Out-Law News 2 min. read

Peer-to-peer lender prepares for stock market flotation

A US peer to peer lender has filed preparatory paperwork with the US Securities and Exchange Commission (SEC) that would enable it to make an initial public offering (IPO) of its shares on the stock market.

Lending Club, which describes itself as "the world's largest online marketplace connecting borrowers and investors", has appointed Morgan Stanley, Goldman Sachs and Citigroup to lead its offering, according to a statement on its website. Although the number of shares to be sold and their price range has not yet been announced, the Financial Times has reported that the firm is hoping to raise more than the $500 million 'placeholder' amount included in its SEC filing.

Founded in 2007, Lending Club allows individuals and small businesses to borrow from multiple outside investors. As of the end of June 2014, the company had facilitated over $5 billion in loans and paid out over $494 million in interest to investors. According to the SEC filing, more than $1bn of these loans were made in the second quarter of 2014.

"We believe a technology-powered online marketplace is a more efficient mechanism to allocate capital between borrowers and investors than the traditional banking system," said Lending Club's chief executive, Renaud Laplanche, in the company's filing.

"Consumers and small business owners borrow through Lending Club to lower the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn attractive risk-adjusted returns from an asset class that has historically been closed to individual investors and only available on a limited basis to institutional investors," he said.

According to the filing, Lending Club's revenue generally comes from transaction fees for matching borrowers to investors, servicing fees from investors and management fees for investment funds and other managed accounts. It does not assume credit risk or use any of its own capital to invest in loans. The business is currently operating at a loss of $16.5m due to increasing operating expenses, it said.

Lending Club plans to use the proceeds of the IPO to increase its working capital, broaden the loan products that it offers in order to "attract a greater number and broader variety of consumers and small business owners" and widen the spectrum of borrowers that it is able to serve. Although it expects most of its near-term growth to be in the US, it intends to expand the platform into other territories "over time". Potential risks included in the filing are the company's relatively limited operating history at its current scale, whether it continues to incur net losses and the risk of "negative publicity".

Payments expert Angus McFadyen of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement was a sign of the rate at which alternative methods of finance were growing.

"Peer to peer lending, crowdfunding and payday lending have each grown rapidly, in a large part thanks to people finding it difficult to access traditional funding sources" he said.

In the UK, banks unable to provide finance to small and medium-sized businesses (SMEs) will soon be required to provide help to those businesses if they wish to access alternative sources of finance. Provisions included in the Small Business, Enterprise and Employment Bill, which is currently before the UK parliament, will require banks to ask the SMEs that they reject for finance whether they want their information to be passed on to designated online platforms that will be able to match them with alternative sources of finance including 'fintech' lenders such as crowdfunders and peer to peer platforms.

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