This article was written by Amy Wan, the General Counsel of Patch of Land, in response to my original article, "Patch of Land announces "bankruptcy remote" protection and indirect investor collateral"

 

Hi Ian,

 

Thank you for your interest in Patch of Land’s new legal structure. We’re delighted that investors have taken an interest in what we believe is an innovative offering structure for our investors.

 

Most of what your article states is correct, but I did want to weigh in on some important points so that investors don’t get confused. First though, I do have to disclaim that investors are encouraged to talk with their financial advisor and legal counsel prior to making an investment, and that this response is intended to clarify and educate investors. It is not legal advice and should not be construed as such.

 

The History

 

First, I want to clear that air that the redacted language Anthony Zeoli critiqued did not come from Patch of Land. I made it a point to confirm that with Mr. Zeoli.

 

Our new legal structure was a massive project that we’ve been working on since last May. When Mr. Zeoli wrote an article on investor protection, we were halfway through the process and took the opportunity to demonstrate our commitment to investor protection as a leading platform (and to provide a bit of a teaser for our investors). We’ve expended a huge amount of time, energy, and resources into this project, and hope that it will spur other platforms to innovate and come out with increased investor protection mechanisms.

 

Also, a few days after you wrote this article, Mr. Zeoli published a critique of our new offering structure, which you can read here.

 

Bankruptcy remote

 

For various reasons, Patch of Land does not create a new LLC for each project (or “Note Series Listing” as we refer to it in our PPM), though we reserve the right to do so in the future.

 

“Bankruptcy remote” refers to the special purpose entity (SPE) structure that we’ve set up, which is designed to have as little economic impact as possible on other entities within a corporate group. Under our new offering structure, aside from the SPE structure, we’ve contracted with a bank (the trustee) that will essentially step into our shoes and handle investor distributions and loan monitoring in case anything should ever happen to the SPE.

 

Secured notes for investors

 

Patch of Land has always made it very clear that our notes under the previous offering structure were only indirectly secured. We’ve made it an important point to educate our investors on that subject.

 

I’m going to go out on a limb here and say the score should be +1, not -1! Increased security is a subject many of our investors have brought up over the past year, and was the main driving point behind our new offering structure.

 

Patch of Land’s SPE owns the underlying borrower loan, but the SPE then grants investors a security interest the underlying borrower loan (and its documents) in the second paragraph of page 2 of the Borrower payment dependent note: “your Note is secured by a pledge of the Underlying Borrower Loan pursuant to the Indenture”. The Indenture specifies that the pledge is “for the benefit of the Trustee on behalf of the Holders” and defines the security interest as payments on the underlying loan, the promissory note, deed of trust/mortgage and other security agreements, the loan agreement, guaranty, and “all of the documents, instruments or agreements evidencing or otherwise securing each Underlying Loan.”

 

At the end of the day, the easiest way I can explain it is this: I believe that our investors ARE directly secured, though the mechanism by which they are secured is indirect.

 

There’s a good reason for this mechanism too. One of the protections we’ve taken has been to perfect the pledge of security to our investors (by way of a secured agent) is a UCC filing that puts creditors and the world on notice. However, had we filed a ton of UCCs with the names of our investors, we’d be putting the world on notice as to the identity of our investors, which raises serious privacy concerns. Instead, by using a third party secured agent, we were able to both protect our investors’ security AND privacy.

 

Last thing to note: the indenture trustee is NOT the bankruptcy remote company. It is a bank who we’ve paid a lot of money to up-front to step into the shoes of the SPE should an event of default ever occur.

I hope this clarifies a few points. I realize it's not easy to fully understand all the legalese behind this complex structure, but few good things are easy. Happy to take questions.

 

We’ll also be hosting a webinar on our new legal structure on June 24th with a live Q&A, and you can sign up here.