount of any collection fees a third-party collection agency charges.  Under the terms of the Notes, if we do not receive payments on the corresponding borrower loan, you will not receive any payments on your Note.
 
Information supplied by applicants may be inaccurate or intentionally false. Information regarding income and employment is not verified in many cases.
 
Applicants supply a variety of information regarding the purpose of the loan, income, occupation, and employment status that is included in borrower listings.  We do not verify the majority of this information, which may be inaccurate or intentionally false.  Applicants may misrepresent their intentions for the use of borrower loan proceeds.  Neither we nor WebBank verifies any statements by applicants as to how loan proceeds are to be used and do not confirm after loan funding how loan proceeds were used.  All listings are posted on the platform without our verifying the information provided by the applicant, including the borrower’s stated income, employment status or occupation.  Lender members should not rely on an applicant’s self-reported information such as income, employment status, or occupation in making investment decisions.  In the cases in which we select applicants for income and employment verification, the verification is normally done after the listing has been created but prior to the time the borrower loan is funded.  From the period from July 14, 2009 to September 30, 2011 PMI verified employment and/or income on approximately 42% of the PMI Borrower Loans originated through the platform on a unit basis (6,316 out of 15,139) and approximately 65% of originations on a dollar basis ($55,766,041 out of $85,985,988).  PMI selected these listings based on the same combination of factors we use in selecting listings for additional verification, including amount of loan requested, Prosper Rating, debt-to-income ratio and stated income.  Listings do not disclose the identity of applicants, and lender members have no ability to obtain or verify applicant information either before or after they purchase a Note.   If you rely on false, misleading or unverified information supplied by applicants in deciding to purchase Notes, you may lose part or all of the purchase price you pay for a Note. See “About the Platform—Borrower Identity and Financial Information Verification” for more information.
 

 
The Notes are special, limited obligations of Prosper Funding LLC only and are not directly secured by any collateral or guaranteed or insured by any third party.
 
The Notes will not represent an obligation of borrowers, PMI or any other party except Prosper Funding LLC, and are special, limited obligations of Prosper Funding LLC.  The Notes are not directly secured by any collateral and are not guaranteed or insured by any governmental agency or instrumentality or any third party.  Although we have granted the indenture trustee, for the benefit of the Note holders, a security interest in all of the borrower loans, all payments and proceeds received by us on the borrower loans and in the bank account in which the borrower loan payments are deposited, the Note holders do not themselves have a security interest in the borrower loans or the right to payment thereunder.  If an event of default under the indenture were to occur, the Note holders would be dependent on the indenture trustee’s ability to realize on the collateral and make payments on the Notes in the manner contemplated by the indenture.
 
The borrower loans are not secured by any collateral or guaranteed or insured by any third party, and you must rely on us or a third-party collection agency to pursue collection against any borrower.
 
Borrower loans are unsecured obligations of borrower members.  They are not secured by any collateral, and they are not guaranteed or insured by any third party or backed by any governmental authority in any way.  We and our designated third-party collection agencies will, therefore, be limited in our ability to collect on borrower loans.  Moreover, borrower loans are obligations of borrowers to Prosper Funding LLC as successor to WebBank, not obligations to the holders of Notes.  Holders of the Notes will have no recourse to the borrowers and no ability to pursue borrowers to collect payments under borrower loans.  Holders of the Notes may look only to Prosper Funding LLC for payment of the Notes.  Furthermore, if a borrower fails to make any payments on the borrower loan, the holders of the Notes corresponding to that borrower loan will not receive any payments on their Notes.  The holders of such Notes will not be able to pursue collection against the borrower and will not be able to obtain the identity of the borrower in order to contact the borrower about the defaulted borrower loan.  
 
Some of the borrowers on the platform have “subprime” credit ratings, are considered higher than average credit risks, and may present a high risk of loan delinquency or default.
 
Some of the borrowers on the platform are people who have had difficulty obtaining loans from other sources, including banks and other financial institutions, on favorable terms, or on any terms at all, due to credit problems, limited credit histories, adverse financial circumstances, or high debt-to-income ratios.  Therefore, acquiring Notes that are dependent on payments we receive on the corresponding borrower loans of such borrowers may present a high risk of loan delinquency or default.  

Prior to the commencement of this offering, PMI operated the platform directly, facilitated the origination of loans by WebBank through the platform and issued and sold notes corresponding to those loans.  We refer to borrower loans originated and notes issued and sold by PMI as “PMI Borrower Loans” and “PMI Notes”, respectively.  From July 13, 2009 to September 30, 2011, PMI facilitated 15,001 PMI Borrower loans with an average original principal amount of $5,583 and an aggregate original principal amount of $83,754,411 on the platform.   As of September 30, 2011, of these 15,001 PMI Borrower Loans, 77.2% were current or had not reached their first billing cycle, 15.3% were paid in full, 1.8% were 1- 30 days past due, 2.0% were more than 30 days past due, and 3.7% had defaulted (a PMI Borrower Loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy).  In addition, of these 15,001 PMI Borrower Loans:

 
·
1,282, or 9%, have been more than 15 days past due on at least one occasion;
 
 
·
952, or 6%, have been more than 30 days past due on at least one occasion;
 
 
·
735, or 5%, have been more than 60 days past due on at least one occasion;
 
There can be no assurance that historical loss rates for PMI Borrower Loans will be indicative of future loss rates or the likelihood of the delinquency or default on our borrower loans. See “About the Platform—Historical Performance of PMI Borrower Loans” and “Risk Factors—Risks Relating to Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.

 
There is no maximum debt-to-income ratio for applicants.
 
There is no maximum debt-to-income ratio (or “DTI”) for applicants who post listings on the platform.  DTI is a measurement of a borrower’s ability to take on additional debt.  Because there is no maximum DTI for applicants, borrower loans may have a higher risk of default than would otherwise be the case if there were a maximum DTI.
 
The credit information of an applicant may be inaccurate or may not accurately reflect the applicant’s creditworthiness, which may cause you to lose all or part of the price you paid for a Note.
 
We obtain applicant credit information from consumer reporting agencies, and assign Prosper Ratings to listings based in part on the applicant’s credit score.  A credit score that forms a part of the Prosper Rating assigned to a listing may not reflect the applicant’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data. Similarly, the credit data taken from the applicant’s credit report and displayed in listings may also be based on outdated, incomplete or inaccurate consumer reporting data.   We do not verify the information obtained from the applicant’s credit report.   Moreover, lender members do not, and will not, have access to financial statements of applicants or to other detailed financial information about applicants.  
 
The Prosper Rating may not accurately set forth the risks of investing in the Notes and no assurances can be provided that actual loss rates for the Notes will come within the expected loss rates indicated by the Prosper Rating.
 
We will  indemnify a Note holder or repurchase a Note if we include the wrong Prosper Score in a listing or calculate the Prosper Score for a listing incorrectly.  We will not, however, have any indemnity or repurchase obligation as a result of any other inaccuracy with respect to a listing’s Prosper Score or Prosper Rating.  For example, the Prosper Rating for a listing could be inaccurate because the applicant’s credit report contained incorrect information.  A Prosper Rating is not a recommendation by us to buy, sell or hold a Note.  In addition, no assurances can be provided that actual loss rates for the Notes will fall within the expected loss rates indicated by the Prosper Rating. See “About the Platform—Our Note Repurchase and Indemnification Obligations” for more information.
 
Some borrowers may use the platform to defraud lender members, which could adversely affect your ability to recoup your investment.
 
We use identity and fraud checks with external databases to authenticate each borrower’s identity.  Although we use diligent efforts in this regard, there is a risk that our fraud checks could fail and fraud may occur.  In addition, applicants may misrepresent their intentions regarding loan purpose or other information contained in listings, and we do not verify the majority of this information.  While we will repurchase Notes in limited circumstances (including, e.g., a material default on the borrower loan resulting from verifiable identity theft), we are not obligated to repurchase a Note from you if your investment is not realized in whole or in part due to fraud (other than verifiable identity theft) in connection with a loan listing, or due to false or inaccurate statements or omissions of fact in a listing, whether in credit data, a borrower member’s representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the borrower loan.  If we repurchase a Note, the repurchase price will be equal to the Note’s outstanding principal balance and will not include accrued interest.  See “About the Platform—Our Note Repurchase and Indemnification Obligations” for more information.
 
The fact that we have the exclusive right and ability to investigate claims of identity theft in the origination of loans creates a significant conflict of interest between us and the lender members.

We have the exclusive right to investigate claims of identity theft and determine, in our sole discretion, whether verifiable identity theft has occurred. Verifiable identity theft triggers an obligation by us to repurchase a Note.  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. Lender members rely solely on us to investigate incidents that might require us to repurchase a loan. The denial of a claim under our identity theft guarantee would save us from our repurchase obligation. See “About the Platform—Our Note Repurchase and Indemnification Obligations” for more information.


We do not have significant historical performance data about performance on the borrower loans.  Loss rates on the borrower loans may increase and prior to investing you should consider the risk of non-payment and default.
 
We are in the early stages of our development and have a limited operating history.  We did not offer borrower loans through the platform prior to this offering.  PMI began offering PMI Borrower Loans through the platform in February of 2006, but the performance of PMI Borrower Loans may not be indicative of the future performance of our borrower loans.  Due to our limited operational history, we do not have significant historical data regarding the performance of the borrower loans, and we do not yet know what the long-term loan loss experience will be.  The estimated loss rates we display on our website and use to determine the Prosper Rating have been developed from PMI’s loss histories of PMI Borrower Loans.   Accordingly, borrower loans originated on the platform may default more often than similar PMI Borrower Loans have defaulted in the past, which increases the risk of investing in the Notes.
 
If payments on the corresponding borrower loans relating to your Notes become more than 30 days overdue, it is likely you will not receive the full principal and interest payments that you expect to receive on your Notes, and you may not recover any of your original purchase price.
 
If a borrower fails to make a required payment on a borrower loan within 30 days of the due date, we will pursue reasonable collection efforts in respect of the borrower loan.  Referral of a delinquent borrower loan to a collection agency within five (5) business days after it becomes thirty days past due will be considered reasonable collection efforts.  

If we refer a borrower loan to a collection agency, we will not have any other obligation to attempt to collect that borrower loan.  We also may handle collection efforts in respect of a delinquent borrower loan directly.  If payment amounts on a delinquent borrower loan are received from a borrower more than 30 days after their due date, and the loan has been referred to an outside collection agency, that collection agency will retain a percentage of that payment as a fee before any principal or interest becomes payable to you.  Collection fees range from 17% to 30% of recovered amounts.  
  
For some non-performing borrower loans, we will not be able to recover some or all of the unpaid loan balance and, as a result, a lender member who has purchased a corresponding Note will receive little, if any, of the unpaid principal and interest payable under the Note.  You must rely on the collection efforts of us, PMI or the applicable collection agency to which such borrower loans are referred.  You are not permitted to attempt to collect payments on the borrower loans in any manner.

Loss rates on the borrower loans may increase as a result of economic conditions beyond our control and beyond the control of the borrower member.
 
Borrower loan loss rates may be significantly affected by economic downturns or general economic conditions beyond our control and beyond the control of individual borrowers.  In particular, loss rates on borrower loans 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.    
 
In the unlikely event that we receive payments on the borrower loans relating to your Notes after the final maturity date, you will not receive payments on your Notes after maturity.
 
Each Note will mature on the initial maturity 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, in which case the maturity of the Note will be automatically extended to the final maturity date.  If there are any amounts under the corresponding borrower loan still due and owing to us after the final maturity date, we will have no further obligation to make payments on the related Notes, even if we receive payments on the corresponding borrower loan after final maturity.


The borrower loans do not restrict borrowers from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrowers during the term of the borrower loan, which may impair your ability to receive the full principal and interest payments that you expect to receive on a Note.
 
If a borrower incurs additional debt after the date of the borrower loan, the additional debt may impair the ability of that borrower to make payments on his or her borrower loan and your ability to receive the principal and interest payments that you expect to receive on a corresponding Note.  In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower.  To the extent that the borrower has or incurs other indebtedness and cannot pay all of his or her indebtedness, the borrower may choose to make payments to other creditors, rather than us.
 
To the extent borrowers incur other indebtedness that is secured, such as a mortgage, a home equity line or an auto loan, the ability of the secured creditors to exercise remedies against the assets of the borrower may impair the borrower’s ability to repay the borrower loan on which your Note is dependent for payment.  Borrowers may also choose to repay obligations under secured indebtedness before repaying borrower loans because there is no collateral securing the borrower loans.  A lender member will not be notified if a borrower incurs additional debt after the date a loan listing is posted.
 
A borrower may request that his or her bank “chargeback” a payment on a borrower loan upon which a Note is dependent for payment and request a refund on that payment, resulting in a delinquency on the payment and a possible negative cash balance in your lender member account.
 
A borrower chargeback is a process by which a borrower who has made a payment on a borrower loan has his or her bank cancel the payment or request a refund of that payment.  We withhold payments to lender members up to six business days after a related borrower payment is initiated.  If the chargeback occurs between six and 60 days after the initiation of payment, you must rely on us to contest the chargeback if we deem it appropriate.  If a borrower successfully processes a chargeback between six and 60 days after initiation of payment, such payment will be deducted from your lender member account, and if you have withdrawn funds in the interim, a negative cash balance may result. Amounts received on borrower loans corresponding to your Notes payments and deposited into your lender member account are subject to set-off against any negative balance or shortfall in your lender member account. See “About the Platform - Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.

Peer-to-peer lending is a new lending method and the platform has a limited operating history.  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.
 
The investment return on the Notes depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding borrower loan.  Borrowers may not view peer-to-peer lending obligations originated on the 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 borrower loan upon which payment of your 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 platform may fail to comply with applicable law, which could limit our ability to collect on borrower loans .
 
The borrower loans are subject to federal and state consumer protection laws.  The platform may not always be, and the equivalent platform previously operated by PMI may not always have been, in compliance with these laws.  Failure to comply with the laws and regulatory requirements applicable to the platform may, among other things, limit our, PMI’s or a collection agency’s ability to collect all or part of the principal of or interest on borrower loans.  See “Government Regulation—Regulation and Consumer Protection Laws” for more information.


 We regularly review the requirements of these laws and take measures aimed at ensuring that the borrower loans originated on the platform meet the requirements of all applicable laws.  However, determining compliance with all applicable laws is a complex matter and it is possible that our determination may be inaccurate or incorrect.  Also, changes in law, either due to court decisions, regulatory interpretations or rulings, or new legislation, may adversely affect the collectability of a borrower loan.
 
In general, the borrower loans do not contain any cross-default or similar provisions.  If a borrower defaults on any of his or her other debt obligations, our ability to collect on the borrower loan on which your Notes are dependent for payment may be substantially impaired.
 
The borrower loans do not contain cross-default provisions.  A cross-default provision makes a default under certain debt of a borrower an automatic default on other debt of that borrower.  Because the borrower loans do not contain cross-default provisions, a borrower’s loan will not be placed automatically in default upon that borrower’s default on any of the borrower’s other debt obligations.   If a borrower defaults on debt obligations owed to a third party and continues to satisfy the payment obligations under the borrower loan, the third party may seize the borrower’s assets or pursue other legal action against the borrower before the borrower defaults on the borrower loan.  
  
Borrowers may seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of your Notes.
 
Borrowers may seek protection under federal bankruptcy law or similar laws.  If a borrower 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 the borrower loan on hold and prevent further collection action absent bankruptcy court approval.  If we receive notice that a borrower has filed for protection under the federal bankruptcy laws, or has become the subject of an involuntary bankruptcy petition, we will put the borrower’s loan account into “bankruptcy status.” When this occurs, we terminate automatic monthly ACH debits on borrower loans and we will not undertake collection activity without bankruptcy court approval.  Whether any payment will ultimately be made or received on a borrower loan after a bankruptcy status is declared depends on the borrower’s particular financial situation.   In most cases, however, unsecured creditors such as us receive nothing, or only a fraction of their outstanding debt.  See “About the Platform—Loan Servicing and Collection” for more information.
 
Federal law entitles borrowers 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 borrowers on active military service with rights that may delay or impair our ability to collect on a borrower loan corresponding to your Note.  The Servicemembers Civil Relief Act, or “SCRA,” requires that the interest rate on preexisting debts, such as borrower 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 borrower loan for payment will not receive the difference between 6% and the original stated interest rate for the borrower loan during any such period.  The SCRA 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 borrower loans in default, and, accordingly, payments on the corresponding Notes.  If there are any amounts under such a borrower loan still due and owing to us after the final maturity of the corresponding Notes, we will have no further obligation to make payments on the Notes, even if we receive payments on the borrower loan after the final maturity of the Notes.  We do not take military service into account in assigning a Prosper Rating to loan listings.  In addition, as part of the borrower registration process, we do not request borrower members to confirm if they are qualified service members or reservists within the meaning of the SCRA.  See “Government Regulation—Regulation and Consumer Protection Laws—Servicemembers Civil Relief Act” for more information.
 
The death of a borrower may substantially impair your ability to recoup the full purchase price of Notes or to receive the interest payments that you expect to receive on the Notes.
 
If a borrower dies while his or her loan is still outstanding, generally, we will seek to work with the executor of the borrower’s estate to obtain repayment of the loan.  However, the borrower’s estate may not contain sufficient assets to repay the loan.  In addition, if a borrower dies near the end of the term of his or her loan, it is unlikely that any further payments will be made on the corresponding Notes, because the time required for the probate of the borrower’s estate will probably extend beyond the final maturity date of the Notes.


We are not obligated to repurchase any Notes except in limited circumstances.  
 
We are not obligated to repurchase any Note except in limited circumstances, including (1) a material default occurring on a Note as a result of verifiable identity theft, (2) a borrower loan materially failing to comply with applicable federal and state law at origination, or (3) any other breach of our representations and warranties under our lender registration agreement.  Under this agreement, in the event of a breach of the type described in clause (1), we are required to repurchase the Note, and in the event of any breach described in clause (2) or (3) that materially and adversely affects a lender member’s interest in a Note, we are required to cure the breach, repurchase the Note or indemnify and hold the lender member harmless against losses resulting from the breach.   We are not, however, obligated to repurchase a Note from a lender member if his or her investment is not realized in whole or in part due to fraud other than identity theft, or due to false or inaccurate statements or omissions of fact in a listing, whether in credit data, borrower representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the loan.  Even if we are obligated to repurchase a Note, there can be no assurance that we will be able to meet our repurchase obligation.  If we are unable to meet our repurchase obligation, you may lose all of your investment in the Note.
 
Risks Inherent in Investing in the Notes

If you decide to invest through the platform and concentrate your investment in a single Note, you may increase your risk of borrower defaults.
 
Your expected return on your investment in the Notes depends on the performance of the borrowers under the corresponding borrower loans.  There are a wide range of Prosper Ratings and listings on the platform and we expect some borrowers to default on their loans.  If you decide to invest through the platform and concentrate your investment in a single Note, your entire return will depend on the performance of a single borrower loan.  For example, if you plan to purchase $200 of Notes, and choose to invest the entire $200 in a single Note instead of in eight $25 Notes corresponding to the borrower loans of eight different borrowers, your entire $200 investment will depend on the performance of a single borrower loan.  It may be desirable to diversify your portfolio in order to reduce the risk that you could lose your entire investment due to a single default, or a small number of defaults.  However, diversification does not eliminate the risk that you may lose some, or all, of your investment in the Notes.
 
The platform allows a borrower member to prepay a borrower loan at any time without penalty.  Borrower loan prepayments will extinguish or limit your ability to receive additional interest payments on a Note.
 
Borrower loan prepayment occurs when a borrower decides to pay some or all of the principal amount on a borrower loan earlier than originally scheduled.  Borrowers 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 borrower loan on which your Notes are dependent for payment, you will receive your share of such prepayment but further interest will not accrue after the date on which the payment is made.  If the borrower prepays a portion of the remaining unpaid principal balance, the term of the borrower loan will not change, but interest will cease to accrue on the prepaid portion, and you will not receive all of the interest payments that you originally expected to receive on your Notes.  In addition, you may not be able to find a similar rate of return on another investment at the time at which the borrower loan is prepaid.  Prepayments are subject to our servicing fee, even if the prepayment occurs immediately after issuance of your Note.
 
Prevailing interest rates may change during the term of your Notes.  If this occurs, you may receive less value from your purchase of the Note in comparison to other ways you may invest your money.  Additionally, borrowers may prepay their borrower 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 borrower loans on which the Notes are dependent for payment bear fixed, not floating, rates of interest.  If prevailing interest rates increase, the interest rates on Notes you purchase might be less than the rate of return you could earn if you invested the purchase price in a different investment.


We may not set appropriate interest rates for borrower loans.

 If we set interest rates for borrower loans too low, lender members may not be compensated appropriately for the level of risk that they are assuming in purchasing a Note, while setting the interest rate too high may increase the risk of non-payment.  In either case, failure to set rates appropriately may adversely impact the ability of lender members to receive returns on their Notes that are commensurate with the risks they have assumed in acquiring such Notes.
 
 
The Notes will not be listed on any securities exchange, will not be transferable except through the Note Trader platform, and can be held only by our lender members.  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 our lender members.  The Notes will not be transferable except through our Note Trader platform and there can be no assurance that a market for Notes will continue to develop on the Note Trader platform, or that the Note Trader platform will continue in operation.  Therefore, lender members must be prepared to hold their Notes to maturity.  See “About the Platform—Note Trader Platform” for more information. .

If the Note Trader platform fails to develop, or if the Note Trader platform develops but you cannot find a purchaser for the Notes that you wish to sell, you will be forced to hold the Notes for their remaining term.
 
We cannot guarantee that the Note Trader platform will continue to develop.  A Note offered for sale on the Note Trader platform must be purchased in its entirety by a single lender member, and Notes with a high outstanding principal balance may be more difficult to sell due to the smaller number of lender members with the ability to purchase such Notes.  
 
If you choose to post your Notes for sale on the Note Trader platform, you may not realize the expected return on your investment due to changes in the creditworthiness of the borrower under the corresponding borrower loan.
 
The ability to sell your Note on the Note Trader platform does not guarantee that you will be able to find a lender member willing to buy the Note at a price acceptable to you, or at all.  If the borrower becomes delinquent in payments under the corresponding borrower loan upon which your Note is dependent for payment, your ability to sell the Note on our Note Trader platform will be substantially impaired.  You may have to offer the Note for sale at a substantial discount, and there is no guarantee that you will receive the expected value of the Note or any value at all.  Additionally, lender members may be less willing to bid for and purchase your Note if prevailing interest rates have changed or other investing activities have proven more attractive while you have held the Note.
 
You do not earn interest on funds held in your lender member account.
 
Your lender member account represents an interest in a pooled bank account that does not earn interest.  See “About the Platform—Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.
 
 
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 because payments on the Notes are dependent on payments on the corresponding borrower loan, we intend to treat the Notes as our debt instruments that have original issue discount (“OID”) for U.S. federal income tax purposes.  Where required, we intend to file information returns with the IRS in accordance with such treatment unless there is a change or clarification in the law, by regulation or otherwise, that would require a different characterization of the Notes.  You should be aware, however, that the U.S. Internal Revenue Service (“IRS”) is not bound by our characterization of the Notes and the IRS or a court may take a different position with respect to the Notes’ proper characterization.  For example, the IRS could determine that, in substance, each lender member owns a proportionate interest in the corresponding loan for U.S. federal income tax purposes or, for example, the IRS could instead treat the Notes as a different financial instrument (including an equity interest or a derivative financial instrument).  Any different characterization could significantly affect the amount, timing, and character of income, gain or loss recognized in respect of a Note.  For example, if the Notes are treated as our equity, (1) we would be subject to U.S. federal income tax on income, including interest, accrued on the corresponding loans but would not be entitled to deduct interest or OID on the Notes, and (2) payments on the Notes would be treated by the holder for U.S. federal income tax purposes as dividends (that may be ineligible for reduced rates of U.S. federal income taxation or the dividends-received deduction) to the extent of our earnings and profits as computed for U.S. federal income tax purposes.  A different characterization may significantly reduce the amount available to pay interest on the Notes.  You are strongly advised to consult your own tax advisor regarding the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership, and disposition of the Notes (including any possible differing treatments of the Notes).
 
Our ability to pay principal and interest on a Note may be affected by our ability to match the timing of our income and deductions for U.S. federal income tax purposes.
 
You should be aware that our ability to pay principal and interest on a Note may be affected by our ability, for U.S. federal income tax purposes, to match the timing of income we receive from a corresponding loan that we hold and the timing of deductions that we may be entitled to in respect of payments made on the Notes that we issue.  For example, if the Notes are treated as contingent payment debt instruments for U.S. federal income tax purposes but the corresponding borrower loans are not, there could be a potential mismatch in the timing of our income and deductions for U.S. federal income tax purposes, which could affect our ability to make payments on the Notes.
 
Participation in the funding of loans could be viewed as creating a conflict of interest.
 
As is the practice with other peer-to peer lending companies, including our competitor, LendingClub, from time to time, we or PMI may fund portions of qualified loan requests on the platform and hold any Notes that we or PMI purchase as a result of such funding for our or PMI’s own account.  Even though we and PMI will participate in loans on the platform under the same terms and conditions and through the use of the same information that is made available to other potential lenders on the platform, such participation may be perceived as involving a conflict of interest.  For example, our or PMI’s funding of a loan may cause the loan to fund, and in some cases, fund faster, than it would fund in the absence of our or PMI’s participation, which could benefit us to the extent that it ensures that we generate the revenue associated with the loan.
 
Risks Related to Us, the Platform and Our Ability to Service the Notes

PMI faces a contingent liability for securities law violations in respect of PMI Borrower Loans sold to its lender members from inception until October 16, 2008.  This contingent liability may impair its ability to perform its obligations under the Servicing Agreement.
 
PMI Borrower Loans sold to PMI’s lender members through PMI’s platform from November 2005 until October 16, 2008 may be viewed as involving an offering of securities that was not registered or qualified under federal or state securities laws.  
 
       On November 26, 2008, plaintiffs, Christian Hellum, William Barnwell and David Booth, individually and on behalf of all other plaintiffs similarly situated, filed a class action lawsuit against PMI and certain of its executive officers and directors in the Superior Court of California, County of San Francisco, California.  The suit was brought on behalf of all purchasers of loan notes from PMI on the platform from January 1, 2006 through October 14, 2008.  The lawsuit alleges that PMI offered and sold unqualified and unregistered securities in violation of the California and federal securities laws.  The lawsuit seeks class certification, damages and the right of rescission against PMI and the other named defendants, as well as treble damages against PMI and the award of attorneys’ fees, experts’ fees and costs, and pre-judgment and post-judgment interest.

 
            PMI intends to vigorously defend the class action lawsuit.  PMI cannot, however, presently determine or estimate the final outcome of the lawsuit, and there can be no assurance that it will be finally resolved in PMI’s favor.  If the class action lawsuit is not resolved in PMI’s favor, PMI might be obliged to pay damages, and might be subject to such equitable relief as a court may determine.

As a result of PMI’s prior operations, a lender member who holds a loan originated on the platform prior to October 15, 2008 may be entitled to rescind her purchase and be paid the unpaid principal amount of her borrower loan, plus statutory interest.   PMI has not recorded an accrued loss contingency in respect of this contingent liability, although it intends to continue to monitor the situation.  Generally, the federal statute of limitations for noncompliance with the requirement to register securities under the Securities Act is one year from the violation; however, the statute of limitations periods under state laws may extend for a longer period of time.  Under the Servicing Agreement we have entered into with PMI (the “Servicing Agreement”), PMI is generally responsible for managing the operation of the platform on our behalf.  See “Summary of Indenture, Form of Notes and Servicing Agreement—Servicing Agreement”.  If a significant number of PMI’s former lender members sought rescission, or if the class action securities lawsuit is successful, PMI’s ability to perform its obligations under the Servicing Agreement may be adversely affected and, in such event, our ability to continue to make payments on the Notes could be materially impaired.

PMI has incurred operating losses since inception and we anticipate that PMI will continue to incur net losses through at least 2012.

PMI has incurred operating losses since its inception and we anticipate that PMI will continue to incur net losses for a number of years as it grows its business.  For the nine months ended September 30, 2011 and 2010 PMI had negative cash flows from operations of $6.7 million and $7.3 million, respectively.  Additionally, from its inception through September 30, 2011, PMI had an accumulated deficit of $56.7 million.
 
PMI had financed its operations to date primarily with proceeds from the sale of equity securities.  At September 30, 2011, PMI had approximately $13.6 million in unrestricted cash and cash equivalents.  PMI is dependent upon raising additional capital or debt financing to fund its current operating plan.  PMI’s failure to obtain sufficient debt and equity financings and, ultimately, to achieve profitable operations and positive cash flow from operations could adversely affect its ability to perform its obligations under the Servicing Agreement and, in such event, our ability to continue to make payments on the Notes could be materially impaired. 

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

As the number of borrowers, lender members and borrower loans originated on the platform increases, PMI will need to increase its facilities, personnel and infrastructure in order to accommodate the greater servicing obligations and demands on the platform.   PMI must constantly add new hardware and update its software and our website, expand its customer support services, and add new employees to maintain the operations of the platform as well as to satisfy our servicing obligations on the borrower loans and the Notes.  If PMI is unable to increase the capacity of the platform and maintain the necessary infrastructure, you may experience delays in receipt of payments on your Notes and periodic downtime of our website.
 
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.  With the introduction of new technologies and the influx of new entrants, we expect competition to persist and intensify in the future, which could harm our ability to increase volume on the platform.
 
Our principal competitors include major banking institutions, credit unions, credit card issuers and other consumer finance companies, as well as other peer-to-peer lending platforms, including LendingClub.  Competition could result in reduced volumes, reduced fees or the failure of the 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, such as eBay Inc., Google Inc., or Yahoo! Inc., possessing 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 peer-to-peer 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 use of the 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 the Prosper brand in a cost-effective manner is critical to achieving widespread acceptance of the platform and attracting new borrower and lender members.  Furthermore, we believe that the importance of brand recognition will increase as competition in the peer-to-peer lending industry increases.  Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the member experience on the platform.   These brand promotion activities may not yield increased revenues.  If we fail to successfully 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 the platform.
 
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 the platform by attracting a large number of borrowers and lender members in a cost-effective manner, many of whom have not previously participated in peer-to-peer lending.  If we are not able to attract qualified borrowers and sufficient lender members 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 borrowers and lender 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 the platform.
 
We are subject to extensive federal, state and local regulation that could adversely impact our ability to service the borrower loans.
 
We are subject to extensive federal, state and local regulation, non-compliance with which could have a negative impact on our ability to service the Notes, provide a trading market for the Notes, or maintain the platform.  
 
Additionally, PMI holds lending licenses or similar authorizations in 16 states, all of which have the authority to supervise and examine PMI’s activities.  Because we rely on PMI, as Servicer under the Servicing Agreement, to manage the operation of the platform on our behalf, if PMI does not comply with applicable laws, it could lose one or more of these licenses or authorizations, which may have an adverse effect on our ability to continue to perform our servicing obligations or maintain the platform.  See “Government Regulation—Regulation and Consumer Protection Laws” for more information.
 
The Federal Fair Debt Collection Practices Act and similar state debt collection laws 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.   While we obligate the collection agencies we use to comply with applicable law in collecting borrower loans, it is possible that improper collection practices may occur that could adversely impact the collectability of particular borrower loans originated through the platform.


Our arrangements for back-up servicing are limited.  If PMI fails to maintain operations, you will experience a delay and increased cost in respect of your expected principal and interest payments on your Notes, and we may be unable to collect and process repayments from borrowers.
 
 If PMI were to fail or become insolvent, we would attempt to transfer servicing obligations on the borrower loans and Notes to a third party pursuant to our contractual agreements with lender members.  We and PMI have entered into a back-up servicing agreement with a loan servicing company who is willing and able to transition servicing responsibilities in the event PMI can no longer do so.  There can be no assurance that this back-up servicer will be able to adequately perform the servicing of the outstanding borrower loans.  If this back-up servicer assumes the servicing of the borrower loans, the back-up servicer may impose additional servicing fees, reducing the amounts available for payments on the Notes.  Additionally, transferring these servicing obligations to the back-up servicer may result in delays in the processing of information with respect to amounts owed on the borrower loans or, if the platform becomes inoperable, may prevent the back-up servicer from servicing the borrower loans and making principal and interest payments on the Notes.  If the back-up servicer is not able to service the borrower loans effectively, your ability to receive principal and interest payments on your Notes may be substantially impaired.
 
PMI does not have patent protection for all of its proprietary technology.  It may be difficult and costly for PMI to protect its intellectual property rights, and PMI may not be able to ensure their protection.
 
PMI developed the platform and owns the proprietary technology that makes operation of the platform possible.   PMI’s ability to maintain the platform and perform its obligations under the Servicing Agreement depends, in part, upon its proprietary technology.  PMI may not protect its proprietary technology effectively, 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 PMI’s proprietary technology without its consent.  In addition, the platform may infringe upon claims of third-party patents and we or PMI may face intellectual property challenges from such other parties.  We or PMI may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes.  Furthermore, PMI’s technology may become obsolete, and there is no guarantee that PMI will be able to successfully develop, obtain or use new technologies to adapt the platform to compete with other peer-to-peer lending platforms.  If PMI cannot protect the proprietary technology embodied in and used by the platform from intellectual property challenges, or if the platform becomes obsolete, PMI’s ability to maintain the platform and perform its servicing obligations under the Servicing Agreement could be adversely affected and, in such event, our ability to continue to make payments on the Notes could be materially impaired.

We rely on a third-party commercial bank to process transactions.  If we are unable to continue utilizing these services, our business and ability to service the Notes may be adversely affected.
 
Because we are not a bank, we cannot belong to or directly access the Automated Clearing House (ACH) payment network.  As a result, we currently rely on an FDIC-insured depository institution to process our transactions.  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.
  
Although we have been organized in a manner that is intended to minimize the likelihood that we will become subject to a bankruptcy proceeding, if this were to occur, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped.   The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note.
 
Although we have been organized and will be operated in a manner that is intended to minimize the likelihood that we will become subject to a bankruptcy or similar proceeding, if this were to occur, 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.  For example, we have structured our limited liability company agreement to limit our activities in a manner that is intended to limit the possibility that we could be required to file for bankruptcy.  There is no guarantee, however, that we have made the right choices structurally and as a result, we could take actions that ultimately could cause us to file for bankruptcy.  Further, although we have granted the indenture trustee, for the benefit of the Note holders, a security interest in all of the borrower loans, all payments and proceeds we receive on the borrower loans and in the bank account in which the borrower loan payments are deposited, the holders of the Notes would still be subject to the following risks associated with our insolvency, bankruptcy or a similar proceeding.


If we become subject to a bankruptcy or similar proceeding, borrowers may delay payments or cease making payments at all.  

Borrowers may delay or suspend making payments to us because of the uncertainties occasioned by our becoming subject to a bankruptcy or similar proceeding, even if the borrowers 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 borrower loans.  In addition, 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 the indenture trustee would be required to enforce its security interest in the borrower loans in a bankruptcy or similar proceeding, the indenture trustee’s ability to make payments under the Notes would be delayed, which 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.
 
If we become subject to a bankruptcy or similar proceeding, interest accruing upon and following such bankruptcy or similar proceeding may not be paid.  

In a bankruptcy or similar proceeding for us, interest accruing on the Notes during the proceeding 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.
 
If we become subject to a bankruptcy or similar proceeding a holder of a Note may not have any priority right to payment from the corresponding borrower loan, may not have any right to payment from funds in the master servicing account, and may not have any ability to access funds in the account we maintain for the benefit of lender members.

If we failed to perfect the security interest properly, you may be required to share the proceeds of the borrower loan upon which your Note is dependent for payment with our other creditors.  To the extent that proceeds of the corresponding borrower loan would be shared with our other creditors, any secured or priority rights of such other creditors may cause the proceeds to be distributed to such other creditors before any distribution is made to you on your Note.

 If a payment is made on a borrower loan corresponding to a Note before our bankruptcy or similar proceeding is commenced, and those funds are held in the master servicing account we maintain with Wells Fargo Bank, N.A., to collect borrower payments 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 rights to such funds that are equal to or greater than the rights of the holder of the Note.  See “About the Platform—Loan Servicing and Collections” for more information.
 

 
        We maintain a pooled account at Wells Fargo Bank, N.A. to hold the funds of lender members.  This account is titled “Prosper Funding LLC for the benefit of its lender members” and we refer to it as the “FBO account”.  Although we believe that amounts funded by lender members into the FBO account should not be subject to claims of our creditors other than the lender members for whose benefit the funds are held, the legal title to the FBO account, and the attendant right to administer the FBO account would be property of our bankruptcy estate.  As a result, if we were to file for bankruptcy protection, the legal right to administer the funds in the FBO account would vest with the bankruptcy trustee or debtor in possession.  In that case, while neither we nor our creditors should be able to reach those funds, the indenture trustee or the lender members may have to seek a bankruptcy court order lifting the automatic stay and permitting them to withdraw their funds.  Lender members may suffer delays in accessing their funds in the FBO account as a result.  Moreover, United States Bankruptcy Courts have broad powers and, if we have failed to properly segregate or handle lender members’ funds, a bankruptcy court could determine that some or all of such funds were beneficially owned by us and therefore that they became available to our creditors generally.  See “About the Platform—Loan Servicing and Collections” and “About the Platform—Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.
 
In a bankruptcy or similar proceeding for us, the holder of a Note may be delayed or prevented from enforcing our repurchase obligations.  

In a bankruptcy or similar proceeding for us, any right of a holder of a Note to require us to repurchase the Note under the circumstances set forth in the lender registration agreement might not be enforceable, and such holder’s claim for such repurchase may be treated less favorably than a general unsecured obligation of ours.  For a discussion of the restrictions we have imposed upon ourselves and the formalities we have adopted under our organizational documents to minimize the likelihood of our becoming subject to a bankruptcy or similar proceeding, see “Information about Prosper Funding LLC”.

Although we have been organized in a manner that is intended to prevent us from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if we were substantively consolidated in this manner, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited, suspended or stopped  The recovery, if any, of a holder on a Note may therefore be substantially delayed and substantially less than the principal and interest due and to become due on the Note.

Although we have been organized and will be operated in a manner that is intended to prevent us from being substantively consolidated with PMI in the event of PMI’s bankruptcy, if PMI became subject to a bankruptcy or similar proceeding and we were substantively consolidated with PMI, the risks described in the immediately preceding risk factor regarding (i) payment delays, (ii) uncollectability of interest accrued during the bankruptcy proceeding, (iii) being subordinated to the interests of our other creditors or other creditors of PMI, and (iv) the indenture trustee’s inability to access funds in the master servicing account or the FBO account would all be present. 

In addition, in a bankruptcy or similar proceeding of PMI, (1) the implementation of back-up servicing arrangements may be delayed or prevented, and (2) PMI’s ability to transfer its servicing obligations to a 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 borrower loans to the detriment of holders of the Notes.

For a discussion of the restrictions we have imposed upon ourselves and the formalities we have adopted under our organizational documents to prevent our being substantively consolidated with PMI in the event of PMI’s bankruptcy, see “Information about Prosper Funding LLC.”

If the security of our lender members’ and borrowers’ 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.
 
The platform stores our lender members’ and borrowers’ 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 PMI’s software are exposed and exploited, and, as a result, a third party or disaffected employee obtains unauthorized access to any lender members’ or borrowers’ data, our relationships with our members will be severely damaged, and we could incur significant liability.  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.


Any significant disruption in service on our website or in PMI’s computer systems could adversely affect PMI’s ability to perform its obligations under the Servicing Agreement.
 
PMI’s ability to perform its obligations under the Servicing Agreement could be materially and adversely affected by events outside of its control.  The satisfactory performance, reliability and availability of PMI’s technology and its underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new members and retain existing members.  PMI’s system hardware is hosted in a hosting facility located in San Francisco, California, owned and operated by Digital Realty Trust.  PMI also maintains an off-site backup system located in Las Vegas, Nevada.  Digital Realty Trust does not guarantee that access to our website will be uninterrupted, error-free or secure.  PMI’s operations depend on Digital Realty Trust’s ability to protect PMI’s systems in Digital Realty Trust’s facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity or other environmental concerns, computer viruses or other attempts to harm PMI’s systems, criminal acts and similar events.  If PMI’s arrangement with Digital Realty Trust is terminated, or there is a lapse of service or damage to Digital Realty Trust’s facilities, PMI could experience interruptions in its service as well as delays and additional expense in arranging new facilities.  Any interruptions or delays in PMI’s service, whether as a result of Digital Realty Trust or other third-party error, PMI’s 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, PMI’s insurance policies may not be sufficient for PMI to adequately compensate us for any losses that we may incur.  PMI’s disaster recovery plan has not been tested under actual disaster conditions, and PMI may not have sufficient capacity to recover all data and services in the event of an outage at the Digital Realty Trust facility.  These factors could prevent PMI from processing or posting payments on the borrower loans or the Notes, damage our brand and reputation, divert the attention of PMI’s employees, reduce our revenue, subject us to liability and cause members to abandon the platform, any of which could adversely affect our business, financial condition and results of operations.
 
The platform may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.
 
The platform may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.  If a “hacker” were able to infiltrate the platform, you would be subject to the 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.  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 the platform, if we are unable to prevent such activity, the value of your investment in the Notes could be adversely affected.
 
Competition for PMI’s employees is intense, and PMI may not be able to attract and retain the highly skilled employees it needs to perform under the Servicing Agreement.
 
Competition for highly skilled technical and financial personnel is extremely intense.  PMI may not be able to hire and retain these personnel at compensation levels consistent with its existing compensation and salary structure.  Many of the companies with which PMI competes for experienced employees have greater resources than PMI has and may be able to offer more attractive terms of employment.
 
In addition, PMI invests significant time and expense in training its employees, which increases their value to competitors who may seek to recruit them.  If PMI fails to retain its employees, it could incur significant expenses in hiring and training their replacements and the quality of its services and its ability to serve borrowers and lender members could diminish, resulting in a material adverse effect on its ability to perform its obligations under the Servicing Agreement and, in such event, our ability to continue to make payments on the Notes could be materially impaired.


Purchasers of Notes will have no control over us and will not be able to influence our corporate matters.
 
We are not offering and will not offer equity interests in our company.  Lender members who purchase Notes offered through the platform will have no equity interest in Prosper Funding LLC and no ability to vote on or influence our decisions.  As a result, PMI, which owns all of our outstanding equity interests, will continue to have sole control over our governance matters, subject to the presence of our independent directors, whose consent will be required before we can take certain extraordinary actions. See “Information About Prosper Funding LLC”.
 
Events beyond our control may damage our ability to maintain adequate records, maintain the 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 a 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.  PMI stores back-up records in offsite facilities located in San Francisco, California and Las Vegas, Nevada.  If its electronic data storage and back-up data storage system are affected by such events, we cannot guarantee that you would be able to recoup your investment in the Notes.

Risks Relating to Compliance and Regulation

The platform represents a novel approach to borrowing and lending that may fail to comply with federal and state securities laws, borrower protection laws, such as state lending laws, federal 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 the state counterparts to such consumer protection laws.  Borrowers may make counterclaims regarding the enforceability of their obligations under borrower or consumer protection laws after collection actions have commenced, or otherwise seek damages under these laws.  Lenders may attempt to rescind their Note purchases under securities laws.  Compliance with such regulatory regimes is also costly and burdensome.

The platform operates a novel program that must comply with regulatory regimes applicable to consumer credit transactions as well as with regulatory regimes applicable to securities transactions.  The novelty of the 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, and also require licensing for certain activities.  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 borrower loans on the platform.  The platform is also subject to other laws, such as:

·
the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which require certain disclosures to borrowers regarding the terms of their loans;

·
the Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination in the extension of credit 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;

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

·
the Federal Fair Debt Collection Practices Act, which regulates debt collection practices by “debt collectors” and prohibits debt collectors from engaging in certain practices in collecting, and attempting to collect, outstanding consumer loans;

·
state counterparts to the above consumer protection laws; and

·
state and federal securities laws, which require that we register any non-exempt offers and sales of Notes.

 

We may not always be in compliance with these laws.   Borrowers may make counterclaims regarding the enforceability of their obligations under borrower or consumer protection laws after collection actions have commenced, or otherwise seek damages under these laws.  Lenders may attempt to rescind their Note purchases under securities laws, and our failure to comply with such laws could also result in civil or criminal liability. For example, in 2010 and 2011 PMI failed to timely renew its applications to offer and sell its borrower payment dependent notes in several states, resulting in $35,800 in penalties in four states, and the repurchase of $21,900 of Notes from Florida residents pursuant to a rescission offer.  Compliance with these requirements is also costly, time-consuming and limits our operational flexibility.  See “Government RegulationRegulation of Consumer Protection Laws” for more information.

Noncompliance with laws and regulations may impair our ability to facilitate the origination of or service borrower loans.

Generally, failure to comply with the laws and regulatory requirements applicable to our business may, among other things, limit our, PMI’s or a collection agency’s ability to collect all or part of the principal amount of or interest on the borrower loans on which the Notes are dependent for payment.  In addition, non-compliance could subject us to damages, revocation of required licenses, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business and ability to maintain the platform and may result in borrowers rescinding their borrower loans.
 
Where applicable, we seek to comply with state lending, servicing and similar statutes.  In all U.S. jurisdictions with licensing or other requirements we believe may be applicable to the platform, we and PMI have obtained any necessary licenses or comply with the relevant requirements.  Nevertheless, if we or PMI are found to not comply with applicable laws, we or PMI could lose one or more of our licenses or face other sanctions, which may have an adverse effect on our ability to continue to facilitate the origination of borrower loans through the platform, perform our servicing obligations or make the platform available to borrowers in particular states, which may impair your ability to receive the payments of principal and interest on your Notes that you expect to receive.  See “Government Regulation—Regulation of Consumer Protection Laws—State and Federal Laws and Regulations” for more information.
 



We rely on our agreement with WebBank to originate loans 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 originate borrower loans.
 
Borrower loan requests take the form of an application to WebBank, which currently makes all loans to borrowers through the platform, and allows the 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 borrower loans.  Because we do not currently possess state lending licenses in every U.S. state, we might be forced to limit the rates of interest charged on borrower loans in some states and might not be able to originate loans in some states altogether.  We also may face increased costs and compliance burdens if our agreement with WebBank is terminated.
 
Several lawsuits have sought to recharacterize certain loan marketers and other originators as lenders.  If litigation or a regulatory enforcement action on similar theories were successful against us, borrower loans originated through the platform could be subject to state consumer protection laws and licensing requirements 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 recharacterize 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.

Nevertheless, if we were recharacterized as the lender of borrower loans,  such a recharacterization could render those loans voidable or unenforceable.  In addition, we could be subject to claims by borrowers, 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 peer-to-peer 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 the platform.


If the SEC deems us to be an asset-backed issuer, we could be required to provide the disclosures and file the reports required of asset-backed issuers, which could adversely impact our business model and impose additional costs.

Regulation AB under the Securities Act of 1933, as amended, defines an asset-backed security as “a security that is primarily serviced by the cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period, plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to the security holders.” We do not believe that a Note is an asset-backed security under this definition, in part because our Notes are not backed by a “discrete pool” of assets since we will make payments on a Note from the cash flow generated by the single loan underlying the Note.  We have not, however, sought a no-action letter or other informal confirmation from the staff of the SEC, and it is possible that the SEC or a court could disagree with our conclusion.  In such circumstances, we would be required to seek an exemptive order or no-action relief, both of which impose significant costs and delays on our business, and if those are unsuccessful, prepare a registration statement and periodic reports that are substantially different from this registration statement and the periodic reports filed by PMI in connection with its outstanding Notes.  For example, an asset-backed issuer must file a distribution report on Form 10-D within 15 days after each required distribution date for the asset-backed security as specified in the transaction documents.  We make hundreds of distributions a week, and as a result, we could be required to file numerous Forms 10-D in the absence of no-action relief from the SEC.  These requirements could adversely impact our business model and impose additional costs that we did not anticipate in structuring this offering, which could ultimately undermine the purpose for which we were organized.

If we or PMI is 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 PMI has conducted its business, and we intend to conduct our business, in a manner that does not result in our 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.  Any determination that PMI is an investment company under the Investment Company Act similarly could impair its ability to perform its obligations under the Servicing Agreement and thereby impair our ability to make payments on the Notes.  If we or PMI were deemed to be an investment company, we or PMI may also attempt to seek exemptive relief from the SEC, which could impose significant costs and delays on our business.
 
If we or PMI are required to register under the Investment Advisers Act, our ability to conduct our business could be materially adversely affected.
 
The Investment Advisers Act of 1940, or the “Investment Advisers Act,” contains substantive legal requirements that regulate the manner in which “investment advisers” are permitted to conduct their business activities.  We believe that our business consists of providing a platform for peer-to-peer lending for which investment adviser registration and regulation do not apply under applicable federal or state law, and do not believe that we are required to register as an investment adviser with either the SEC or any of the various states. The SEC or a state securities regulator could reach a different conclusion, however.   Registration as an investment adviser could adversely affect our method of operation and revenues. For example, the Investment Advisers Act requires that an investment adviser act in a fiduciary capacity for its clients.  Among other things, this fiduciary obligation requires that an investment adviser manage a client’s portfolio in the best interests of the client, have a reasonable basis for its recommendations, fully disclose to its client any material conflicts of interest that may affect its conduct and seek best execution for transactions undertaken on behalf of its client.  It could be difficult for us to comply with this obligation without meaningful changes to our business operations, and there is no guarantee that we could do so successfully.  If we were ever deemed to be in non-compliance with applicable investment adviser regulations, we could be subject to various penalties, including administrative or judicial proceedings that might result in censure, fine, civil penalties (including treble damages in the case of insider trading violations), the issuance of cease-and-desist orders or other adverse consequences.  Similarly, any determination by regulators that PMI must register as an
investment adviser could materially adversely affect PMI and impair its ability to continue to administer the platform on our behalf.

 

We may face liability under state and federal securities law for statements in our prospectus and in other communications that could be deemed to be an offer to the extent that such statements are deemed to be false or misleading.

Loan listings and other borrower information available on our website as well as in our sales and listing reports are statements made in connection with the purchase and sale of securities that are subject to the antifraud provisions of the Exchange Act and the Securities Act.  In general, these liability provisions provide a purchaser of Notes with a right to bring a claim against us for damages arising from any untrue statement of material fact or failure to state a material fact necessary to make any statements made not misleading.  Even though we have advised you of what we believe to be the material risks associated with an investment in the Notes, the SEC or a court could determine that we have not advised you of all of the material facts regarding an investment in the Notes, which could give you the right to rescind your investment and obtain damages, and could subject us to civil fines or criminal penalties in addition to any such rescission rights or damages.
 
 Our activities in connection with the offer and sale of securities on the platform could result in potential violations of federal securities law and result in material liability to us.

Our business is subject to federal and state securities laws that may limit the kinds of activities in which we may engage and the manner in which we engage in such activities.  For example, changes to the manner in which we offer and sell Notes or other securities on the platform could be viewed by the SEC or a state securities regulator as involving the creation or sale of new, unregistered securities.  In such circumstances, the failure to register such securities could subject us to liability and the amount of such liability could be meaningful.  
 
 
 
 

USE OF PROCEEDS
 
We will use the proceeds of each series of Notes to facilitate the funding of a borrower loan through the platform designated by the lender members purchasing such series of Notes.  We will use the proceeds of each series of Notes to purchase the corresponding borrower loan from WebBank.  See “About the Platform” for more information.
 
PLAN OF DISTRIBUTION
 
We will offer the Notes to lender members at 100% of their principal amount.  The Notes will be offered only by us through www.prosper.com, and there will be no underwriters or underwriting discounts.  See “About the Platform” and “About the Issuer” for more information.
 
FINANCIAL SUITABILITY REQUIREMENTS
 
The Notes are highly risky and speculative.  Investing in the Notes should be considered only by persons who can afford the loss of their entire investment.  Our platform currently allows lender members to bid as little as $25 and as much as the full amount of any particular listing, up to an aggregate amount of $5,000,000 for individuals and $50,000,000 for institutions.  

To purchase Notes, lender members located in Idaho or Missouri must meet one or more of the following suitability requirements:
 
 
 
a. (i) You must have an annual gross income of at least $70,000; (ii) your net worth must be at least $70,000; and (iii) the total amount of Notes you purchase cannot exceed 10% of your net worth; or
 
 
 
 
b. (i) Your net worth must be at least $250,000; and (ii) the total amount of Notes you purchase cannot exceed 10% or your net worth.
 
For purposes of the suitability requirements described above, you and your spouse are considered to be a single person.  In addition, the following definitions apply:

 "annual gross income" means the total amount of money you earn each year, before deducting any amounts for taxes, insurance, retirement contributions or any other payments or expenses;

"net worth" means the total value of all your assets, minus the total value of all your liabilities. The value of an asset is equal to the price at which you could reasonably expect to sell it. In calculating your net worth, you should only include assets that are liquid, meaning assets that consist of cash or something that could be quickly and easily converted into cash, such as a publicly-traded stock. You shouldn't include any illiquid assets, such as homes, home furnishings or cars;

"net investment" means the principal amount of Notes purchased, minus principal payments received on the Notes.

We are seeking to register the offer and sale of our Notes in all 50 states as well as the District of Columbia.  As part of this process, we expect that states in addition to those referenced above will impose minimum financial suitability standards and maximum investment limits for lender members who reside in such states.  Should this occur we will set forth these requirements in a supplement to this prospectus.  Under the lender registration agreement, lender members are required to represent and warrant that they satisfy the applicable minimum financial suitability standards and maximum investment limits of the state in which they reside.  Lender members who fail to satisfy any such requirements will not be permitted to purchase Notes.
 


ABOUT THE PLATFORM
 
Overview
 
Prosper Funding LLC operates a peer-to-peer online credit platform, which we refer to as the “platform”, that enables its borrower members to borrow money and its lender members to purchase Borrower Payment Dependent Notes, or Notes, issued by Prosper Funding LLC, the proceeds of which facilitate the funding of the loans made to borrower members. Prosper Funding LLC is a wholly-owned subsidiary of Prosper Marketplace, Inc. We use the terms “we”, “us” and “our” to refer to Prosper Funding LLC, and we use the term “PMI” to refer to Prosper Marketplace, Inc.

PMI developed the platform and owns the proprietary technology that makes operation of the platform possible.  We have entered into a Servicing Agreement with PMI pursuant to which PMI has licensed to us the right to operate the platform, and we have appointed PMI to provide certain administrative services relating to the platform (the “Servicing Agreement”).     Prior to the commencement of this offering, PMI operated the platform directly, facilitated the origination of loans by WebBank through the platform and issued and sold notes corresponding to those loans.  We refer to borrower loans originated and notes issued and sold through the platform prior to the commencement of this offering as “PMI Borrower Loans” and “PMI Notes”, respectively.

The platform was designed to allow people to lend money to other people in an open transparent marketplace. Prosper believes peer-to-peer lending represents a new model of consumer lending, where individuals can earn the interest spread of a traditional consumer lender but must also assume the credit risk of a traditional lender.   It is people that are the drivers of credit formation in peer-to-peer lending, not institutions.

We believe peer-to-peer lending presents an enormous opportunity to create a more transparent form of consumer lending.  Key drivers of peer-to-peer lending include:
 
· The possibility of lower rates and better terms for borrowers compared to traditional sources of consumer credit, such as credit cards;
 
· A new asset class for investors with the possibility of attractive risk-adjusted returns that are not directly correlated to the performance of the stock market;
 
· An opportunity to combine social networking with financial services in a manner that allows users that help fund loans to feel they are directly helping other people while also potentially earning attractive returns;
 
· Growing acceptance of the Internet as an efficient and convenient forum for consumer transactions.
 
How the Platform Works

The platform is an online marketplace that matches individuals who wish to obtain consumer loans, whom we refer to as “borrower members”, with persons who are willing to help fund those loans, whom we refer to as “lender members”.  A borrower member who wishes to obtain a loan through the platform must post a loan listing, or listing, on the platform.  Lender members can review all the loan listings on the platform and make a commitment towards any listing they wish to help fund.  A commitment is a commitment to purchase a promissory note, or “Note”, from us, the payments on which will be dependent on the payments we receive on the loan requested in the listing.  If a listing receives enough lender member commitments to be funded, our partner WebBank, an FDIC-insured, Utah industrial bank, will originate the loan requested and then sell it to us and, at the same time, we will sell a Note to each lender member that made a commitment towards the loan in the principal amount of that commitment. We refer to a borrower member who posts a loan listing as an “applicant” and an applicant who obtains a loan through the platform as a “borrower”.
 

 
In order to post a listing, an applicant must first complete a loan application. We then obtain a credit report for the applicant and use data from that report as well as data supplied by the applicant to assign a risk grade to the listing, which is called a “Prosper Rating”. The listing is then posted on the platform.   The format for listings is shown below. The actual images are from hypothetical listings we created rather than actual listings.  Each listing includes the Prosper Rating, selected items from the applicant’s credit report, intended use of the potential loan, plus information regarding any previous loans obtained by the applicant through the platform.
 

 
 
Lender members can bid on listings in amounts ranging from the entire loan amount requested to as little as $25. Thus, it is typical to have multiple lender members bid on a single listing.  As the listing is funded, the listing will show the amount of commitments made towards that potential loan by lender members.
 


One unique aspect of peer-to-peer lending is that it allows lender members who are friends and family of an applicant to bid on that applicant’s listing. Friends and family bids can signal that a stronger social bond exists that could influence repayment rates. Friends and family can also vouch for the applicant’s character. These bids are also shown on the listing page for all lender members to review, as shown below.
 
 


Our registration, processing and payment systems are automated and electronic.  We have no physical branches, no deposit-taking and interest payment activities and limited loan underwriting activities.  Our website provides detailed information about the platform, including detailed fee information, the full text of our member legal agreements, help pages and white papers.  In addition to the customer support materials available on our website, we make additional customer support available to members by email and phone.  Our customer support team is currently located at our headquarters in San Francisco, California.
 
We will attract lender members and borrowers to www.prosper.com through a variety of sources, including referrals from other parties (such as online communities, social networks and marketers), search engine results and online and offline advertising.  We are not dependent on any one source of traffic to our website.  Through the first nine months of 2011, our website was receiving an average of approximately 167,716 unique visitors per month.
 
We generate revenue by charging lender members ongoing servicing fees on the Notes they have purchased, and from transaction fees paid by borrowers.  
 
Platform Participants, Registration Requirements and Minimum Credit Criteria

All platform participants must register with us and agree to the platform’s rules and terms of use, including consent to receipt of disclosures electronically.  At the time of registration, individuals or authorized institutional agents must provide their name, address and an email address.  After responding to an email verification, registrants must agree to the terms and conditions (including the applicable registration agreement) for the specific role for which they are registering.
 
Borrower Members
 
A borrower member may be any natural person at least 18 years of age who is a U.S. resident in a state where loans through the platform are available, with a bank account and a social security number.  After passing Prosper’s anti-fraud and identity verification process, borrower members can request unsecured borrower loans at interest rates we set.  We set minimum credit and other credit guidelines for borrowers, as discussed in the risk grading section.
 
When an applicant requests a loan, we first evaluate whether the applicant meets the underwriting criteria we have established with our origination partner, WebBank.  WebBank makes loans to borrowers and then sells and assigns the promissory notes evidencing those loans to us.  The underwriting criteria apply for all borrower loans originated through the platform and may not be changed without WebBank’s consent.  The underwriting criteria require that borrowers have a minimum credit score of a specified threshold amount (currently 640, except that the minimum is 600 for borrower members who (1) previously obtained a borrower loan and paid off the loan in full, or (2) are seeking a second loan and are otherwise eligible for a second loan), and have no prior charge-offs on loans originated through the platform. In connection with our identity and anti-fraud verification process for applicants, we verify the deposit account into which the loan proceeds will be deposited, to determine that the applicant is a holder of record of the account.  Even if a listing receives bids that equal or exceed the minimum amount required to fund, we will cancel the listing if we are unable to verify the applicant’s account.  While we attempt to authenticate each platform participant’s identity, our fraud checks could fail to detect identity theft, fraud and inaccuracies.  See “Risk Factors—Risks Related to Borrower Default” for more information.
 
Lender Members
 
Our lender members are individuals and institutions that have the opportunity to buy our Notes.  Lender members must register on the platform.  During lender registration, potential lender members must authorize us to obtain their credit report for identification purposes, they must also consent to any applicable tax withholding statement and must agree to the terms and conditions of our website.  Lender members must also enter into a lender registration agreement with us, which agreement governs all sales of our Notes to lender members.  Lender members are not required to give credit information to the same extent as borrower members.  An individual lender member must be a natural person at least 18 years of age and a U.S. resident, must provide his or her social security number and may be required to provide his or her state driver’s license or state identification card number.  Institutions must provide their taxpayer identification number.  At the time a lender member registers with Prosper, the lender member must satisfy any minimum financial suitability standards and maximum investment limits established for the platform or the Note Trader platform by the state in which the lender member resides.  Prior to bidding on a listing, lender members must transfer funds to an account maintained on the platform, which we refer to as a “funding account.” The funding account holds all funds supporting a lender member’s bids and all Note payments payable to the lender member are deposited in the funding account.


Our Relationship with WebBank
 
WebBank is a FDIC-insured, Utah-chartered industrial bank and direct lender that makes loans to borrowers and sells and assigns the promissory notes evidencing borrower loans to us.

Risk Management

The Prosper Rating System

Each listing is assigned a Prosper Rating based on the estimated loss rate for that listing. The Prosper Rating is a letter that indicates the level of risk associated with a listing and corresponds to an estimated average annualized loss rate range. This rating system allows us to maintain consistency when assigning a rating to a listing. There are currently seven Prosper Ratings, but this, as well as the loss ranges associated with each, may change over time as the marketplace dictates.
 
The current Prosper Ratings and the estimated loss ranges associated with them are as follows:
 
Prosper Rating
 
Est. Avg. Annual Loss Rate
AA
 
0.00% - 1.99 %
A
 
2.00% - 3.99%
B
 
4.00% - 5.99%
C
 
6.00% - 8.99%
D
 
9.00% - 11.99%
E
 
12.00% - 14.99%
HR
 
>=15.00%

The estimated loss rate for each listing is based on the historical performance of PMI Borrower Loans with similar characteristics and is primarily determined by two scores: (1) a custom Prosper Score, and (2) a credit score obtained from a credit reporting agency.
 
Prosper Score
 
The Prosper Score predicts the probability of a borrower loan going “bad,” where “bad” is the probability of going more than 60 days past due.  To create the Prosper Score, PMI developed a custom risk model using its historical data. PMI built the model on the platform’s borrower population so that the model would incorporate behavior that is unique and inherent to that population. In contrast, a credit score obtained from a credit reporting agency is based on a much broader population, of which platform borrowers are just a small subset. We use both the Prosper Score and a credit score to assess the level of risk associated with a listing.
 
To build and validate its custom risk model, PMI used loans originated through the platform from April 2007 through October 2008 and measured their performance for the fifteen months following origination. PMI analyzed variables available at the time of listing for potential inclusion in the final model, including those from the credit report and provided by the borrower.  PMI dropped or kept variables in the final model based on their contribution and stability over time, and went through a number of iterations before finalizing the model in its current form.  Some of the variables included in the final model are:
 
- Total Inquiries
- Inquiries last 6 months
- Total Trades
- Trades opened <= 6 months
- Trades Never Delinquent or Derogatory
- Trades with Delinquent Balance
- Available Credit on Open Bankcards
- Debt-to-Income Ratio
- Bankcard Utilization

 
The model assigns weights to all of its variables based on their value in predicting the likelihood of a loan going bad.  For a given listing, the model estimates the probability of the related loan becoming bad, which we call the listing’s “probability of bad”.  The probability of bad for a listing is then mapped to a Prosper Score, which is displayed as part of that listing.  Prosper Scores range from 1 to 10, with 10 being the best, or lowest risk value.  The probability of bad ranges and the corresponding Prosper Scores are as follows.
 
 
Probability Bad
 
Prosper Score
> 24.84%
 
1
20.33 < x <=24.84%
 
2
17.05 < x <= 20.33%
 
3
14.42 < x <= 17.05%
 
4
12.00 < x <= 14.42%
 
5
10.00 < x <= 12.00%
 
6
8.17 < x <= 10.00%
 
7
5.98 < x <= 8.17%
 
8
4.50 < x <= 5.98%
 
9
0.00 < x <= 4.50%
 
10

For example, a probability of bad of 3.29% equates to a Prosper Score of 10, a probability of bad of 12.00% equates to a Prosper Score of 6, and a probability of bad of 37.54% equates to a Prosper Score of 1. The probability of bad ranges is likely to change over time as we acquire additional performance data.
 
Credit Score
 
In addition to Prosper Score, the other element we use to determine the Prosper Rating for a listing is a credit score from a consumer reporting agency. The credit score we use currently is Experian’s Scorex PLUS score, although we may use one or more different scores in the future.  The minimum credit score required for an applicant to post a listing is 640, except for applicants who (i) previously obtained a borrower loan or a PMI Borrower Loan and paid off the loan in full, or (ii) are seeking a second loan while their first loan is still outstanding and are otherwise eligible for such second loan, for whom the minimum score required is 600.

We obtain an applicant’s credit score at the time his listing is created, unless we already have a credit score on file that is not more than thirty days old.  This credit score is used to determine the Prosper Rating for the listing, and the range that credit score falls within is also included in the listing.  If available, we obtain updated credit scores on a monthly basis for borrowers with outstanding loans, and we include the applicable score ranges by month in listings on the Note Trader platform.  We do not disclose applicant’s exact credit score to any of our customers, except for the applicant himself.

Assigning Estimated Loss Rates

We assign estimated loss rates for listings based on the historical performance of borrower loans and PMI Borrower Loans with similar characteristics.  The starting point for this determination is our base loss rate table, shown below, which PMI created by dividing the range of Prosper Scores and credit scores into multiple segments and combining them into a single grid.  We estimate a base loss rate for each cell in the table, based on the historical performance of loans originated on the platform that occupied the same cell (i.e., that had the same point of intersection for their Prosper Score and credit score). Cells are grouped together due to small volume, similar behavior or both.  We review our loan performance on a monthly basis to see how our loss estimates compare to the actual performance of loans originated on the platform, and we make any adjustments to those estimates we deem necessary based on such reviews. Please refer to our website for the estimated base loss rate currently in use. Estimated base loss rates for the cells in the table below are based on performance of historical PMI Borrower Loans as of November 30, 2011.


 
   
Experian Scorex Plus Score
Prosper Score
 
600-619
 
620-639
 
640-649
 
650-664
 
665-689
 
690-701
 
702-723
 
724-747
 
748-777
 
778+
1
 
24.90%
 
24.90%
 
24.90%
 
24.90%
 
24.90%
 
24.90%
 
24.90%
 
24.90%
 
16.50%
 
16.50%
2
 
24.90%
 
24.90%
 
24.90%
 
19.90%
 
19.90%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
3
 
24.90%
 
24.90%
 
24.90%
 
19.90%
 
19.90%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
4
 
19.90%
 
19.90%
 
19.90%
 
19.90%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
 
16.50%
5
 
19.90%
 
19.90%
 
19.90%
 
19.90%
 
16.50%
 
16.50%
 
16.50%
 
11.90%
 
11.90%
 
11.90%
6
 
19.90%
 
19.90%
 
19.90%
 
14.70%
 
14.70%
 
11.90%
 
11.90%
 
8.90%
 
8.90%
 
8.90%
7
 
19.90%
 
19.90%
 
19.90%
 
8.90%
 
8.90%
 
8.90%
 
8.90%
 
8.90%
 
8.90%
 
8.90%
8
 
14.70%
 
14.70%
 
14.70%
 
5.65%
 
5.65%
 
5.65%
 
5.65%
 
5.65%
 
5.65%
 
3.30%
9
 
14.70%
 
14.70%
 
14.70%
 
5.65%
 
5.65%
 
5.65%
 
5.65%
 
3.30%
 
3.30%
 
3.30%
10
 
14.70%
 
14.70%
 
14.70%
 
5.65%
 
5.65%
 
5.65%
 
5.65%
 
3.30%
 
3.30%
 
1.00%

We can make adjustments to the base loss rate to determine the final loss rate.  The final loss rate determines the Prosper Rating.  We currently make adjustments if the applicant has already been a borrower on the platform and based on loan term.  The value of the adjustments are based on historical PMI data, where available, as well as observed industry performance.  Current adjustment variables and their values are:
 
 
   
Previous Prosper Loan
 
Loan Term
Base Loss Rate
 
Yes
 
No
 
1 year
 
3 year
 
5 year
0.00 – 1.99%
 
-0.25%
 
-
 
-0.15%
 
-
 
-
2.00 – 3.99%
 
-1.30%
 
-
 
0.00%
 
-
 
-
4.00 – 5.99%
 
-3.65%
 
-
 
0.00%
 
-
 
-
6.00 – 8.99%
 
-4.70%
 
-
 
-0.10%
 
-
 
-
9.00 – 11.99%
 
-4.70%
 
-
 
-0.10%
 
-
 
-
12.00 – 14.99%
 
-10.50%
 
-
 
-0.10%
 
-
 
-
15.00+%
 
-10.00%
 
-
 
-0.45%
 
-
 
-
 
Here is an example of how the final loss rate and Prosper Rating for a loan listing would be calculated:
- Applicant credit bureau score = 715 and Prosper score = 9
- Applicant has borrowed through the platform before
 
Base Loss Rate:
 
5.65%
Adjustments:
   
 
-Previous Loan:
-3.65%
Final Loss Rate:
 
2.00%
Prosper Rating:
 
A

 
 

Calculating Loss Estimates

To calculate the estimated loss rates contained in the base loss rate table and adjustment values, PMI developed a loan model to simulate the future performance of loans based on past performance data.  The principal elements of the model are as follows:
 
Average Balance. To calculate the average balance for each period, PMI used the amount of loan principal on loans that are still open and have not been charged-off or paid off. As loan payments are made, the principal balance of each loan declines over time. It is assumed that borrowers that are making scheduled payments on these loans do so according to their amortization schedule.
 
When the loan is paid off early, it is no longer included in the outstanding balance for subsequent periods. Historical payoff rates were used to project the monthly payoffs and these rates were assumed to remain constant throughout the life of the loans. Similarly, once a loan has been charged-off, the principal associated with this loan is considered a credit loss and is no longer included in the outstanding periodic balance.
  
Delinquent and Charged-Off Loans.  To estimate the number of current and delinquent accounts on a monthly basis, PMI applied roll rates to each group of given loans. PMI first calculated the historical roll rates of accounts in particular cells and then applied the historical rate to the given loans. A roll rate measures the percent of loans within a particular payment status that “roll” to the next late payment status if the loan is not paid. For example, a current account that is not paid “rolls” to a new payment status defined as 1 to 30 days past due. Similarly, an account that is already 1 to 30 days past due and does not make the next payment then “rolls” to a status of 31 to 60 days past due. An account is considered to be a loss, or charged-off, when it reaches 121+ days past due. The average historical roll rates were assumed to be constant for the life of the loan term.
 
Loss Rates.  The estimated monthly dollar charge-offs are calculated by multiplying the estimated number of accounts that reach 121+ days past due in that month by the average balance of loans in that month.
 
Collection expenses and recovery payments are applied to gross losses to calculate net losses. When an account becomes more than 30 days past due, it is referred to a collection agency. Collection agencies are compensated by keeping a portion of the payments they collect based on a predetermined schedule. Payments collected by the collection agency reduce the amount of principal that is repaid to lenders. This expense is added to losses in the month the payment is made.
 
In addition, once an account has been charged-off, any subsequent payments received or proceeds from the sale of the loan in a debt sale are considered recoveries and reduce the amount of principal lost. Recovery assumptions are based on historical recoveries through November 2009 on accounts that were 121+ days past due in 2008. The recovery rate assumptions were:
 
·
Prosper Rating AA-D = 6.0% annual recovery rate
 
·
Prosper Rating E-HR = 2.0% annual recovery rate
 
To calculate the estimated average annualized net loss rate:
 
 
1.
Calculate monthly net loss rate = (Net principal charge-offs in month X) / (Outstanding principal balance in month X)
     
  2. Calculate average annualized net loss rate:
·
monthly net loss rate x 12
 
·
balance-weighted average of the monthly rates over the life of the loan
 
For each group of loans, the average loan amount for charged-off accounts was compared to that for total loans; if there was a significant difference, the ratio of average charged-off loan amount to average total loan amount was applied to the expected loss rate to account for this differential.  Estimated loss rates determine the Prosper Rating.
  


Comparing Estimated Loss Rates to Actual Losses

We review our loan performance on a monthly basis to see how our loss estimates compare to the actual performance of our loans, and we make any adjustments to those estimates we deem necessary based on such reviews.  The graphs below show the expected versus actual cumulative dollar loss rates by Prosper Rating for PMI Borrower Loans booked from July 13, 2009 through September 30, 2010.  Performance is as of September 30, 2011.   The loss performance is tracked by quarterly vintage, meaning each line represents all the loans originated in a given quarter.  We have only included quarterly vintages where all PMI Borrower Loans originated during that quarter have been outstanding at least 10 months, to ensure that all of the loans included are adequately seasoned.  In addition, we only include data for a point along the x axis if at least 70% of the amount originated in that vintage has been outstanding for at least that number of cycles. For example, in our graph for AA PMI Borrower Loans funded during Q3 2009, 70% or more of the original amount borrowed in that vintage has been outstanding for 24 cycles, but less than 70% of the original amount borrowed has been outstanding for 25 or more cycles. So, that graph includes a data point for cycle 24 but not for cycle 25.

Quarterly vintages generally contain enough volume for their performance curves to be meaningful, but there are exceptions.  For example, the volume of PMI Borrower Loans originated in the 3rd quarter of 2009 was relatively low because the platform was closed during the first few weeks of the quarter, and also because the  platform reopened during the quarter after having been shut down for almost nine months.  And during the 4th quarter of 2010 only 31 PMI Borrower Loans were originated on the platform with a C Prosper Rating.  For such vintages, a few loans charging-off, or even a single charge-off, can result in actual losses for that vintage being well above estimates.  Therefore, we look at quarterly vintages individually as well as in aggregate to get a more complete picture of loan performance.



Note: Expectation line reflects the weighted average expected loss rate across all vintages at the time of origination







 
 




Note: Expectation lines represent the high end of the estimated loss rate range for each Prosper Rating, except for HR, where the high end of the range is 100% and we have set the expectation curve at 20%.
 
In aggregate, all quarterly vintages are coming in below the expected loss rates.  Loss rates for some of the 2009 vintages have been higher than expected for the lower risk Prosper Ratings, AA-C, but subsequent vintages have generally been at or below expectations.  The higher risk Prosper Ratings, D-HR, have consistently performed at or better than expectations.
 
We review our actual losses on a monthly basis and analyze any material variances from our estimates.  To the extent we conclude that any such variance seems likely to continue, we adjust our loss estimates accordingly.  For example, based on the continuing exceptional risk performance of repeat borrowers, we made adjustments in April 2011 to reduce expected loss rates on repeat borrowers.

Please note that the historical performance of PMI Borrower Loans may not be indicative of the future performance of our borrower loans.  See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.

 Criteria for Applying a Second Loan
 
Borrowers may have up to two loans outstanding at any one time, provided that the aggregate outstanding principal balance of both borrower loans does not exceed the then-current maximum allowable loan amount for borrower loans (currently $25,000).  We treat any outstanding PMI Borrower Loan as a "loan" for purposes of this two loan limit.  Currently, to be eligible to obtain a second borrower loan while an existing loan is outstanding:
 
·Borrowers must be current on their existing borrower loan, and must not have been more than 30 days past due in making their most recent monthly borrower loan payments for a specified number of months (between six and twelve, depending on the borrower’s credit score range at time the existing loan was obtained);
 
·Borrowers may not post a listing for a second borrower loan within six to twelve months (depending on the borrower’s credit score range at time the existing loan was obtained) following the date of origination of their existing borrower loan; and
 
·Borrower’s credit score must be 600 or more.
 
Underwriting requirements for borrower loans, including eligibility requirements for second loans, are subject to change from time to time.

 
Maximum Loan Amount
 
The maximum loan amount for a listing is determined by the applicant’s Prosper Rating.  The table below shows the maximum loan amount for each Prosper Rating:
 
Prosper Rating
 
Maximum Loan Amount
AA
 
$
25,000
A
   
25,000
B
   
15,000
C
   
15,000
D
   
15,000
E
   
4,000
HR
 
$
4,000

Borrower Identity and Financial Information Verification

We reserve the right in our member agreements to verify the accuracy of all statements and information provided by borrower members and lender members in connection with listings, commitments and borrower loans.  We may conduct our review at any time before, during or after the posting of a listing, or before or after the funding of a borrower loan.  If we are unable to verify material information with respect to an applicant or listing, we will cancel or refuse to post the listing or cancel any or all commitments against the listing.  We may also delay funding of a borrower loan in order to verify the accuracy of information provided by an applicant in connection with the listing, or to determine whether there are any irregularities with respect to the listing.  If we identify material misstatements or inaccuracies in the listing or in other information provided by the applicant, we will cancel the listing or related loan.
 
We verify the identity of every borrower who obtains a loan through the platform using a combination of documentary and non-documentary methods. We ask each applicant to submit a copy of her current driver’s license, passport or other government-issued, photo identification card, which we authenticate using third-party reference materials.  In addition, we compare the information contained in the applicant’s credit report  with the information contained in the application. We also run the applicant’s application information through a fraud database.  Finally, we require the applicant to submit bank statements, cancelled checks or other documentary evidence to verify the accuracy of her bank account information. To the extent any of these processes identify inconsistencies between the information submitted by the applicant and the information contained in another data source, we require the applicant to submit documentation to resolve the discrepancy to our satisfaction.  For example, we might require the applicant to submit a recent utility bill to reconcile a discrepancy between the current address listed in her application and the one listed in her credit report.  For the small number of applicants who do not have a current, government-issued photo identification card, we may rely on the other screening processes described above to verify their identity. But we obtain and authenticate photo identification from the great majority of applicants, and perform the other processes described above for all borrowers.  If we are unable to verify the identity of an applicant in the manner described above, we will cancel the applicant’s listing or pending loan.
 
In addition to the identity verification processes just described, we verify income and employment information for a subset of applicants based on a proprietary algorithm.  The intention of this algorithm is to identify instances where the applicant’s self-reported income is highly determinative of the applicant’s Prosper Rating.  The algorithm gives greatest weight to the following factors:
 
·Prosper Rating;
 
·loan amount;
 
·stated income; and
 
·debt-to-income ratio.

 
To verify an applicant’s income, we require the applicant to submit a paystub from within the last thirty days and a W-2 or Form 1099 from the prior calendar year.  To verify an applicant’s employment, we obtain confirmation from the human resources department of the applicant’s employer, verbally or by email, or phone the main phone number of the applicant’s employer and confirm that we can be connected directly to the applicant’s work number from that main number.
 
Between July 14, 2009 and September 30, 2011 (based on start time of the applicable bidding period), PMI verified employment and/or income on approximately 42% of the PMI Borrower Loans originated on the platform on a unit basis (6,316 out of 15,139) and approximately 65% of originations on a dollar basis ($55,766,041 out of $85,985,988). Breaking these numbers down by Prosper Rating:
 
·
for PMI Borrower Loans with a Prosper Rating of AA, A or B, PMI verified income and/or employment information on approximately 58% of the loans originated on a unit basis (3,047 out of 5,274) and approximately 80% of originations on a dollar basis ($31,388,823 out of $39,303,272);
 
·
for PMI Borrower Loans with a Prosper Rating of C or D, PMI verified income and/or employment information on approximately 42% of the loans originated on a unit basis (2,290 out of 5,493) and approximately 63% of originations on a dollar basis ($18,383,137 out of $29,292,670); and
 
·
for PMI Borrower Loans with a Prosper Rating of E or HR, PMI verified income and/or employment information on approximately 22% of the loans originated on a unit basis (979 of 4,372) and approximately 34% of originations on a dollar basis ($5,994,081 out of $17,390,046).
 
 Our bases for selecting listings for employment or income verification are the same as the ones used by PMI for PMI Borrower Loans.  Please note, however, that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.  See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.
 
If an applicant fails to provide satisfactory information in response to an income or employment verification inquiry, we will (a) request additional information from the applicant, (b) cancel the applicant’s listing or (c) refuse to proceed with the funding of the loan.  Where we choose to verify an applicant’s income or employment information, the verification is normally done after the applicant’s listing has already been posted.  This allows us to focus our verification efforts on the listings most likely to fund, and increases the percentage of funded loans that are subject to verification.

When we identify inaccurate employment or income information in an  application or listing that has resulted in the applicant obtaining a different Prosper Rating or interest rate for her listing than she would have obtained if she had provided the correct information, we cancel the listing. If we identify inaccurate information in a listing that does not trigger cancellation of the listing, we do not update the listing to include the corrected information. Cancellation automatically triggers a notice to the applicant and any lender members who made commitments that the listing has been cancelled, and we send an adverse action notice to the applicant indicating the reasons for cancellation. We make the funds committed by the lender members on the cancelled listing immediately available to them for bidding on other listings.
 
We generally do not verify information included by applicants in their listings other than identity, income and employment information. Similarly, we do not verify the information in any recommendations from an applicant’s Prosper friends. We derive the applicant’s debt-to-income ratio, or “DTI,” from a combination of the applicant’s self-reported income and information from the applicant’s credit report.  The credit data that appears in listings is taken directly from the applicant’s credit report. Although applicants may provide proof of homeownership to establish homeownership status, in most instances, homeownership status is derived from the credit report as well.  For example, if the credit report reflects an active mortgage loan, the applicant is presumed to be a homeowner. Lender members should not rely on unverified information provided by applicants.

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

We are continuously looking for ways to improve our verification procedures in a cost-effective manner in order to increase the repayment performance of loans.  See “Risk Factors—Risks Related to Borrower Default—Information supplied by applicants may be inaccurate or intentionally false- Information regarding income and employment is not verified in many cases” for more information.

Our Note Repurchase and Indemnification Obligations

Under the lender registration agreement, in the event of a material default under a series of Notes due to verifiable identity theft of the named borrower’s identity, we will repurchase the Note and credit the lender members’ account with the remaining unpaid principal balance of the Note.  Our repurchase obligation will apply only if the relevant Note is at least 120 days past-due; provided, that we may in our sole discretion elect to repurchase such Note at an earlier time.  The determination of whether verifiable identity theft has occurred is in our sole discretion.  We generally recognize the occurrence of identity fraud upon receipt of a police report regarding the identity fraud.  This remedy for identity fraud only provides protection against identity theft; in no way is it a guarantee of a borrower’s self-reported information (beyond identity) or a borrower’s creditworthiness.  We expect the incidence of identity fraud on the platform to be low because of our identity verification process. As of September 30, 2011, PMI had experienced 23 cases of confirmed identity fraud affecting 36 PMI Borrower Loans since inception, but has not experienced any cases of confirmed identity fraud during the year ended December 31, 2010 or in the nine months ended September 30, 2011.  In the cases of identity theft PMI has experienced, it received a police report and identity theft affidavit from the victim evidencing that identity theft had occurred.  Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.  See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.

We have the exclusive right to investigate claims of identity theft and determine, in our sole discretion, whether verifiable identity theft has occurred.  As PMI, acting as Servicer on our behalf, is 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 of identity theft would save us from our repurchase obligation. There are, however, three factors that mitigate the risk of this conflict.  Without the protection offered by this repurchase obligation, fewer potential lender members will have the confidence to participate on the platform, 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.

In the event we breach any of our other representations and warranties in the lender registration agreement pertaining to the Notes, and such breach materially and adversely affects a series of Notes, we will either indemnify the lender members, repurchase the series of Notes or cure the breach.  The circumstances where this may occur include where the listing contained the wrong Prosper Score, or where we miscalculated the Prosper Score, resulting in the wrong Prosper Rating appearing in the listing.  We are not, however, under any obligation to cure, indemnify or repurchase a series of Notes because a correctly determined Prosper Score or Prosper Rating fails to accurately predict the actual losses on a borrower loan.  In addition, we are not obligated to repurchase a Note or indemnify a lender member whose investment is not realized in whole or in part due to false or inaccurate statements or omissions of fact in a listing, whether in credit data, borrower’s representations, user recommendations, group affiliations or similar indicia of borrower intent and ability to repay the loan. Finally, if we repurchase a Note, we will only return the outstanding principal balance to the lender member and not unpaid interest.
 


Historical Performance of PMI Borrower Loans

The performance of borrower loans is a function of the credit quality of borrowers and the risk and return preferences of lender members.  Lender members can choose to pursue a variety of bidding strategies, including strategies that may or may not maximize the return on their investment.  When making commitment decisions, lender members consider applicants’ Prosper Rating, credit score, debt-to-income ratios and other credit data and information displayed with listings.    See “Risk Factors—Risks Related to Borrower Default.”
 
The following seven graphs show performance for PMI Borrower Loans through September 30, 2011 by delinquency rates and cumulative principal default rates.  
 
The table below shows 1-30 and 31-120 day delinquency rates by quarter for PMI Borrower Loans originated between July 13, 2009 and September 30, 2011.  This graph shows delinquencies as a percentage of total outstanding principal balance.  We consider loans more than 30 days past due to be severely delinquent due to the significant decrease in the likelihood of receiving future payment once a loan has missed two payments.  
 
 
 
 
The following graphs show cumulative principal default rates for PMI Borrower Loans originated by year.  The cumulative charge-off rate is calculated as the sum of the cumulative principal balance charged-off, divided by the original amount borrowed.  The vertical axis shows the percentage of principal charged-off.  The horizontal axis shows the age of the loan in monthly cycles.  We only include data for a point along the x axis if at least 70% of the original amount borrowed in that vintage has been outstanding for at least that number of cycles.  
 
The following table shows cumulative principal default rates for PMI Borrower Loans originated from July 13, 2009 to December 31, 2009, as of September 30, 2011.
 
 
The following table shows cumulative principal default rates for PMI Borrower Loans originated from January 1, 2010 through September 30, 2010, as of September 30, 2011.  
 
 

 
The following table presents aggregated information as of September 30, 2011, grouped by Prosper Rating, for all PMI Borrower Loans originated on the platform from July 13, 2009 through September 30, 2011.  With respect to delinquent PMI Borrower Loans, the table shows the entire amount of the principal remaining due (not just that particular payment) as of September 30, 2011. 
 
Loan Originations
 
July 13, 2009 - September 30, 2011
 
(as of September 30, 2011)
 
                                                   
     
Total Loan Originations
   
Current Loans
   
1-30 Days Past Due
 
Prosper Rating
 
Number
   
Amount
   
Number
   
Origination Amount
   
Outstanding Principal
   
Number
   
Origination Amount
   
Outstanding Principal
 
AA
      1,393     $ 10,873,454       973     $ 8,340,325     $ 5,956,394       4     $ 27,500     $ 23,284  
 A       2,348       15,928,899       1,858       13,403,704       10,310,546       15       76,165       49,957  
 B       1,487       11,318,661       1,240       9,685,457       7,968,677       12       86,500       74,709  
 C       1,672       9,235,753       1,228       7,080,821       5,702,736       23       145,200       98,790  
 D       3,771       19,336,546       2,941       15,929,843       13,634,230       89       419,620       352,042  
 E       2,474       11,152,797       1,985       9,232,551       8,203,297       75       359,008       322,333  
HR
      1,856       5,908,301       1,360       4,322,601       3,541,855       52       182,180       151,611  
                                                                     
          15,001     $ 83,754,411       11,585     $ 67,995,301     $ 55,317,735       270     $ 1,296,172     $ 1,072,727  
       
avg loan size:
    $ 5,583                                                  
                                                                     
percent of total
                    77.2 %     81.2 %             1.8 %     1.5 %        
                                                                     
                                                                     
       
Paid In Full
   
31+ Days Past Due
   
Defaulted 1
 
Prosper Rating
 
Number
   
Origination Amount
   
Number
   
Origination Amount
   
Outstanding Principal
   
Number
   
Origination Amount
   
Net Charged Off Principal
 
AA
      389     $ 2,262,728       9     $ 75,500     $ 51,114       18     $ 167,400     $ 124,989  
 A       401       2,126,643       15       67,500       46,246       59       254,887       198,674  
 B       198       1,278,604       12       85,300       71,400       25       182,800       155,873  
 C       324       1,502,083       23       142,950       112,460       74       364,700       309,354  
 D       474       1,890,618       102       485,657       426,843       165       610,809       523,679  
 E       241       857,527       73       342,502       320,180       100       361,210       319,449  
HR
      265       834,954       67       221,335       185,968       112       347,231       315,082  
                                                                     
          2,292     $ 10,753,157       301     $ 1,420,745     $ 1,214,211       553     $ 2,289,037     $ 1,947,100  
                                                                     
percent of total
    15.3 %     12.8 %     2.0 %     1.7 %             3.7 %     2.7 %        
                                                                     
                                                                     
       
Repurchased
                           
Default due to Delinquency:
         
Prosper Rating
 
Number
   
Origination Amount
                                      501     $ 1,795,569  
AA
      -       -                                                  
 A       -       -                                                  
 B       -       -                            
Default due to Bankruptcy2 :
         
 C       -       -                                       52     $ 151,531  
 D       -       -                                                  
 E       -       -                                                  
HR
      -       -                                                  
                                                                     
          -       -                                                  
percent of total
    0.0 %     0.0 %                                                
 
1
includes all loans >120 days past due
             
2
Only includes loans where the bankruptcy notification date is prior to the date the loan became 121 days past due.  If we were notified of a bankruptcy after the loan reached 121 days past due, it is included in the "Default due to Delinquency" totals.
 
From July 13, 2009 through September 30, 2011, 15,001 PMI Borrower Loans were originated on the platform with an average original principal amount of $5,583 and an aggregate original principal amount of $83,754,411.  As of September 30, 2011, 77.2% of these loans were current or had not reached their first billing cycle and 15.3% were paid in full, 1.8% were 1 to 30 days past due, 2.0% were more than 30 days past due, and 3.7% had defaulted.  A PMI Borrower Loan is considered to have defaulted when it is more than 120 days past due or has been discharged in bankruptcy.  Of these 15,001 loans, 1,282 loans, or 9%, have been greater than 15 days past due at any time, 952 loans, or 6%, have been more than 30 days past due at any time, and 735 or 5%, have been more than 60 days past due at any time.
 
 
Of PMI Borrower Loans originated after July 13, 2009, 553 have defaulted as of September 30, 2011, equaling a total net defaulted amount of $1,947,110.  Of these 553 defaulted loans, the borrowers of 52 of the loans have filed for bankruptcy, resulting in a net defaulted amount of $151,531.
 
       The data in the preceding tables regarding PMI Borrower Loans may not be representative of the loss experience that will develop for our borrower loans.  In addition,  the data in the preceding tables regarding prepayments may not be representative of the prepayments we expect over time.

      
         The following table presents aggregate information, as of September 30, 2011, regarding the results of PMI’s collection efforts for PMI Borrower Loans originated after July 13, 2009 that became more than 30 days past due at any time, grouped by Prosper Rating. 
 
Prosper Rating
   
Loans In Collections
   
Origination Amount
   
Aggregate Amount Sent to Collections
   
Gross Amount Collected on Accounts sent to Collections
   
Number of Loans Charged-off
   
Gross Aggregate Principal Balance of Loans Charged-Off
   
Gross Amount Recovered on Loans Charged-Off
   
Net Aggregate Charge-Off
 
AA
      36     $ 281,400     $ 18,369     $ 6,194       18     $ 137,489     $ 12,500     $ 124,989  
 A
      94       398,512       25,917       14,841       59       204,248       5,574       198,674  
 B       42       283,100       19,722       4,577       25       157,652       1,779       155,873  
 C       127       640,706       48,996       19,920       74       319,015       9,660       309,354  
 D       314       1,261,216       103,266       47,416       165       547,323       23,644       523,679  
 E       209       842,707       73,732       27,988       100       332,199       12,750       319,449  
HR
      211       664,453       58,848       31,519       112       320,318       5,236       315,082  
                                                                     
 Total       1,033     $ 4,372,094     $ 348,850     $ *152,455       553     $ 2,018,244     $ 71,144     $ 1,947,100  
* This amount excludes collection agency payments that were subsequently returned by the bank
                           

We may alter the terms or make principal reductions on some loans, which may include cases where a reduction in the initial interest rate is required by law.  The Servicemembers’ Civil Relief Act requires interest rates to be reduced to 6% while a borrower in the armed forces is on active duty.
 
PMI Borrower Loans
 
The following table presents aggregated information about borrowers for PMI Borrower Loans originated over the period from July 13, 2009 to September 30, 2011, grouped by Prosper Rating.
 
Prosper Rating
 
Number
 
Amount
 
Average Loan Size
 
Weighted Average Lender Yield
   
Weighted Average Borrower Rate
   
Weighted Average Borrower APR
 
AA
    1,393   $ 10,873,454   $ 7,806     7.85 %     8.85 %     9.27 %
 A     2,348     15,928,899     6,784     10.05 %     11.06 %     13.10 %
 B     1,487     11,318,661     7,612     14.59 %     15.59 %     17.69 %
 C     1,672     9,235,753     5,524     19.45 %     20.45 %     23.30 %
 D     3,771     19,336,546     5,128     25.54 %     26.54 %     29.79 %
 E     2,474     11,152,797     4,508     30.57 %     31.57 %     35.30 %
HR
    1,856     5,908,301     3,183     31.19 %     32.19 %     35.52 %
Total
    15,001   $ 83,754,411   $ 5,583     19.21 %     20.22 %     22.74 %

The following table presents aggregated information about borrowers for PMI Borrower Loans originated over the period from July 13, 2009 to September 30, 2011, grouped by Prosper Rating.  The information for each borrower was obtained from a credit reporting agency at the time the borrower’s loan application was submitted. PMI has not independently verified this information:
 
Prosper Rating
 
Average Experian ScorexPlus Score
 
Average Number of Current Delinquencies
 
Average Number of Open Credit Lines
 
Average Number of Total Credit Lines
AA
   
800
 
0.03
   
8.95
 
26.44
 A    
752
 
0.10
   
9.07
 
25.89
 B    
739
 
0.19
   
8.55
 
25.30
 C    
701
 
0.23
   
8.92
 
27.30
 D    
695
 
0.41
   
7.90
 
25.17
 E    
673
 
0.64
   
8.18
 
26.95
HR
   
667
 
0.79
   
7.78
 
26.75
 
Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.  See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.
 
 

Posted Borrower Loan Listings
 
Once a loan listing is completed by an applicant, the listing is posted on our website and then becomes available for bidding by lender members. A loan listing is a request by the applicant for a borrower loan in a specified amount.
 
When creating a listing, the applicant may opt for partial funding. Partial funding means the applicant’s loan does not have to receive bids for 100% of the amount requested to fund, but can be funded if it receives bids for 70% or more of the amount requested.  Each listing indicates whether the applicant has elected partial funding and, if so, the minimum amount of bids required for the loan to fund. We may change the percentage threshold for partial funding, which is currently set at 70%, from time to time.  Any such change will be disclosed on our website, and will only affect listings created after we have implemented such change.
 
Borrower loans are unsecured obligations of individual borrowers with an interest rate determined by us and with a specified loan term, currently set at one, three or five years, but which we may in the future extend to between three months to seven years. Applicants may currently request loans within specified minimum and maximum principal amounts (currently, between $2,000 and $25,000), which are subject to change from time to time. Borrower loans may be repaid at any time by borrowers without prepayment penalty. A borrower loan will be made to an applicant only if the applicant’s listing has received bids equal to or exceeding the minimum amount required for the listing to fund.
 
In addition to the applicant’s requested loan amount, listings include:
 
·the interest rate, annual percentage rate and monthly payment amount on the requested loan;
 
·the servicing fee lenders must pay;
 
·the lender yield percentage (interest rate on the loan, net of the servicing fee);
 
·the Prosper Rating and estimated loss rate;
 
·the Prosper Score and credit score range;
 
·the minimum amount required for the loan to fund and whether the applicant has opted for partial funding;
 
·the number of accounts on which the applicant is currently late on a payment, including unpaid derogatory accounts;
 
·the total past-due amount the applicant owes on all delinquent and derogatory accounts;
 
·the number of 90+ days past due delinquencies on the applicant’s credit report;
 
·the number of public records (e.g., bankruptcies, liens, and judgments) on the applicant’s credit report over the last 12 months, and over the last 10 years;
 
·the number of inquiries made by creditors to the applicant’s credit report in the last six months;
 
·the month and year the applicant’s oldest recorded credit line (e.g., revolving, installment, or mortgage credit) was opened;
 
·the total number of credit lines appearing on the applicant’s credit report, along with the number that are open and current;
 
·the total balance on all of the applicant’s open revolving credit lines;
 


·the applicant’s bankcard utilization ratio, expressed as a percentage, reflecting the ratio of the total balance used, to the aggregate credit limit on, all of the applicant’s open bankcards;
 
·whether the applicant owns a home;
 
·DTI percentage;
 
·the applicant’s self-reported income range, occupation, employment status, and intended use of funds;
 
·the amounts and dates of all lender member bids;
 
·the applicant’s Prosper friends who have bid on the listing, together with any narrative recommendation from a bidding Prosper friend;
  
·the applicant’s group affiliations, if any; and
 
·if the applicant previously obtained one or more loans through the platform, a description of such loan activity, including the number and aggregate principal borrowed on such loans, the current outstanding principal balance of any existing loan, the payment history on such loans, and the applicant’s credit score ranges as of the four most recent dates credit reports were obtained on the applicant in connection with the applicant’s listings, with an arrow indicator denoting whether the applicant’s credit score has improved, declined or remained unchanged since the applicant’s most recent Prosper loan.
 
Part of an applicant’s credit profile displayed in listings is a DTI ratio. DTI is a measurement of the applicant’s ability to take on additional debt. This number takes into consideration how much debt the applicant has or will have, including the requested loan amount. The DTI is expressed as a percentage and is calculated by dividing the applicant’s monthly debt payments, including the debt resulting from the borrower loan being requested, by the applicant’s monthly income. Such debt amounts are taken from the applicant’s credit report without verification and exclude monthly housing payments, and the applicant’s income is self-reported and may not be verified by us.
 
Listings may include the applicant’s narrative description of why the loan is being requested, and of the applicant’s financial situation.
  
For PMI Borrower Loans funded between July 13, 2009 and September 30, 2011, borrowers identified their intended use of loan proceeds by unit distribution as follows:
 
·debt consolidation (approximately 47%);
 
·business use, such as financing their home-based or small businesses (approximately 10%);
 
·home improvement (approximately 10%); 
 
·financing the purchase of an automobile (approximately 6%); and
 
·other (approximately 27%).
_________________________
Applicants typically state the use of funds in a short sentence or clause, such as “Consolidate my credit card debt and be rid of it.”  Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.  See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.
 
 
Loan listings and other borrower information available on the platform or in our sales and listing reports are statements made in connection with the purchase and sale of securities, and are therefore subject to Rule 10b-5 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as well as the antifraud provisions of the Securities Act of 1933, as amended (the “Securities Act”).  In general, Section 10b-5 and the antifraud provisions of the Securities Act provide the purchaser of securities with a right to bring a claim against the issuer for damages arising from any untrue statement of material fact or failure to state a material fact necessary to make any statements made by the issuer not misleading.  In this prospectus, we advise you of the limitations on the reliability of the information provided by applicants with respect to loan listings.  Accordingly, a court could determine that we have advised you of all material facts regarding the information supplied by applicants and your recourse in the event this information is false or misleading may be extremely limited under the securities laws because you have been so advised. Alternatively, the SEC or a court could determine that we have not advised you of all of the material facts regarding an investment in the Notes, which could give you the right to rescind your investment and obtain damages, and could subject us to civil fines or criminal penalties in addition to any such rescission rights or damages.
 
How to Bid to Purchase Notes

A bid on a listing is a lender member’s binding commitment to purchase a Note in the principal amount of the lender member’s bid, should the listing receive bids equaling or exceeding the amount required for the listing to fund.  Lender members bid the amount they are willing to commit to purchase a Note dependent for payment on payments we receive on the borrower loan described in the listing.  
 
The bidding period for a listing begins when the listing is posted on the platform and ends either 14days after posting or on the first date on which the listing has received bids totaling the loan amount requested, whichever is earlier. Lender members cannot place bids on a listing once its bidding period has ended.  If the applicant opts for partial funding, the bidding period still will not end prior to the end of the 14 day listing period unless the listing has received bids totaling the full amount of the loan requested.
 
If the listing does not receive bids equal to or exceeding the minimum amount required for the loan to fund by the end of the bidding period, the listing will terminate and will not be funded. Applicants whose listings expire due to an insufficient amount of bids may post a new listing on the platform, although we have the right under our borrower registration agreement to limit the number of listings a borrower member may post on the platform.
 
In order to bid on a listing, a lender member must have funds on deposit in his lender member account in at least the amount of the bid. Once bids are placed, they are irrevocable.  Lender members may not cancel their bids or withdraw the amount of their bids from their accounts unless the bidding period expires without the listing having received bids in the required minimum amount, or unless the listing is withdrawn or cancelled. See “About the Platform—Structure of Lender Member Accounts and Treatment of Lender Member Balances” for more information.

 
Currently, the minimum amount a lender member may bid is $25, and the maximum amount a lender member may bid is the amount of the requested borrower loan. The maximum aggregate amount a single lender member may bid on the platform is currently $5,000,000 for individuals and $50,000,000 for institutions. We may change the minimum bid amount or the maximum aggregate bid amounts from time to time. Depending on the amount of the winning bids at the end of the bidding period, there may be a winning bidder on a listing with a winning bid of less than $25. But there cannot be more than one partial winning bid on a listing.
 
A listing that gets funded typically receives bids from many different lender members. For example, from July 2009 through September 30, 2011, the average aggregate size of a PMI Borrower Loan was approximately $5,583 and the average bid was approximately $59. Please note that historical data regarding PMI Borrower Loans may not be indicative of the future characteristics of our borrower loans.  See “Risk Factors—Prosper Funding LLC, the Platform and Our Ability to Service the Notes” for more information.

  
Lender members may browse online through available listings displayed on the platform by desired borrower loan amount, yield percentage, Prosper Rating, estimated loss rate, debt-to-income ratio, group or other applicant characteristics. Alternatively, lender members can use our loan search tool, Quick Invest, to identify loan listings that meet their investment criteria.  A lender member can bid on as many listings as the lender member desires, subject to the aggregate bidding limit.  A lender member can diversify her risk of default if she elects to do so. It is solely up to the individual lender members to select their bidding method and the credit characteristics that are acceptable to the lender member and to determine a diversification strategy.

 
Quick Invest

Our loan search tool, Quick Invest, allows lender members to identify listings that meet their investment criteria. A lender member using Quick Invest is asked to indicate (i) the Prosper Rating or Ratings she wishes to use as search criteria, (ii) the total amount she wishes to invest and (iii) the amount she wishes to invest per Note. If she wishes to search for Notes using criteria other than, or in addition to, Prosper Rating, she can use one or more of several dozen additional search criteria, such as loan amount, debt-to-income ratio and credit score.

Quick Invest then compiles a basket of Notes for the lender member’s consideration that meet her search criteria.  If the pool of Notes that meet her criteria exceeds the total amount she wishes to invest, Quick Invest selects Notes from the pool based on how far the listings corresponding to the Notes have progressed through our loan verification process, i.e., Notes from the pool that correspond to listings for which we have completed our loan verification process will be selected first.  If the pool of Notes that meet the lender member’s criteria and for which we have completed loan verification still exceeds the amount she wishes to invest, Quick Invest selects Notes from that pool based on the principle of first in, first out, i.e.,  the Notes from the pool with the corresponding listings that were posted on our website earliest will be selected first. To the extent available Notes that meet the lender member’s criteria are insufficient to fill her order, the lender member is advised of this shortfall and given an opportunity either to reduce the size of her order or modify her search criteria to make her search more expansive.

If the lender member’s search criteria included multiple Prosper Ratings, Quick Invest divides her basket into equal portions, one portion representing each Prosper Rating selected, and then attempts to fill each portion in the manner just described.  To the extent there are insufficient Notes available with a particular Prosper Rating to fill that portion of the lender member’s basket, Quick Invest attempts to make up the deficit by including additional Notes with the other Prosper Ratings selected in equal proportions. To the extent available Notes with these other Prosper Ratings are still insufficient to fill the lender member’s order, the lender member is advised of this shortfall and given an opportunity either to reduce the size of her order or to modify her search criteria to make her search more expansive.

For example, if a lender member using Quick Invest indicated that she wished to invest a total of $600 in Notes with a Prosper Rating of B, C or D, Quick Invest would first attempt to fill her order with equal portions of B, C and D Notes ($200 – B; $200 – C; $200 – D). If there were only $100 of D Notes available, the search tool would attempt to increase the allocation of B and C Notes from $200 to $250 ($250 – B; $250 – C; $100 – D).  If there were $250 of B Notes available but only $200 of C Notes available, the search tool would then attempt to make up the remaining gap by increasing the allocation of B Notes from $250 to $300 ($300 – B; $200 – C; $100 – D). But if there were only $275 worth of B Notes available, the lender member would be given the choice of expanding her search criteria or reducing the total size of her order from $600 to $575.  If she elected to reduce the size of her order, her final order would consist of $575 of Notes: $275 of B Notes, $200 of C Notes and $100 of D Notes.

Our Auto Quick Invest feature allows lender members (i) to have Quick Invest searches run on their designated criteria automatically each time new listings are posted on the platform, and (ii) to have bids placed automatically on any Notes identified by each such search. As with a lender making manual bids, a lender member using Quick Invest is not permitted to place a bid unless the funds in her account are sufficient to cover the bid, and funds will only be debited from her account if and when her bid is successful.

Setting Interest Rates

PMI has an interest rate committee, consisting of its Chief Executive Officer, Chief Financial Officer, Executive Vice President, Acquisition and Risk Management, and General Counsel, which meets regularly to set interest rates for all borrower loans.  These rates are set forth in a rate table, which is posted at www.prosper.com.  The table dictates the interest rate for all borrower loans, based on Prosper Rating, as well as additional factors, such as loan terms, group affiliations, competitive conditions and the general economic environment.  The yield percentage on each series of Notes is equal to the interest rate on the related borrower loan, minus our servicing fee, currently set at 1%, which we may increase in the future to up to 3%.
 


        The interest rate committee meets on at least a monthly basis, but may meet more frequently as changes in market conditions and the general economic environment dictate.  At each meeting, the committee reviews the interest rate table and makes adjustments to it the extent the committee deems necessary.  The factors besides Proper Rating that the committee takes into consideration in updating the table, as well as the weight the committee accords each such factor, may change from time to time.
 
The interest rate table currently in effect is set forth below.  In addition, the interest rate for each loan listing, as well as the yield percentage for the corresponding Notes, is included in the listing report we file for that listing.  This information is also included in the listing itself when it is posted on our website.  In addition, we keep the copy of the current interest rate table posted on our website.
 
Prosper Rating
Term (years)
Number of Previous Prosper Loans
Borrower Rate
AA
1
1+
5.65%
AA
3
1+
6.25%
AA
5
1+
9.11%
       
AA
1
0
5.65%
AA
3
0
6.49%
AA
5
0
9.61%
A
1
1+
6.09%
A
3
1+
8.99%
A
5
1+
12.96%
       
A
1
0
6.08%
A
3
0
9.99%
A
5
0
13.96%
B
1
1+
9.58%
B
3
1+
14.49%
B
5
1+
18.45%
       
B
1
0
9.58%
B
3
0
14.49%
B
5
0
18.45%
C
1
1+
12.59%
C
3
1+
18.74%
C
5
1+
22.93%
       
C
1
0
14.34%
C
3
0
20.49%
C
5
0
24.68%
D
1
1+
16.72%
D
3
1+
22.87%
D
5
1+
27.05%
       
D
1
0
18.37%
D
3
0
24.52%
D
5
0
28.70%
E
3
1+
29.99%
E
5
1+
33.04%
       
E
3
0
29.58%
E
5
0
33.04%
HR
3
0
31.77%
 

 
Purchase of Notes by  Prosper Funding LLC or Related Parties
 
From time to time, we or PMI may bid on listings and hold any Notes we or PMI purchase as a result of such bids for our or PMI’s own account. Any bid on a loan by us or PMI will be made public in the same manner in which bids by other bidders on a particular listing are made public.  In addition, loans upon which we or PMI bids will be identified to other bidders through the use of a special symbol and a user profile that are intended to make it clear that we or PMI are bidding on a particular listing.
 
We and PMI will participate in bidding on the listings under the same terms and conditions and through the use of the same information that is made available to other lender members on the platform.  In some cases, our or PMI’s bidding on a listing may cause it to fund, and in some cases, fund faster, than it would fund in the absence of such bid.  The amount that we or PMI may choose to bid on any particular listing may vary significantly and we and PMI each reserve the right to bid up to the entire amount of a listing.
 
Some of our or PMI’s executive officers, directors and 5% shareholders have bid on listings and purchased PMI Notes from time to time in the past, and may purchase Notes in the future. As of September 30, 2011, these individuals had purchased $3,313,654 in PMI Notes or loans.  These loans and PMI Notes were obtained on the same terms and conditions as those obtained by other lender members. However, as certain of these executive officer and directors, by virtue of their duties as employees or directors of PMI, have access to information not available to the general population of lender members, we and PMI have adopted the following procedures to prevent or detect the improper use of non-public information in bidding activities by any of our respective officers and directors:
 
· PMI’s corporate policies, distributed to all employees, prohibit an employee’s use of non-public information and any violation of this policy is grounds for immediate termination.
 
·Security features of our system limit access to data needed to perform particular employee job functions. These limitations are defined by “security group,” which corresponds to both job title and function and the number of PMI’s employees that have access to such non-public information on a “bulk” or “query” basis is extremely limited.
 
· In addition to prevention efforts, we have developed an audit process that identifies and investigates bidding and funds transfer activities that are classified as “suspicious.”
 
Structure of Lender Member Accounts and Treatment of Lender Member Balances

We maintain a pooled account at Wells Fargo Bank, N.A. to hold the funds of lender members.  This account is titled “Prosper Funding LLC for the benefit of its lender members” and we refer to it as the “FBO account”.  In order to bid on listings, a lender member must have sufficient funds in the FBO account. A lender member can transfer funds into the FBO account by authorizing an electronic transfer using the Automated Clearing House, or ACH, network from the lender member’s designated and verified bank account to the FBO account. All payments on Notes are made by deposit into the FBO account.  Upon request by the lender member, we will transfer lender member funds in the FBO account to the lender member’s designated and verified bank account by ACH transfer, provided such funds are not already committed to the future purchase of Notes.

On our system, we divide the FBO account into sub-accounts for each lender member.  These sub-accounts allow us to track and report for each lender member the funds the lender member has transferred into and out of the FBO account, the funds the lender member has committed to purchase Notes, and the payments the lender member has received on outstanding Notes.  We refer to each lender member’s sub-account as his or her “lender member account”. Lender members have no direct relationship with Wells Fargo Bank by virtue of having a lender member account or participating on the platform.

  
The FBO account is FDIC-insured on a “pass through” basis to the individual lender members, subject to applicable limits. This means that each lender member’s balance is protected by FDIC insurance up to the aggregate per person limit established by the FDIC. Other funds the lender member has on deposit with the same institution where the FBO account is maintained may count against the FDIC insurance limits for that member. We will always maintain the FBO account with an FDIC member financial institution. Funds of a lender member may stay in the FBO account indefinitely and do not earn interest.  We never commingle our assets or any assets of PMI with the assets in the FBO account.
 
Borrower Loan Funding and Purchases; Sale of Notes

Once the bidding period for a listing ends, if the listing has received bids from lender members equal to or exceeding the minimum amount required to fund, the funding of the corresponding borrower loan and the sale of the Notes to the lender members who bid on the listing will proceed.
 
Applicants execute an electronic borrower registration agreement at the time they post a listing on the platform.  After expiration of the bidding period for the listing and satisfactory completion of our pre-funding verification process, the applicant executes an electronic promissory note in favor of WebBank in an amount equal to the total amount of winning bids.  WebBank then electronically endorses the promissory note to us and sells and assigns the promissory note to us without recourse. The promissory note and the borrower registration agreement contain customary agreements and covenants requiring the applicants to repay their loans and describing the process of posting listings and obtaining loans through the platform.
 
WebBank funds all loans originated on the platform, and we disburse the loan proceeds on WebBank’s behalf to the borrower. Each borrower authorizes the loan proceeds to be disbursed by ACH transfer into the borrower’s designated bank account.
 
Borrowers pay an origination fee out of the proceeds of the loan at the time of funding.  As of September 30, 2011, borrowers with a AA Prosper Rating pay an origination fee equal to 0.5% of the loan amount, borrowers with a Prosper Rating of A and B pay 3% of the loan amount, and borrowers with Prosper Ratings C through HR pay 4.5%.  The origination fees are charged by WebBank, and we receive payments from WebBank equal to the origination fees as compensation for its loan origination activities on WebBank’s behalf.
 
Lender members know only the screen names, and do not know the actual names, of applicants.  The actual names and mailing addresses of the applicants are known only to us.  We maintain custody of the electronically-executed promissory notes evidencing borrower loans as well as the Notes in electronic form on the platform.
 
 When we issue and sell a Note to a lender member, we register the Note in the name of the lender member on our books and records.  For each loan originated on the platform, we transfer the principal amount of the Notes corresponding to that loan from the FBO account to Web Bank.  This transfer represents the payment (i) by the lender members who have agreed to purchase the Notes to us of the purchase price for the Notes and (ii) by us to WebBank of the purchase price for the corresponding loan.   WebBank is the lender for all borrower loans, which allows the platform to be available on a uniform basis to borrowers throughout the United States.  The lender registration agreement provides that, in the event of a material breach of our representations and warranties pertaining to a Note, we must either cure the defect, repurchase the Note, or indemnify and hold the lender member harmless against losses resulting from the breach.
 
Loan Servicing and Collection

Following our purchase of borrower loans and our sale of Notes corresponding to the borrower loans, we begin servicing the borrower loans and Notes.  We have entered into a servicing agreement with PMI, pursuant to which we have engaged PMI to assist us in performing these duties and to perform various other tasks on our behalf relating to the operation of the platform.  In general, any actions described below that we take in servicing the borrower loans or Notes may be taken on our behalf by the Servicer acting as our agent.  See “Summary of Indenture, Form of Notes and Servicing Agreement - Servicing Agreement.”


We collect payments from borrowers on borrower loans.  We transfer amounts collected to the lender members who own Notes corresponding to the borrower loan, after deducting servicing fees.  On Notes, the payment dates will fall on the sixth business day after the due date for each installment of principal and interest on the corresponding borrower loan.
 
To the extent we do not receive the anticipated payments on a borrower loan, we will not make any payments on the Notes related to that borrower loan, and a holder of a Note will not have any rights against us or the borrower in respect of the Note or the corresponding borrower loan.  Each holder’s right to receive principal and interest payments and other amounts in respect of that Note is limited in all cases to the holder’s pro rata portion of the amounts we receive on the corresponding borrower loan, including without limitation, all payments or prepayments of principal and interest, subject to servicing fees and charges retained by a third party, as set forth in the following chart. Our current collection agencies charge collection fees from 17.0% to 30.0% of the amount recovered up to the “total amount delinquent.” To the extent that we place loans with another collection agency, we will disclose the collection fees percentages on its website.

Description of Fee
 
Fee Amount
 
When Fee is Charged
 
Effect on Lender Member
             
Prosper Borrower Notes
       
             
Servicing fee
 
Annualized rate currently set at 1% of outstanding principal balance, but which we may increase in the future to an amount greater than 1% but less than or equal to 3%.  The servicing fee percentage is subject to change from time to time, is disclosed in all loan listings and is posted in the Fees and Charges section at www.prosper.com, but will not change during the course of the loan.
 
The servicing fee is payable on all payments received on borrower loans, including, without limitation, partial payments.
 
The servicing fee will reduce the effective yield below the interest rate on the borrower loan. This reduction is reflected in the yield percentage included in each listing.
             
Non-sufficient funds fee
 
$15, unless a lesser amount is required by applicable law.
 
First failed payment for each billing period.
 
We retain 100% of the non-sufficient funds fees to cover our administrative expenses.
             
Late payment fee
 
 
Equal to greater of 5% of the unpaid installment amount or $15, unless a lesser amount is required by applicable law.
 
After 15-day grace period, we assess a late fee. The late payment fee is charged only once per payment period.
 
Any late payment fees we receive are paid to the lender members, subject to deductions for Collection Charges and Servicing Fees.
             
Collection Charges
 
Our current collection agencies charge collection fees from 17.0% to 30.0% of the amount recovered up to the “total amount delinquent,” plus any legal fees incurred in the event legal action is taken to collect a loan.  The collection fees vary depending upon the collection agency used.  These fees are posted in the Fees and Charges section of the our website.
 
 
 
After a borrower loan becomes more than 30 days past due, the loan may be referred to a collection agency. Collection charges and any related legal fees are only charged if delinquent amounts are collected.
 
Our servicing fee is also deducted from the net payments we receive as a result of any collection efforts on a delinquent borrower loan.
 
Lender members will not receive any collection fees we or a third-party collection agency charges, which fees will be retained by the party charging the fees as additional servicing compensation.
 
The collection fees and any related legal fees will be deducted from any borrower loan payments we receive. These fees will reduce the lender member’s effective yield, and are not reflected in the yield percentage shown on the  listing.
             
Loan modification fees
 
We will not charge a fee for restructuring a borrower loan.
 
We may work with the borrower to structure a new payment plan in respect of the borrower loan without the consent of any holder of the Notes corresponding to the borrower loan. This generally would only occur in lieu of bankruptcy or a similar proceeding.
 
Not applicable.
 
 
 
Our procedures for collecting borrower loan payments generally involve the automatic debiting of borrower bank accounts by ACH transfer.  Such funds are transferred to a master servicing account in our name that we maintain with Wells Fargo Bank, N.A.  Thereafter, we make payments on the Notes by transferring the appropriate funds from the master servicing account to the FBO account and allocating amounts received on specific borrower loans to the appropriate lender member accounts.  We transfer amounts due to us for servicing from the master servicing account to another operating account of ours.  A lender member may transfer uncommitted funds out of the FBO account by ACH transfer to the lender member’s designated bank account at any time, subject to normal execution times for such transfers (generally 2-3 days).
 
We will make payments on the Notes upon receiving payments under the corresponding borrower loan, in accordance with the payment schedule for each Note.  Each Note will have a payment schedule providing for monthly payments over a term equal to the corresponding borrower loan.  The payment date for Notes will fall on the sixth business day after the due date for each installment of principal and interest on the corresponding borrower loan. The stated interest rate on each Note will be the lender yield percentage set forth in the loan listing. The yield percentage is net of the servicing fee.

We disclose borrowers’ payment performance on loans to the relevant lender members on our website and also report such information to consumer reporting agencies.  

We subtract a servicing fee from every loan payment we receive. The amount of the servicing fee with respect to a particular payment is calculated by (a) multiplying the applicable annual servicing fee rate by a fraction, the numerator of which is equal to the number of days since the borrower’s last payment and the denominator of which is 365, and (b) multiplying the product obtained by the outstanding principal balance of the loan prior to applying the current payment.  The rate of our annual servicing fee is currently set at 1.0%, but we may increase that in the future to a rate greater than 1% but less than or equal to 3%. Our servicing fees are subject to change from time to time, and are posted in the Fees and Charges section at www.prosper.com.
 
We keep lender members apprised of the delinquency status of borrower loans by identifying delinquent loans on our website as “1 month late,” “2 months late,” “3 months late,” or “current.” Borrower loans that become more than 120 days overdue are charged off and designated as such on our website.  Through their online Prosper account, lender members are able to monitor the borrower loans corresponding to their Notes, but cannot participate in or otherwise intervene in the collection process.
 

 
If a borrower dies while a borrower loan is in repayment, we require the executor or administrator of the estate to send a death certificate to us.  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 borrower loan in full, we will treat the unsatisfied portion of that borrower loan as charged off with zero value.  In addition, if a borrower dies near the end of the term of a borrower loan, it is unlikely that any further payments will be made on the Notes corresponding to such borrower loan, because the time required for the probate of the estate may extend beyond the final maturity date of the Notes.
 
When we receive notice of a borrower bankruptcy filing, it ceases all automatic monthly payments on the borrower loan and defers any other collection activity, as required by law.  The status of the borrower loan, which the relevant lender members may view through their online Prosper account, switches to “bankruptcy.”  We then determine whether we have a basis to object to the inclusion of the debt in any bankruptcy action (e.g., based on the time between loan origination and bankruptcy filing).  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 borrower loan.