Regulatory Circumvention: Underpricing and Flipping in Marketplace Lending

Abstract

Marketplace lending platforms (MLPs) function similar to IPO underwriters by matching capital demanders with suppliers of capital and extracting a flat fee as compensation. Using the lens of the underwriter literature, we examine motives of MLPs and find evidence that they underprice the primary offering of debt securities. This discount appears to be driven by the need to circumvent complex regulatory restrictions on investor participation. Our evidence suggests this discount allows primary market investors to flip securities into the secondary market for notes, thus providing the platform a mechanism to access restricted investors. We provide evidence that the MLP discount is unwound as investor restrictions are removed. Our results underscore the parallels between new financial technology (FinTech) firms and traditional agents such as underwriters but also the unintended consequences of complex FinTech regulation.

Keywords: IPO, Underwriter Discount, Peer-to-peer Lending, FinTech, Marketplace Lending, Crowdfunding, Financial Intermediation

JEL Classification: G21, G23, L81, D53, G28