November 19, 2009
Is Kiva a Private Equity Fund?
Posted by Christine Hurt is all aflurry these days after a blogger disclosed that lenders under the Kiva system are not actually lending to a specific entrepreneur, but to a previously undisclosed microfinance organization that has already made a loan to the specific entrepreneur.  Now, that doesn't mean that Kiva is evil or that Kiva has a bad mission or that lenders are not making the impact they had hoped, but it does mean that Kiva was not being very transparent, a quality it had prided itself upon.  So now, the website is revamped, and lenders see that its mission is now to connect people through lending for the sake of alleviating poverty, but it also calls itself a Person-to-Person microlending website and explains how you "choose an entreprenuer to lend to."

Transparency aside, there is nothing wrong with this model, and I'm sure it avoids certain transaction costs and allows more funds to go where the funds need to go.  Non-profit microfinance organizations do not require person-to-person lending to benefit its borrowers. 

But, I was intrigued by one aspect, a legal aspect.  If you loaned money directly to a woman in Uganda to help her vegetable stand business, and that woman paid you back with interest, then there is no securities law implication there.  If you donated money to a microfinance organization that then made many loans to many Ugandans, there is no securities law implication there, either.  But, if you invest money in Kiva, which then pools invested money and makes loans to Ugandans, then repays your principal, are there are any securities law implications?  Under the Howey  test, a person invests money in a common eterprise and is led to expect profits solely from the efforts of the promoter or a third party.  The threshold question is whether an investor is "led to expect profits" by merely expecting to get principal back.  We don't have a lot of other examples of investors just wanting their principal back!  The United Housing Foundation v. Forman  case is somewhat similar; affordable housing tenants bought "shares" in the coop that were purchased back at the same price if they moved out.  The court said there was no expectation of profit there.  But the investment in the common enterprise is probably there.  Here is how the pooling works, according to the Kiva website:

Over time, the entrepreneur repays her loan. The Field Partner collects those repayments and lets Kiva know if a repayment was not made as scheduled. We give Field Partners the option to cover both currency losses and entrepreneur defaults. To speed things up and to minimize the number and expense of wire transfers, Kiva works on a net billing system. This means that, for any given month, we subtract the amount of repayments that a Field Partner owes to Kiva lenders from the amount that a Field Partner fundraises for entrepreneurs on Kiva. If the balance is positive, that means that the Field Partner has raised more than they need to repay, and we use those funds to credit your lender account with the repayments due to you. Tell me more If the balance is negative, then the Field Partner has 30 days to send us a payment for the balance. As soon as we receive that payment, we use those funds to credit your lender account with the repayments due to you. Repayment and other updates are posted on Kiva and emailed to lenders who wish to receive them.
The lenders may choose to relend their repayments, donate them to Kiva, or withdraw them to their PayPal accounts.  I would guess that Kiva investments wouldn't be securities because of the "expectation of profit" prong, but I'd be interested to hear what Kiva attorneys say.

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