I wrote about the P2P VC concept several months ago in an entry on LendingClub’s corporate blog, so I was excited to see that someone had finally figured out how to legally implement the concept and allow large groups of small, unsophisticated investors to place funds directly into startups looking for seed capital – without running afoul of SEC securities regulations.

The “creativity” of Atlanta-based startup 40billion.com’s solution surprised me, however, to say the least. While they bill themselves as the first “Friends and Family Funding Network for Entrepreneurs”, and continually make use of the term “investment” (as in: “Investors contribute as little as $50 or $100 each, but these small investments really add up” and “Investors receive social returns, financial returns, and discounts”), a close reading of the site reveals a model that, in the carefully chosen words of 40billion.com “allows many investors to give small amounts of money and spread the risk”.

Didn’t catch it? The key word, buried in the seventh paragraph of 40billion’s launch press release, is (drumroll): “give“. That’s right – in exchange for, well, nothing – you can “invest” in as many up and coming startup companies as you like, and 40billion will pass along your investment dollars to the entrepreneur (or entrepreneurs) that you’ve chosen to “invest” in.

Of course, your “investment” will also be slightly diluted by the fact that 40billion.com will pocket “a small service fee of 5-7%” on the front end, so, instead of owning, um, -none- of the company that you have(n’t) invested in, investors will actually own none… minus 5-7%.

Personally, I think this is brilliant – and I went looking for who could have come up with such a clever and elegant solution. The “Founder & Co-Chief Venture Officer” of 40billion, one Cornelius Colin McNab, who, according to his onsite bio, “is an inventor with three patents and holds an MBA from MIT and a degree from Yale” (and whose entry into MITs 2005 Sloan School Entrepreneurship Contest was something called “Circle Funding”, which aimed to allow “the poor” to pool their savings and borrow from one another – interest free), is also the principal of “3 Guys In A Garage” (listed as the “backer” of 40billion).

3 Guys has a “Venture Wiki” where, apparently, all the big ideas are birthed – indeed, 40billion originated there! – including such concepts as the “Perfect Toothbrush” (tagline: “Don’t brush your teeth anymore!”) and the “BeerTender”, a vending machine for alcoholic beverages (why were cigarette machines outlawed again?), and, my favorite, “Totally Free TV” which is explained as follows: “What if TV were free, commercial-free. This idea seeks to pick up where Tivo left off, and eliminate commercials altogether. I think this requires a new, disruptive business model. Any thoughts?” Yeah, uh – drug testing?

To their credit, 40billion does mention in one place that entrepreneurs might “offer investors something in return for their investment (e.g., a customer discount or free sample)” and promises in one other place that support for “loans and equity investments” are forthcoming – “soon”. In the meantime, however, they do no identity verification or OFAC checking, so, if I had to guess, many of their first round of entrepreneurs, and investors, might be in the “laundry” business. I’m sure Uncle Sam will be thrilled.

On a final note, 40billion’s site indicates that its business model is patent pending. Given that the “CVO” hasn’t heard of cable television, it’s no surprise that he also hasn’t discovered long-running ventures like Fundable, ChipIn, & DropCash.

In a major development in the P2P Lending space, one that has implications for the entire P2P Lending model as it currently exists, it appears that LendingClub.com has partially ceased operations. A notification is up on their site that they are no longer accepting new P2P lender registrations and that no further loans may be made by P2P lenders, though they do apparently plan to continue issuing loans to new borrowers, however, the loans will not, strictly, be “peer-to-peer“.

The stated reason for the shut-down is that they have begun a process of registering the loans as securities (presumably with the SEC) and so must enter a “quiet period”. As well, LendingClub claims that existing loans will continue to be serviced and that lenders will still receive payments. Curiously, they also say that borrowers may still register and seek loans though those loans will be funded and owned by LendingClub.

There has been a large amount of speculation recently in many corners that the P2P Lending models might be subject to some legal uncertainty regarding whether the loans should be classified as securities (and would therefore need to be registered with the SEC). The speculation has primarily been concerned with who, in fact, owns the loans (notes), and how exactly that ownership (or various ownership interests) are transferred between the originator of the loan (the P2P Lending company) and the individual “P2P Lender” (more info here).

It is unclear whether LendingClub has ceased operations as a result of an SEC action or whether LendingClub has chosen to bite the bullet and submit to regulation voluntarily. This event could have major repercussions for other P2P Lenders in the US with similar business models.

I received the following email which contains slightly more information than what was available in the onsite notification:

—

Dear (Peer-Lend),

Lending Club has started a process to register, with the appropriate securities authorities, promissory notes that may be offered and sold to lenders through our site in the future. Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. We will continue to service all previously funded loans during this period, and lenders will be able to access their accounts, monitor their portfolios, and withdraw available funds without changes.

The borrowing side of our site will remain generally unaffected by this registration process; borrowers can continue to apply for loans and new loans posted after April 7, 2008, will be funded and held only by Lending Club.

Until the registration process is completed, the company will undergo a quiet period and will not be able to respond to press and other inquiries about Lending Club or the registration process during that time.

Q&A:

Q1. What about money I have begun moving, but is still in transit to Lending Club?
A1.1. If you are in the process of verifying your bank account, you will be able to complete that verification but will not be able to add new funds
A1.2 If you have initiated a transfer, the funds will be displayed in your Lending Club account balance as soon as those funds are available.
A1.3 If you have uncommitted funds, you may request that Lending Club return those funds via the same method used to load the funds. For example,
• If you have initiated an ACH to add funds, these funds will be transferred into your Lending Club account but you will not be able to lend these funds out. You can go into your Lending Club account once the ACH transfer has been completed and withdraw funds back into your linked bank account..
• If you’ve wired funds into your Lending Club account and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to wire these funds back to you at no charge.
• If you’ve sent funds by check, and have not yet committed these funds into loans, you can send a request to support@lendingclub.com for us to send you a check by mail for the same amount at no charge.

Q2. What about referrals?
A2.1 The current referral program is terminated. If you have referred someone who has already signed up as a lender or a borrower, or if you have been referred by someone and have already signed up as a lender or a borrower, you will be receiving your referral payment within the next few days.

Sincerely,

Patrick Gannon
Senior Vice President
Lending Club
440 N Wolfe Road
Sunnyvale CA 94085
www.lendingclub.com