Prosper.com recently paid $1 million to settle securities law violations, and they may have more trouble ahead. Securities are regulated by several organizations, and Prosper.com was not subjecting itself to regulation. The question becomes: are peer to peer lenders investing in securities or just making little loans? In particular, regulators are concerned about the packaged notes that Prosper.com handles.
If the loans are considered securities, Prosper.com will be in hot water for dealing with the general public in unregistered securities. What does that mean in English? It means that they sold something that they shouldn't have to regular folks who might not have understood the risks.
Prosper.com is not the only peer to peer lender to deal with the securities question. Loanio has temporarily stopped lending, and LendingClub went through the SEC registration process and is once again making loans.