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March 30, 2015

P2P lending benefits from SEC decision

The peer-to-peer lending market recently benefited from a move by the U.S. Securities and Exchange Commission to revise existing regulations, as this decision gave smaller companies greater ability to raise money and investors more flexibility to participate in this particular industry. 

SEC decision
This watershed change took place when the SEC updated Regulation A, a rule that has been on the books since the enactment of the Securities Act of 1934, according to American Banker. The government agency finalized this revision March 25, making it so companies can raise up to $20 million through Tier 1 offerings or $50 million with Tier 2 offerings.

Before this change, Regulation A permitted private companies to raise as much as $5 million by selling shares of stock to the public, The Wall Street Journal reported. Currently, most firms don't make use of this particular exemption. By voting to finalize the change in existing rules, the SEC was implementing a requirement that stemmed from Jumpstart Our Business Startups Act, which Congress approved in 2012.

Lawmakers originally passed this bill with the intention of making it easier for smaller companies by lowering their compliance burden, according to The Wall Street Journal. More specifically, the legislation sought to empower fledgling firms and enable them to raise money more easily by revising existing security laws.

Greater fundraising ability
Because of these changes, companies can raise up to $50 million without first obtaining the approval of state regulators or holding an initial public offering, American Banker reported. In addition, while marketplace lending currently derives roughly 90 percent of its capital from institutional investors, the SEC decision makes it so the vast majority of Americans will now be able to participate in such activities.

Under the old rules, only accredited investors had the ability to purchase securities sold by P2P lenders and small companies through the aforementioned offerings. After the SEC's latest change, the marketplace lending industry will have the ability to return to its roots by allowing a broader range of investors to take part in such activities.

This watershed change could easily impact the market for loan sales by increasing the equity of these companies and the number of loans being originated through P2P lending platforms. By fueling this form of loan origination, the recent regulatory change could have an impact on the amount and composition of debt available for sale. Interested parties should contact Garnet Capital for more information.