The concept of microfinance

the concept of microfinance

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* The author received a J.D. from Duke University School of Law in Durham, NC and a B.A.

from Emory University in Atlanta, Georgia. The author is an attorney in Atlanta, Georgia and

has enjoyed fulfilling experiences in BigLaw and in the in-house counsel departments of a

prominent nonprofit, a self-regulatory organization, and an international public company.

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Electronic copy available at: http://ssrn.com/abstract=1699405

Morgan Clemons

ABSTRACT

The Supreme Court has asserted that the term security “embodies a flexible rather than a

static principle, one that is capable of adaptation to meet the countless and variable schemes

devised by those who seek the use of the money of others.” Microfinance is such a scheme. The

concept of microlending has existed since at least the 1970s, but Dr. Muhammad Yunus and his

Bangladeshi project, Grameen Bank, did not win the Nobel Peace Prize until 2006. Microfinance

institutions, or MFIs, “seek to ‘include the excluded’ in the provision of financial services” by

allowing the poor in developing countries to build small businesses and escape poverty. Two

websites—Kiva.org and Microplace.com—are popular vehicles in America for microlending to

entrepreneurs abroad. The two websites are, supposedly, very different though. Average

Americans serve as creditors by lending money to poor people in developing countries. These

people use the money to help start or to further develop their small businesses. The borrowers

abroad pledge to pay back the money to the creditors. Lenders through Kiva.org (“Kiva”) receive

no interest on their loan to borrowers but only the principal, while lenders using Microplace.com

(“Microplace”) can receive up to 3% interest on their loans with a repayment length that may be

over three years. Microplace has registered as a broker-dealer with FINRA while Kiva considers

itself a charitable organization; the federal government regulates Microplace because of its

dealings in securities while Kiva remains unregulated. This discrepancy presents a problem

because “the Securities Act prohibits the sale of securities unless the company issuing securities

(the issuer) has ‘registered’ them with the SEC.” Kiva, like Microplace, is a member of the

financial services industry, is involved with issuing securities, and should register the securities.

Kiva is issuing securities for three reasons. First, Kiva’s status as a nonprofit organization is not

consistent with its own professed aims. Second, Kiva does not fall into any of the exceptions

under the act, and finally, the loans are either an investment contract or a note under the

Securities Act of 1933.

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Morgan Clemons

II.

THE MANY EXCEPTIONS INCLUDED IN THE SECURITIES ACT DO NOT ENCOMPASS THE LOANS

THAT KIVA OFFERS TO ITS SITE’S VISITORS………………………………………….9

A. THE LOANS THAT LENDERS CAN PARTICIPATE IN ON KIVA’S WEBSITE ARE NOT “ISSUED

OR GUARANTEED BY A BANK.”………………………………………………. 10

B. THE LOANS THAT LENDERS CAN PARTICIPATE IN ON KIVA’S WEBSITE ARE NOT THE SORT

OF SHORT TERM, SOPHISTICATED NOTES EXEMPTED BY THE SECURITIES ACT….14

1. KIVA DOES NOT OFFER THE SORT OF COMMERCIAL PAPER EXEMPTED UNDER

THE SECURITIES ACT BECAUSE THE LOANS TO INTERNATIONAL BORROWERS

ARE NOT HIGH QUALITY INSTRUMENTS………………………………15

2. KIVA DOES NOT OFFER THE SORT OF COMMERCIAL PAPER EXEMPTED UNDER

THE SECURITIES ACT BECAUSE THE LENDERS WHO PARTICIPATE ARE NOT

SOPHISTICATED INVESTORS………………………………………….16

3. KIVA DOES NOT OFFER THE SORT OF COMMERCIAL PAPER EXEMPTED UNDER

THE SECURITIES ACT BECAUSE THE WEBSITE INDISCRIMINATELY OFFERS THE

OPTION TO LEND……………………………………………………..17

C. THE LOANS ON THE WEBSITE WARRANT PROTECTION UNDER THE SECURITIES ACT’S

EXEMPTIONS, REGARDLESS OF WHETHER KIVA CONSIDERS ITSELF A NONPROFIT

ORGANIZATION………………………………………………………………..18

KIVA’S LOANS ARE SECURITIES BECAUSE THE LENDERS’ INVESTMENTS IN THEM ARE EITHER

NOTES OR INVESTMENT CONTRACTS………………………………………………22

III.

A. KIVA’S LOANS ARE NOTES BECAUSE THE KIVA LENDERS HAVE AN INVESTMENT RATHER

B. WHAT KIVA OFFERS IS AN INVESTMENT CONTRACT AND IS THEREFORE A SECURITY

UNDER THE ACT BECAUSE THE LENDERS WISH TO INVEST IN THE ENTREPRENEURIAL

ENTERPRISE OF SMALL BUSINESS OWNERS ABROAD AND EXPECT

THE RETURN OF THEIR

MONEY WITHOUT HAVING TO EXERT ANY EFFORT THEMSELVES……………..28

IV. CONCLUSION………………………………………………………………. 32

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Morgan Clemons

The Supreme Court has asserted that the term security “embodies a flexible rather than a static

principle, one that is capable of adaptation to meet the countless and variable schemes devised by

those who seek the use of the money of others.”1 Microfinance is such a scheme. The concept

of microlending has existed since at least the 1970s,2 but Dr. Muhammad Yunus and his

Bangladeshi project, Grameen Bank, did not win the Nobel Peace Prize until 2006.3

Microfinance institutions, or MFIs, “seek to ‘include the excluded’ in the provision of financial

services”4 by allowing the poor in developing countries to build small businesses and escape

produce vendor, and others” have used lenders’ loans to finance their endeavors.5

Two websites—Kiva.org and Microplace.com—are popular vehicles in America for

microlending to entrepreneurs abroad. The two websites are, supposedly, very different though.

surrounding microfinance has increased in recent years since Dr. Yunus received the honorary

prize in 2006. The concept has gained exposure on an international level, but microfinance has

managed especially to make an impact on the investing public in the United States.

These people use the money to help start or to further develop their small businesses.7 The

borrowers abroad pledge to pay back the money to the creditors.8

1 SEC v. W. J. Howey Co. 328 U.S. 293, 299 (1946).

2 Matt Flannery, Kiva and the Birth of Person-to-Person Microfinance, 2 INNOVATIONS: TECHNOLOGY,

GOVERNANCE, GLOBALIZATION 31, 48 (2007).

3 http://nobelprize.org/nobel_prizes/lists/2006.html

4 Nitin Bhatt & Shui-Yan Tang, Delivering Microfinance in Developing Countries: Controversies and

Policy Perspectives, in MICROCREDIT AND DEVELOPMENT POLICY 49,51(Douglas R. Snow, et al.

5 Flannery, supra note 2, at 43.

6 http://www.kiva.org/

7 http://www.kiva.org/

8 http://www.kiva.org/

Lenders through Kiva.org

Microplace.com (“Microplace”) can receive up to 3% interest on their loans with a repayment

length that may be over three years.9

With a mere click, funds are transferred to Kiva through a Paypal account. Kiva

continues to collect money from other individual lenders until the loan is fully

raised. [. ] Once the capital has been raised, it is forwarded to the MFI which

disburses the full value to the recipient. [. ] After the loan is completely repaid,

the MFI conveys the money to Kiva and the original loan amount is forwarded to

the individual lenders' PayPal accounts.

Ruth Jackson Lee, the author of the article The Microfinance

Movement, explains how Kiva works:

Microplace has registered as a broker-dealer with FINRA11 while Kiva considers itself a

charitable organization.12 Calvert Impact Fund serves as an issuer for Microplace, and Calvert

Impact Fund invests in microfinance institutions.13 Though both websites consider themselves

as places for social investors,14 the federal government regulates Microplace because of its

dealings in securities while Kiva remains unregulated. This discrepancy presents a problem

because “the Securities Act prohibits the sale of securities unless the company issuing securities

(the issuer) has ‘registered’ them with the SEC.”15

the term ‘security’ means any note, stock, treasury stock, security future, bond,

debenture, evidence of indebtedness, certificate of interest or participation in any

Some might consider the differences between

the two websites to be minor. Therefore, it is questionable, with respect to Kiva, whether the

American public is investing in a better world, devoid of poverty, or in securities. Under the

Securities Act of 1933:

9 https://www.microplace.com/investments

10 Ruth Jackson Lee, The Microfinance Movement: Closing the Gender Gap with a Click. J.

TRANSNAT’L L. & POL’Y 171, 175 (2007).

11 https://www.microplace.com/learn_more/faq

13 Calvert Impact Fund, Certified Shareholder Report of Registered Management Investment Companies

(Form N-CSR) (Dec. 6 2007).

14 Flannery, supra note 2, at 55.

15 William A. Klein et al. BUSINESS ASSOCIATIONS: CASES AND MATERIALS ON AGENCY,

PARTNERSHIPS, AND CORPORATIONS, 421 (6th ed. Foundation Press 2006).

Source: www.researchgate.net

Category: Payday loans

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