Updated 2:30 pm: Prosper's spokesperson Tiffany Fox tells VatorNews that Prosper's lender agreements are in full effect. Servicing continues as usual and lenders are free to transfer money off the platform. Borrowers have to continue paying out their loans. Additionally, the SEC decided that it was not necessary for there to be any financial remedy, such as fines. The order is also not an admission or denial of the Commission's findings. 

Online matchmakers of any type of debt and equity are finding out that while they're disintermediating many traditional parties (like banks), they can't eliminate regulators.

P2P lending site, Prosper, this week received a cease-and-desist letter from the Securities and Exchange Commission. Despite Prosper's argument that it is a venue for matching those seeking loans and those providing loans, the SEC has another take. Prosper has initiated about $174 million in loans since January 2006, and Prosper collects an origination fee from borrowers of one to three percent. Prosper collects a servicing fee from lenders at an annual rate of one percent of the outsanding principal balance of the notes. (In this video, Chris Larsen Prosper CEO gives his video pitch for Prosper)

In its letter, the SEC said Prosper's loan notes issued between January 2006 and October14, 2008 are securities, and Prosper violated Section 5 (a) and 5 (c) of the Securities Act, which "prohibits the offer or sale of securities without an effective registration statement or a valid exemption from registration."

Additionally, the SEC said that Prosper's lenders were motivated by an expected return, much like funds. The SEC said that any reasonable investor would likely expect that the Prosper loans are investments, and that "there is no alternate regulatory scheme that reduces the risks to investors presented by the platform."

From the SEC letter:

As a result, Prosper violated Section 5 of the Securities Act, which states that unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or to carry or cause to be carried through the mails or in interstate commerce, by any means or instructions of transportation, any such security for the purpose of sale or for delivery after sale. 

While clearly the SEC means business against P2P lending sites and other matchmaking sites, the question to be asked is: Given the financial crisis, should this - a tiny company facilitating tiny loans - be the SEC's top priority?