In our latest blog series, we’ve explained the current status of crowdfunding, as well as possible future developments in Alberta. The flip side of crowdfunding, if you will, is peer-to-peer lending, and it’s a topic that has recently been receiving a lot of media attention.
Investopedia defines peer-to-peer lending (P2P) as: “a method of debt financing that enables individuals to borrow and lend money - without the use of an official financial institution as an intermediary.”
Essentially, whereas crowdfunding uses an online platform for an individual or group to identify a ‘crowd’ from whom to obtain or borrow money, peer-to-peer lending may involve the borrower and as few as even one or two potential lenders using an online platform to find each other.
Since the definition of a “security” includes, among other things, a bond, debenture, note or other evidence of indebtedness, a loan is presumed to be a security. Therefore the same two principal requirements of securities law that apply to crowdfunding would potentially be engaged via P2P lending (depending on the particulars, of course).
First, the Dealer requirement – the requirement that a person or company “in the business” of trading securities be registered could apply, for example, to a platform facilitating the bringing together of lenders and borrowers. Second, the Prospectus requirement – the requirement that the issuer of the security prepare and file a prospectus containing certain disclosure, with ongoing reporting obligations, or rely on an applicable prospectus exemption. In some cases, depending on the nature of the lender, the ‘accredited investor’ exemption may be available. In other cases, another prospectus exemption may need to be identified.
For more information on these requirements, and exemptions to them, see our Crowdfunding blogs 1 and 2. Beyond even securities legislation concerns, P2P lending has risks that are not associated with traditional lending methods (e.g. banks) for both the lender and the borrower.
For the lender, there is a substantial risk that the borrower may default on the loan, as their reasons for seeking alternative financing may include the fact that they were not able to qualify for the loan using traditional channels. For the borrower, the interest rate on the loan may be higher than it would be through traditional channels to compensate for the increased risk the lender is taking.
The bottom line is, if people are making loans or other investments, securities laws need to be addressed. If those involved in the deal can’t explain how they are complying with securities laws, it should probably set off some warning bells.
And, even if a deal is structured to comply with securities laws, participants who are considering participating in P2P lending as a borrower or a lender should be aware that there are risks involved, as there are with any investment.
National Registration Search
The Ombudsman for Banking Services and Investments
The Economist on Peer-to-Peer lending