How Marketplace Lenders Can Better Protect Investors

How do the new age of fintech providers that offer platforms for investors and originate credit protect an investor’s investment?

When an investor buys into a commingled receivable, they in effect have an interest in a receivable that is a single unit that is in effect owned by multiple entities.  Lets say it defaults.  You own half and I own half via interest conveyed via a promissory note.  You want your half during bankruptcy.   How do you do it?  When banks do this with other receivables they can do it as they are fiduciaries and serve as trustees.

One such fintech provider, P2Binvestor, recently announced a change in the way this is done.  Previously, when you bought into a receivable from the P2Bi platform, you accepted electronically an agreement which represents a promissory note to P2Bi secured by a payment flow from the assets that back each deal you have invested in, but it doesn’t reflect your direct ownership of a proportional share of the underlying assets that secure the cash flow.  Meaning, you didn’t directly own the receivable, but a promissory note from P2Bi saying that in effect they would pay you when they were paid.

P2Binvestor has changed the way investors are protected.  According to them, “under the new structure, the A/R Finance Agreement you initially signed is replaced by a new document: the Participation Agreement. The fundamental difference between the old document and the new is that you are no longer buying into a framework note; you are now purchasing a proportional share of both the cash flows and underlying assets that support those cash flows in each deal in which you invest.”

Why this is important

There are significant differences between having a promissory note from P2Binvestor and being involved in a Participation Agreement.  To highlight from P2Binvestor recent communication to investors:

  • The new agreement reflects a true sale of the assets and cash flows in each deal in which you invest. If anything happens to P2Bi, the assets that protect your investment should not be considered part of the estate of P2Bi. 
  • Security interest is now established for each investor’s partial ownership in each deal in which they invest. Investors are protected pari passu with every other investor according to their proportional interest in the assets and economics of each deal.

This is a significant step forward to protect investors and I applaud it.   As more lenders expand into the small mid market space with loans that range from 250K to $5M, this is important. I am thinking of Dealstruck, Internex Capital, The Credit Junction and a few others.

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