I am not sure what the punishment for borrowers is when they default on these peer-to-peer loans. I do not think they should be able to get off scotts free. All and all an interesting idea of cutting out the middle men. But at what cost?

While P2P lending is not as addictive as coffee, the SEC has no business getting in the way of Lending Club….LC’s investors and creditors understand the risks, let the markets decide whether this is a good business model or not.

I go the opposite direction with the SEC being irresponsible if they approved it. If they don’t approve it, everyone already invested loses their money and a promising international business phenomenon might be squashed in the US.

It’s kind of like the mortgage crisis where if a few start foreclosing it ruins the value of everything around it. Maybe the SEC doesn’t care.

Read the “Risk factors” section of the S-1 filing closely:

P. 16: “We face a contingent liability for potential securities law violations in respect of loans sold to our lender members from May 2007 until April 7, 2008.”

Translation: We may have been breaking the law for the approximately 11 months that we were actively in business (pre-quiet period).

P. 17: “We have relied on our credit facilities with third parties, such as Silicon Valley Bank (SVB), Gold Hill Venture Lending 03, LP (Gold Hill), and other lenders to borrow funds which we used to participate in the platform as a lender to partially address the shortfall between borrower member loan requests and lender member purchase commitments. We expect these shortfalls to continue for the foreseeable future, and our ability to obtain funds to help address this shortfall may be subject to broader developments in the credit markets, which are currently experiencing a general tightening.”

Translation: We (the company) have been borrowing money to make loans on the site because we can’t get enough lenders to participate (later they go on to say that they have funded $7M of the $15M in loans funded to date). This may not be a viable long-term business model, especially since people may stop fronting us the money to do this in the future.

P. 18: “We have incurred net losses in the past and we expect to incur net losses in the future. As of March 31, 2008, our accumulated deficit was $7.8 million.”

Translation: We have burned through more than half of the $12.3 million we’ve raised, and we’re not sure that anyone will give us more money.

P. 19: “We have incurred substantial senior secured indebtedness under bank credit facilities with SVB and Gold Hill and other notes issued to other investors… We are in violation of certain covenants under our SVB and Gold Hill facilities… Although the continuing existence of these covenant violations constitutes events of default under the facilities, we entered into forbearance agreements with SVB and Gold Hill in June 2008, under which they agreed to forbear from exercising their rights against us with respect to these events of default through September 15, 2008.”

Translation: We are now in default on the money that we borrowed to finance the loans that we made to our customers. Our banks have given us until mid-September to pay up, but…

P 19: … because our obligations to SVB, Gold Hill and other investors are secured, collectively, with a first priority lien against such assets, we may have difficulty obtaining additional debt financing from another lender or obtaining new debt financing on terms favorable to us, because a new lender may have to be willing to be subordinate to SVB, Gold Hill and other investors.

Translation: Our banks have us by the balls, and anyone else who we raise money from will also be had by their balls by our banks. This may make it difficult to raise more money.

P. 26: “On June 6, 2008, our independent registered public accounting firm issued a letter to the Company informing us that, as of March 31, 2007 and 2008, respectively, the Company did not maintain effective controls over the corporate financial reporting process due to an insufficient complement of personnel with a level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with the Company’s corporate financial reporting requirements.”

Translation: All of the above should come as no surprise because we didn’t have the right accounting folks in the first place.

So LendingClub is actually the lender on nearly half the loans funded to date, is in default to its lenders on the money it borrowed to make those loans, and has about 3 months to raise a new round before the banks come and seize all of their assets.

The SEC would be irresponsible in its duties if it approved this filing. Even if it did, LendingClub wouldn’t be around to issue the securities.

LendingClub is dead.