Loanio launched on October 1st, 2008 as the third peer to peer lender in the US (after Prosper and Lending Club). There was plenty of excitement at launch time and over 300 lenders signed up right away. But the excitement quickly faded.
The timing for Loanio was unfortunate to say the least. On October 14th, less than two weeks after their launch Prosper announced it was entering a quiet period. Then a month later Prosper received a cease and desist letter from the SEC making it very clear that SEC registration was mandatory for all peer to peer lenders.
SEC Registration Would Likely Have Been Approved
So founder Michael Solomon, a New York attorney, started the registration process with the SEC. Loanio entered a quiet period with just seven loans originated by a small number of investors. Being an attorney Solomon had an advantage in that he could do a lot of the filing work himself. He filed an S-1 in June 2009 and after going back and forth a few times, they were certain that their next draft would have likely received the “effective date” nod from the SEC.
You would think that would be a green light to start operations. But herein lies the problem. After receiving a successful filing with the SEC Loanio would have had to start operations again immediately. And with VC’s still reluctant to back his operation Solomon felt that it would have been irresponsible to start without some solid financial backing. So, in September last year he made the painful decision to withdraw his SEC registration.
Since then Solomon has kept the site going in the hope that maybe some VC money would be forthcoming. He said it would be easy to re-file all his documents with the SEC. But he realized this month that it was unlikely any money could be raised that would allow him to restart operations. So, he has made the decision to shut the company down.
A 100% Default Rate on Seven Loans
In researching this story I contacted two lenders who invested in loans with Loanio. Each said that payments continued for their loans for quite a while and then in the last year they just stopped. So what happened to the seven loans on the platform? Well two of the borrowers went bankrupt and eventually the other five borrowers all defaulted. So Loanio ended up with a 100% default rate.
In the next two weeks Solomon said that all lenders will be receiving a notification of Loanio’s shutdown. He will be actively talking to and looking for buyers for the loanio.com domain, trademarks, lending technology, and all other intellectual property the company had. If he does not find any buyers, he said he will most likely use the Loanio trademark and domain for a business that compliments the peer to peer lending industry.
The Lessons We Can Take From Loanio
If the life and death of Loanio has taught us one thing it is this: any new company entering the p2p lending space needs to be very well funded. Not only is the SEC registration an expensive process costing several million dollars, but to be profitable a very large volume of loans is needed. Both Prosper and Lending Club know this all too well. Neither company is yet to turn a profit and Prosper just turned five and Lending Club will turn four later this year. Both have raised over $50 million and will likely need to raise many more millions before they become profitable.
I asked Solomon whether he thought the Loanio shutdown provided any precedent for the p2p lending industry. He said that his company operated before SEC registration was mandatory and as such the promissory notes were held directly between the borrower and the lender. With Prosper and Lending Club, the notes are owned by the companies themselves so it is a different animal. He was reluctant to provide any opinion on what might happen if Prosper or Lending Club were to shut down. But both companies have safeguards in place such as a backup loan servicer in the unlikely event that happens.
It is disappointing that government regulation makes it so difficult for competitors to enter and thrive in this space. But for that we would likely have a thriving industry today in the US with many players. Whether Loanio would have made it anyway is unclear. We know that huge loan volumes are needed in order to make money in this industry.
Solomon said he learned a great deal over the life of Loanio. He quipped that he now knows how to file an S-1 and could help any other new company enter the industry. This knowledge may well come in handy as new industry hopefuls seem to be appearing more and more. I hope they all pay close attention to the experiences of Loanio.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.