Practical Education for Attorneys, Accountants and Investors via Webinars

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The material in this webinar is for informational purposes only. It should not be considered
legal, financial or other professional advice. You should consult with an attorney or other
appropriate professional to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate,
Financial Poise™ makes no guaranty in this regard.
While Financial Poise is happy to make this PowerPoint freely available to all, the reader is
cautioned that it was created for use as part of a webinar that featured an extensive verbal
discussion of the topics addressed in the PowerPoint. It was not designed to be read by
itself. Financial Poise webinars can be purchased at www.financialpoise.com. You may also
receive offers for free webinars by subscribing to Financial Poise's DACyak, a free weekly
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DISCLAIMER
5

MEET THE FACULTY
MODERATOR:
Jonathan Friedland Sugar Felsenthal Grais & Helsinger
PANELISTS:
Andrew Bertolina Finvoice
Sumit Gogia TradeFin
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ABOUT THIS WEBINAR
The emergence of the internet completely revolutionized the lending landscape. Innovative financial
technology is changing the way businesses borrow and lenders loan money, offering the promise of increased
convenience and access to financial services.
One such innovation is the emergency of “marketplace lending,” sometimes referred to as “peer-to-peer” or
“platform” lending. Lenders who occupy this space are typically online non-bank financial companies that built
technology platforms and online marketing strategies to match borrowers and lenders.The platforms connect
businesses who seek to borrow money with investors willing to buy or invest in the loan. In my most cases, once
a loan is made, the platform collects principal and interest payments and makes payments, less fees that the
platform keeps, to investors.
This webinar discusses marketplace lending from a macro perspective, including the regulatory regime that
governs the space. It compares marketplace lending with other forms of lending. And it explores some of the
pros and cons of borrowing from a marketplace lender.
This webinar is delivered in Plain English, understandable to you even if you do not have a background in the
subject. It brings you into an engaging, even sometimes humorous, conversation designed to entertain as it
teaches. And, it is specifically designed to be viewed as a stand-alone webinar, meaning that you do not have to
view the other webinars in the series to get a lot out of it.
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ABOUT THIS SERIES
Many companies, and most of any size, use borrowed funds as part of their capital structure. Depending on the
nature of the business, its size, time in business, whether it has adequate collateral, and other factors, a business has
myriad options when borrowing funds.
This webinar series provides a guided tour of the various borrowing options available to businesses, from both a
business and legal perspective. Major topics covered include asset-based lending, P/O Finance, Factoring,
Merchant Cash Advances, and Market Place Lending / Fintech. Learn the advantages and disadvantages of each,
tricks of the trade when negotiating these arrangements, and more!
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors,
business owners, and executives without much background in these areas, yet is also valuable to attorneys,
accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings
you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the
series is designed to be viewed independently of the other episodes, so that participants will enhance their
knowledge of this area whether they attend one, some, or all episodes.
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Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
EPISODE #1 Understanding the Lending Landscape 1/17/2018
EPISODE #2 Asset-Based Lending 2/21/2018
EPISODE #3 Purchase Order Finance 3/21/2018
EPISODE #4 Factoring 4/18/2018
EPISODE #5 Merchant Cash Advances 5/23/2018
EPISODE #6 Market Place Lending / Fintech 6/20/2018
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EPISODE #6: Market Place Lending / Fintech

WHAT IS “FINTECH”?
• Fintech AKA “Financial Technology” generally refers to new, innovative
technologies used to change the way financial services are provided or
the way a financial system operates
• Fintech is a broad and evolving term, can apply to any innovation in
how people transact business, from the invention of digital money to
double-entry bookkeeping.
• Originally used to describe computer technology applied to bank &
trading firm’s back offices
• Note: Marketplace Lending is just one example of a business practice
classified as Fintech
© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 11

FINTECH EXAMPLES
a. Blockchain Technologies (e.g. Bitcoin)
b. Person-to-Person payment platforms (e.g. Zelle, Venmo)
c. Online Mortgage Servicers
d. Marketplace/Platform Lenders
e. Online accounting services/software (e.g. Xero)
f. Online lenders for consumer loans (e.g. SoFi)
g. Mobile banking platforms

FINTECH - BLOCKCHAIN TECHNOLOGY
a. What is Blockchain?
i. Distributed digital ledger containing immutable, cryptographically
secure transactions added to only by peer consensus, and governed
with auto-triggering “smart contracts,” eliminating the need for 3rd
party intermediaries
ii. More simply: a digitally protected, de-centralized, distributed ledger

BLOCKCHAIN TECHNOLOGY – KEY
CHARACTERISTICS
a. Distributed - Blockchain fully transparent because all participants have
full copy of ledger
b. Anonymous - Participant identities are either pseudonymous or
anonymous
c. Time-stamped - All transactions recorded are time-stamped

BLOCKCHAIN TECHNOLOGY – KEY
CHARACTERISTICS (cont’d)
a. Unanimous/Majority Validation – all or most network participants must
agree to validity of each record
b. Immutable - validated records irreversible and unchangeable
c. Secure - all records individually encrypted
d. Programable – “Smart contracts” allow for digital facilitation of
contracts

BLOCKCHAIN TECHNOLOGY – ADVANTAGES
a. Efficiency – no third parties makes exchanges quicker and simpler
b. Transparency – offers real-time transaction data rather than reports made
periodically in different formats, at different times, from different sources
c. Trust – requires majority or all participants to approve transactions
d. Resilience – the more participants in a system = greater replication of datasets

BLOCKCHAIN TECHNOLOGY – KEY TERMS
a. Hyper-ledger: open-source, industry standard for ledger distribution
b. Distributed Ledger: database spread across several nodes that replicate,
and saves copies of the ledger
c. Hashing: scrambling data that takes an input of any size and reduces it
down to a fixed size
d. Smart Contract: self-executing contract with terms of agreement between
buyer and seller directly written into lines of code.
i. Code exists across blockchain network. Facilitate trusted transactions
and agreements to be carried out among disparate, anonymous parties
without need for central authority or external enforcement

BLOCKCHAIN TECHNOLOGY – KEY TERMS
(cont’d)
a. Digital Currencies: internet-based money, in the form of online code, that
may be used like other currencies
b. Cryptography: method of disguising and revealing information through
complex mathematics
c. Miners: validate and approve transactions connecting blocks to blockchain

BLOCKCHAIN TECHNOLOGY – PUBLIC
VS. PRIVATE NETWORKS
a. Access:
i. Public: Open read/write access to database
ii. Private: Permissioned read/write access to database
b. Speed
i. Public: Slower
ii. Private: Faster
c. Security
i. Public: Proof-of-work/proof-of-state
ii. Private: Pre-approved participants

BLOCKCHAIN TECHNOLOGY – PUBLIC
VS. PRIVATE NETWORKS (cont’d)
a. Identity
i. Public: anonymous/pseudonymous
ii. Private: Known identities
b. Asset
i. Public: Native assets
ii. Private: Any assets
c. Costs
i. Public: Expensive
ii. Private: Cheaper

BLOCKCHAIN TECHNOLOGY-
LIMITATIONS
a. Block Size – limited block size restricts the number of possible
transactions per second
b. Scalability – requires growing computational power and stronger
hardware to solve problems, leading to expensive operation costs for
larger blocks
c. Politics – difficulties setting standards and governance models
d. 51% Attack – If more than half of computers working as nodes to
service network “tell a lie,” the lie becomes the truth

BLOCKCHAIN TECHNOLOGY –
APPLICATIONS
a. Insurance – automotive underwriting, accelerated claims settlement,
fraud reduction
b. Retail & Consumer Goods – payment systems and audits, inventory
and asset tracking
c. Government – protect citizen information, maintain trust, ensure public
record accuracy
d. Healthcare – streamline data across organizations, enable patients to
control medical data
e. Automotive – Supply chain traceability

FINTECH – CRYPTOCURRENCY
a. Cryptocurrencies = digital currency
b. Made possible by blockchain technology
c. Stored in digital ‘wallets’ used to manage payments
i. Digital wallet is protected by private key
d. Can be used to buy products, invest & trade, and mine

CRYPTOCURRENCY – TOP CURRENCIES
a. Bitcoin – original cryptocurrency, market leader, and currently the most
valuable
b. Ethereum – designed as digital currency cash system to help companies
deploy applications on distributed blockchain
c. Litecoin – ‘Lite’ version of Bitcoin, using much of Bitcoin’s original
code base. Supports faster payments

CRYPTOCURRENCY – INITIAL COIN
OFFERINGS
Initial Coin Offering (“ICO”) becoming popular way to raise startup capital
• $5+ billion raised last year
• Digital coins offered carry some rights
• Investors pay for shares using established cryptocurrency
• Currently limited regulation of ICOs

CRYPTOCURRENCY – DRAWBACKS
a. Lack of knowledge, difficult for public to understand
b. Not accepted widely at present
c. Possible to lose digital wallet. No significant legal recourse in event of
loss
d. Uncertainty and volatility

FINTECH – MARKETPLACE LENDING
a. Marketplace Lending: broadly defined as practice of pairing lenders
and borrowers using technology, without a traditional bank
intermediary
b. No single or universally accepted definition of “marketplace lending”
c. Sometimes referred to as “platform lending”

ADDITIONAL BACKGROUND FOR
MARKETPLACE LENDING
a. Marketplace Lenders (“MPLs”) are typically online, non-bank financial
companies that built technology platforms and online marketing
strategies to match borrowers and lenders
i. MPLs may not actually be the ultimate lender–MPL describes
participants in marketing, originating, selling, and servicing loans
ii. MPL platforms may connect businesses seeking to borrow money
with investors willing to buy or invest in loans
b. Simply put: marketplace lenders accept applications of generally small,
unsecured loans and determine applicants’ creditworthiness using an
automated algorithm

MARKETPLACE LENDING: BEGINNING
WITH P2P
a. Marketplace Lending initially emerged as peer-to-peer lending (P2P)
around 2005
i. P2P companies gave individual investors platforms to provide
financing directly to individual borrowers
ii. P2P emerged in the US during pre-financial crisis years,
spearheaded by companies Prosper and Lending Club

P2P MECHANICS
a. Individual financing applicant (borrower) uses P2P platform to apply
for financing
b. P2P platform analyzes applicant to determine whether applicant meets
minimum eligibility standards
c. If approved by P2P platform, borrower is permitted to list request for
loan on platform,
i. platform grades and prices risk according to calculation of
borrower’s creditworthiness
ii. Determination Generally, bases the evaluation on data provided by
credit bureaus, but may also use innovative techniques to go beyond
a FICO score
d. Prospective financers offer financing to borrower

MARKETPLACE LENDING GROWS PAST P2P
a. P2P phased out as primary MPL platform around 2011 when large
institutions and hedge funds entered industry
b. Now: Marketplace Lending can refer to P2P, but also refers to a wide
range of other lending activity

COMMON CHARACTERISTICS OF CURRENT
LANDSCAPE OF MARKETPLACE LENDERS
a. Loans made to individuals or small businesses
b. MPLs operate almost entirely online
c. Underwriting almost entirely automated and algorithmic
d. Generally funded by issuing equity or selling loans to investors
e. Loans are unsecured, small, typically short term

FINANCIAL PRODUCTS OFFERED BY MPLS
a. Types of financial products offered by MPLs:
i. Small business loans
ii. Real estate loans
iii. Student loans
iv. Unsecured installment consumer loans

MARKETPLACE LENDING BENEFITS &
DRAWBACKS
a. Benefits for Borrowers
i. Rapid loan decisions
ii. Access to large amounts of credit
iii. MPLs likely hold operating-cost advantages over traditional banks,
and can provide “cheaper” loans to borrowers as result
1. Online-only application processes, automated underwriting, and
lack of branch infrastructure keep labor and overhead costs low
b. Benefits for Investors
i. Relatively high rate of return
1. MPLs may charge yields that are much higher than other
investment products

MARKETPLACE LENDING: TYPICAL LOAN
PROCESS
a. Process of obtaining marketplace loans varies based on different
business models, but it typically involves prospective borrower
submitting loan application online;
b. Loan application is assessed, graded, and assigned an interest rate using
marketplace lender’s (MPL) proprietary credit scoring tool;
c. Credit grades are assigned based on MPL’s scoring algorithm, which
might consider –
i. Borrower’s credit score
ii. debt-to-income ration
iii. income, etc.

MARKETPLACE LENDING: TYPICAL LOAN
PROCESS (cont’d)
a. Once application process is complete, loan request is advertised to
retail investors to review and pledge sufficient capital before deadline in
loan request
OR
Institutional investors can provide funding through whole loan
purchases or direct securitization

MPLS – WHO’S FUNDING THE LOANS?
a. MPLs find funding for loans offered to borrower through various means &
models, including:
i. Direct Lending
ii. Equity capital
iii. Commercial lines of credit
iv. Sales of whole loans to institutional investors
v. Securitizations
vi. pass-through note programs

MARKETPLACE LENDING FUNDING
MODELS: BANK PARTNERSHIP MODEL
a. Bank Partnership Model is most common - MPL partners with issuing
depository bank to originate loans
b. MPL purchases loans for sale to investors as whole loans, or by issuing
securities as member-dependent notes
c. MPL matches individual loans to investors seeking to purchase loans
d. Prospective loan investors (individuals, financial institutions, investment
funds) select loans with interest rates and risk profiles they want to own to
earn interest

MARKETPLACE LENDING FUNDING MODELS:
BANK PARTNERSHIP MODEL (cont’d)
a. When investor commits to fund a loan, MPL uses a partner bank to
originate loan
b. After brief period of time (typically 14 days), MPL buys loan from bank,
and sells loan to investor often using a payment dependent note or
“Marketplace Platform Note,” which directs payments to investor based on
performance of the loan (generally unsecured notes)
i. MPL may hold, sell, or securitize the loan and continue to service
the loan directly, or through sub-servicer
c. MPL earns origination and servicing fee on loan and generally does not
face loss in the event borrower defaults

MARKETPLACE LENDING FUNDING MODELS:
BANK PARTNERSHIP MODEL (cont’d)
Source:
https://www.fdic.gov/regulations/ex
aminations/supervisory/insights/siwi
n15/si_winter2015.pdf

BANK PARTNERSHIP MODEL: BENEFITS
a. No “lender” licenses or registration if required by state
i. Licensing process can be costly and time consuming
ii. Lender licensing laws may contain substantive limitations and
reporting requirements
b. Interest may be changed uniformly at rates that may not be permitted
for direct lenders
i. Loans closed by bank partners may charge interest rates and fees
considered components of interest (i.e. origination fees, late fees,
annual fees, etc.) on a nationwide basis

BANK PARTNERSHIP MODEL: DRAWBACKS
a. Significant risk in “True Lender” litigation
i. Typically involves claim by borrower or regulator that the “true lender”
of the loan funded by the partner bank for MPL is the MPL and not
the partner bank
ii. “True Lenders” must have bank charters, state licenses, and must have
authority to charge the marketplace loans’ interest rates
iii. If MPL is characterized as a True Lender, will be subject to these
requirements

MORE ON “TRUE LENDER”
RECHARACTERIZATION RISKS
a. Federal and state courts evaluating “true lender” claims adopted multiple
standards to determine when MPL and bank relationships should be
recharacterized
i. Some courts look at party named in loan agreements as creditor
ii. Others look at narrow evaluation of fact based on –
1. Who makes the determination to extend credit;
2. Who extends the credit itself;
3. Who disburses funds from extension of credit;
iii. Others evaluate based on totality of circumstances to determine which
party holds “predominant economic interest”

MODELS: DIRECT LENDER MODEL
a. MPL acting as direct lender originates loans to hold in its own portfolio,
sell to investors, or securitizes loans, commonly referred to as balance
sheet lender
b. MPL generally required to obtain licenses from each state in which they
lend
i. not subject to federal regulators supervisory authority, except to the
extent MPL may be subject to Consumer Financial Protection Bureau
supervision
c. Direct lenders hold most or all the loans on their own balance sheets, earn
interest on loans, and face credit risk if borrower does not pay
d. Funds raised by issuing equity to large investors (i.e. hedge funds and
venture capitalists)

MODELS: DIRECT LENDER MODEL (cont’d)
Source: https://www.fdic.gov/regulations/examinations/supervisory/insights/siwin15/si_winter2015.pdf

DIRECT LENDER MODEL: BENEFITS
a. Direct MPL has more control over its business because it originates
loans itself
b. MPL then keeps all the $$$ because MPL does not have to share
profits or risk with bank/financial institution
c. Less headline risks
i. Less litigation risk than bank partnership model

DIRECT LENDER MODEL: DRAWBACKS
a. State licenses – typically costly and time consuming (state by state
variant)
b. Greater regulatory compliance required than bank partnership model
i. Compliance may be costly
ii. May require multiple examinations by licensing authorities
c. Carries sole risk of default
d. Interest and fee limitation subject to state usury laws
i. Legal constraints may prevent direct MPLs from lending in a state

MARKETPLACE LENDING V. TRADITIONAL
BUSINESS LOANS – GRAPHIC #3
Source: https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/financial-services/deloitte-uk-fs-marketplace-lending.pdf

U.S. REGULATORY CONSIDERATIONS
a. Currently no comprehensive regulation of online marketplace lending
in the US, but “lenders” are subject to various federal and state law
regulations, including
i. Truth in Lending Act
ii. Fair Credit Reporting Act
iii. Securities Act

(cont’d)
a. Marketplace Platform Notes and securities that may be issued by an
investment fund investing in marketplace loan exposure are subject to
securities regulation as investment contracts

(cont’d)
a. Recent proposal made by US Office of the Comptroller of the
Currency (“OCC”) to address growing calls for Fintech charter
i. Proposes using authority to charter “special purpose national
banks” over new legislation governing Fintech and marketplace
lending industry
ii. No definitive action taken to date

ABOUT THE FACULTY
Jonathan Friedland is a Partner with Sugar Felsenthal Grais & Helsinger, LLP, with offices in Chicago and New York. Jonathan regularly
advises private funds in their M&A activity and private companies in their day-to-day affairs. Jonathan has extensive experience in guiding
companies and their boards through a variety of challenging situations, including in Chapter 11 and other insolvency regimes.
Jonathan graduated from the SUNY Albany, magna cum laude, in 1991 (after three years of study) and from the University of
Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice. He was an Adjunct Professor of
Strategic Management at the University of Chicago’s Graduate School of Business for several years and was the 2006 Clayton Center for
Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan has been profiled,
interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside
Counsel; LAW360; BusinessWeek.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions;
Dow Jones LBO Wire; and The Daily Deal. Jonathan is also lead author and editor of several significant treatises, several chapters in
other treatises, and hundreds of articles on law and business. Jonathan holds the highest possible rating from Martindale-Hubbell (AV®
Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in multiple areas of practice, including
Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, has been named several times as a “Leading Lawyer” by Leading
Lawyers Magazine, and has received several other similar distinctions. He is also the founder of DailyDAC/Financial Poise.
52© 2018 by DailyDAC, LLC d/b/a Financial Poise Webinars™
JONATHAN FRIEDLAND
jfriedland@sfgh.com

SUMIT GOGIA
sumitgogia@tradefin.com
Sumit is a Product & Technology Executive with deep experience in building highly scalable cloud based web/mobile consumer
& enterprise applications. He is a co-founder of Tradefin. Sumit likes to take ideas and turn them into products. Sumit designs &
develops across multiple tool stacks. He plans, manages & executes a software project using agile methodologies. Sumit coaches
& lead teams towards building useful and usable software solutions.
In the past, Sumit has architected and developed various components in the CRM & SRM solutions at SAP. He has also
managed and successfully delivered multiple customer projects while working at SAP services / custom development division.
Sumit also conceptualized, founded and ran Opkar (Opinions + Karma) for 18 months. Sumit also hired & set up a team of
talented senior engineers and led them towards building critical solution pieces at Cloudzilla.

ANDREW BERTOLINA
andrew@getfinvoice.com
Andrew is Founder of Finvoice, an enterprise SaaS startup providing software to the
asset based lending industry — “lending as a service.”

The material in this presentation is for general educational purposes only. It has been
prepared primarily for attorneys and accountants for use in the pursuit of their
continuing legal education and continuing professional education.
While Financial Poise is happy to make this PowerPoint freely available to all, the
reader is cautioned that it was created for use as part of a webinar that featured an
extensive verbal discussion of the topics addressed in the PowerPoint. It was not
designed to be read by itself. Financial Poise webinars can be purchased
at www.financialpoise.com You may also receive offers for free webinars by
subscribing to Financial Poise's DACyak, a free weekly newsletter.
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About Financial Poise™
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DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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websites, webinars, and books provide Plain English, entertaining,
explanations about legal, financial, and other subjects of interest to these
audiences.
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