US person-to-person lending exchange Prosper has paid $1 million to US state securities regulators to resolve a probe into the sale of unregistered securities over the site.
The payout to state securities regulators follows an undisclosed settlement agreed by Prosper and the Securities and Exchange Commission last week, after the SEC had issued the marketplace with a 'cease and desist' order for selling promissory notes in violation of the Securities Act.
The nascent P2P loans marketplace in the US has been ensnared in regulatory red tape after the SEC judged that loan notes issued by the sites qualified as securities and required registration under the Securities Act.
Fred Joseph, president of the North American Securities Administrators Association explains: "The notes issued by Prosper are securities, but since Prosper's activity began in 2006 these securities were not properly registered."
Prosper's decision to stop taking new loans while it settled outstanding regulatory issues was followed last week by a similar move by startup Loanio. Rival platform Lending Club switched off its service back in April and has only recently resumed business after receiving the green light from the regulatory authorities last month.
Prosper's initial failure to register with the SEC may yet open the company to further legal action, as lenders holding delinquent loans will be entitled to sue for a refund on the grounds they were sold an unregistered security.