Upstart Holdings, Inc., 72718-72720 [2020-25160]

Download as PDF 72718 Federal Register / Vol. 85, No. 220 / Friday, November 13, 2020 / Notices arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: [FR Doc. 2020–25058 Filed 11–12–20; 8:45 am] Electronic Comments BILLING CODE 8011–01–P • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CboeEDGA–2020–028 on the subject line. jbell on DSKJLSW7X2PROD with NOTICES For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 J. Matthew DeLesDernier, Assistant Secretary. SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 34088; 812–15177] Upstart Holdings, Inc. Paper Comments November 9, 2020. • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549–1090. AGENCY: All submissions should refer to File Number SR–CboeEDGA–2020–028. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CboeEDGA–2020–028 and should be submitted on or before December 4, 2020. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice. Notice of an application under Section 6(c) of the Investment Company Act of 1940 (the ‘‘Act’’). SUMMARY OF APPLICATION: Applicant requests an order to permit it directly, and through wholly-owned subsidiaries, to operate an artificial intelligence (‘‘AI’’)-based lending platform (‘‘Platform’’) that facilitates the issuance of small consumer general purpose loans, and conduct related activities, without being subject to the provisions of the Act. APPLICANT: Upstart Holdings, Inc. FILING DATES: The application was filed on November 5, 2020. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by emailing the Commission’s Secretary at SecretarysOffice@sec.gov and serving Applicant with a copy of the request by email. Hearing requests should be received by the Commission by 5:30 p.m. on November 30, 2020, and should be accompanied by proof of service on the Applicant, in the form of an affidavit or, for lawyers, a certificate of service. Pursuant to rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request by emailing the Commission’s Secretary. ADDRESSES: The Commission, Secretarys-Office@sec.gov; Applicant, 2950 S. Delaware Street, Suite 300, San Mateo, California 94403. FOR FURTHER INFORMATION CONTACT: Rochelle Plesset, Senior Counsel, or David Marcinkus, Branch Chief, at (202) 20 17 VerDate Sep<11>2014 17:19 Nov 12, 2020 Jkt 253001 PO 00000 CFR 200.30–3(a)(12). Frm 00099 Fmt 4703 Sfmt 4703 551–6821 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission’s website by searching for the file number, or for an applicant using the Company name box, at https:// www.sec.gov/search/search.htm or by calling (202) 551–8090. APPLICANT’S REPRESENTATIONS: 1. Upstart Network Inc. (‘‘UNI’’), a Delaware corporation established in 2012, originally began as an internetbased platform that connected graduates with investors who provided funding in return for a portion of the graduate’s earnings. As part of its operations, UNI used AI and modelling to assess a graduate’s future income. In 2014, UNI adapted its AI model to support the origination of consumer loans and changed its business model to that of operating the Platform and conducting related activities. 2. Applicant states that, pursuant to a restructuring, Applicant was incorporated in December 2013 to become the holding company of UNI, which in turn became its wholly-owned subsidiary. Applicant states that it operates its business, directly and indirectly, through UNI. Accordingly, Applicant’s assets consist entirely of its interest in UNI. Applicant has publicly filed a Form S–1 registration statement and intends to effect an initial public offering (‘‘IPO’’) of its equity securities. 3. Applicant states that UNI develops AI models that are generally used by partner U.S. banks to quantify the credit risk of potential borrowers and to determine whether to originate a loan if the AI model shows the loan meets applicable underwriting standards. UNI also operates the Platform, which among other things, aggregates consumer demand for the loans, and connects that demand to the banks for purposes of originating the loans. Through the Platform, UNI provides banks a broad range of services, including an application flow interface used to facilitate origination of loans, risk underwriting, verification of borrower information, and support for borrowers during the origination. Banks can use these services either by originating loans on the Platform or by ‘‘white-labelling’’ the technology on their own websites.1 1 Applicant notes that UNI recently began operating a pilot program in which it originates through its Platform a new auto loan product. Applicant states that while it generally prefers to collaborate with a bank partner, in this instance it could test this new product more quickly by originating the auto loans itself. Applicant states that UNI in 2020 (through September 30) has E:\FR\FM\13NON1.SGM 13NON1 Federal Register / Vol. 85, No. 220 / Friday, November 13, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES UNI also services the loans originated through its Platform. 4. Applicant states that to help facilitate the origination and liquidity of the loans originated through the Platform, UNI purchases most of the loans shortly after origination. In 2019, only 23% of the loans originated on the Platform were retained by the originating bank. In contrast, Applicant states that the vast majority of the purchased loans are sold to third parties on the day of purchase from the originating bank,2 thereby never appearing on the Applicant’s consolidated balance sheet.3 Applicant states that in 2019 loans immediately sold to third parties constituted 70% of all loans originated through the Platform. 5. Applicant states that the loans not retained by the originating bank or immediately sold to third parties are held indirectly by UNI until the loans are eventually sold, placed in securitization vehicles that UNI may be sponsored by UNI or an unaffiliated third party, or held to maturity. Applicant states that in 2019, these loans constituted 7% of the loans originated through the Platform (compared to a high of 20% in 2017, which was the year UNI launched its securitization program). Applicant states that the amount of loans held on its balance sheet has fluctuated because UNI’s purchase of these loans generally serves as a backstop for excess loans originated on the Platform. Applicant explains that UNI holds these loans because the Platform supports the origination of more loans than can immediately be sold and that providing banks with such liquidity allows the Applicant to grow its business more quickly. Nevertheless, Applicant states that UNI only holds to maturity those loans that it cannot ultimately sell or securitize. Furthermore, Applicant states that the amount of loans purchased and held depends on the allocated $5 million to the program (compared with $2.2 billion in total loans originated during the same period). If the program is successful, UNI plans to offer the auto loan product to partner banks, and sell the auto loans in the same manner as it sells the consumer loans. Applicant states that UNI may engage in similar pilot programs in the future, consistent with building its AI-based business, but does not currently have any plans to do so. Applicant represents that these pilot programs are expected to represent in the aggregate no more than 5% of the loans originated through the Platform on an annual basis. 2 Applicant states that these purchases and sales are for exactly the same amount and, accordingly, Applicant does not profit from such sales. 3 As a holding company, Applicant asserts that its financial data consolidated with its wholly-owned subsidiaries’ financial data provides a more accurate picture of its business. VerDate Sep<11>2014 17:19 Nov 12, 2020 Jkt 253001 market for the loans, not on any decision regarding whether to purchase particular loans or the amount of loans that should be retained. Applicant explains that the average length of time that loans remained on its consolidated balance sheet was approximately 3.3 months (calculated as weighted average time of loans on the balance sheet as of 1Q 2020). 6. Applicant states that the loans purchased by UNI that are not immediately sold are held by UNI’s wholly-owned subsidiaries: Upstart Warehouse Trust (‘‘UWT’’), Upstart Loan Trust (‘‘ULT’’) and Upstart Loan Trust 2 (‘‘ULT2’’).4 Applicant explains that UWT and ULT hold certain loans originated on the Platform until such loans are sold to third parties or placed in the securitization vehicles. ULT2 holds loans that are purchased or repurchased by UNI, which UNI believes cannot be sold in the future. Such loans are held to maturity unless they are ultimately sold to third parties or securitized. 7. Applicant states that the assets listed on its consolidated balance sheet consist primarily of the loans, certain certificates issued by the securitization vehicles (‘‘ABS’’), cash and cash equivalents. Applicant explains that it seeks to hold only the amount of ABS it is required to retain for purposes of compliance with Regulation RR under Section 15G of the Securities Exchange Act of 1934 (‘‘Risk Retention Rules’’) and will sell them as soon as Applicant is no longer required to hold all or part of those interests. Applicant states that after the IPO, Applicant intends to invest any proceeds not immediately required in Government securities and Capital Preservation Investments.5 8. Applicant states that although loans comprise the vast majority of its assets, Applicant’s net revenue 6 is almost exclusively derived from Platform fees, loan servicing fees and loan referral fees. Applicant states that in 2019, 97% of its net revenue was derived from such fees, 71% of which were related to the loans that were immediately sold upon origination. Net interest revenue from 4 Applicant states that at the time of the application, UWT was in the process of being dissolved. ULT and ULT2 will continue to operate as described in the application. 5 The term ‘‘Capital Preservation Investments’’ refers collectively to Applicant’s investments in short-term investment grade and liquid fixed income and money market investments that earn competitive market returns and provide a low level of credit risk. 6 Applicant states that because it is still operating at a net loss, income may not be the most relevant determinant of its status as an operating company; rather, Applicant states that its current source of revenues provides a more accurate picture of the nature of its business. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 72719 the loans in 2019 represented approximately 3% of total net revenues. APPLICANT’S LEGAL ANALYSIS: 1. Section 3(a)(l)(A) of the Act defines the term ‘‘investment company’’ to include an issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Section 3(a)(l)(C) of the Act further defines an investment company as an issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities, and owns or proposes to acquire investment securities having a value in excess of 40% of the value of the issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated basis. Section 3(a)(2) of the Act defines ‘‘investment securities’’ to include all securities except Government securities, securities issued by employees’ securities companies, and securities issued by majority-owned subsidiaries of the owner which (a) are not investment companies and (b) are not relying on the exclusions from the definition of investment company in Section 3(c)(1) or Section 3(c)(7) of the Act. 2. Applicant states that, based on the Applicant’s consolidated financial statements for 2019, approximately 87% of assets (of which 76% were in loans), were in investment securities as defined in Section 3(a)(2) of the Act. Accordingly, Applicant states that it may meet the definition of investment company under Section 3(a)(1)(C). Applicant also states that the definition of investment company under Section 3(a)(1)(A) also may be implicated because the loans may be considered to be securities for purposes of the Act.7 3. Applicant, however, states that it views itself, and has consistently represented itself publicly, as being 7 Section 3(c)(4) of the Act excepts from the definition of investment company any person substantially all of whose business is confined to making small loans, industrial banking, or similar businesses. Section 3(c)(5) of the Act excepts from the definition of investment company, in relevant part, any person who is primarily engaged in one or more of the following businesses: (A) Purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services; (B) making loans to manufacturers, wholesalers, and retailers of, and to prospective purchasers of, specified merchandise, insurance, and services; and (C) purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. Applicant states that it is unable to rely Section 3(c)(4) because it is not in the business of originating loans. Applicant states that it is unable to rely on Section 3(c)(5) because it is not primarily engaged in purchasing or acquiring loans, and the loans are not of the types specified in the exclusion. E:\FR\FM\13NON1.SGM 13NON1 jbell on DSKJLSW7X2PROD with NOTICES 72720 Federal Register / Vol. 85, No. 220 / Friday, November 13, 2020 / Notices primarily engaged in the business of providing technology and related services to financial institutions and not in the business of being an investment company or investing in loans. Applicant explains that most of its 374 employees are devoted to developing the AI models, facilitating the origination and financing of loans through its Platform, performing roles supporting the operations of the Platform and servicing those loans. Applicant states that only 9 employees are engaged in any activities related to managing the loans held on the Applicant’s balance sheet. Applicant estimates that these 9 individuals spend a negligible amount of time on activities related to the loans. In addition, Applicant states that substantially all of its net revenues are derived from these business activities. Applicant states that the loans and other investment securities that are held by its whollyowned subsidiaries are a byproduct of these activities and are acquired not for investment purpose but to support the loan origination by its partner banks by finding financing for those loans. Furthermore, Applicant states that any net investment income derived from such securities is minimal. 4. Applicant states that it, including its wholly-owned subsidiaries, are subject to a range of regulations that cover their business activities. Specifically, Applicant states that UNI maintains state licenses and registrations related to consumer lending, loan brokering and servicing. Applicant also states that the Platform generally has been structured to comply with banking regulations, consistent with UNI’s role as a service provider to its bank partners. 5. Section 6(c) of the Act provides that the Commission may exempt any person, security or transaction or any class or classes of persons, securities or transactions from any provision of the Act, or from any rule or regulation under the Act, if and to the extent such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Applicant requests an order under Section 6(c) to permit the Applicant, directly and through its wholly-owned subsidiaries, to engage in its business activities without being subject to the Act. 6. Applicant states that the requested exemption is necessary and appropriate in the public interest, and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Applicant states that, directly and through its VerDate Sep<11>2014 17:19 Nov 12, 2020 Jkt 253001 wholly-owned subsidiaries, it is primarily engaged in the business of providing technology and related services to financial institutions to help facilitate the origination of loans to consumers. Applicant states that the structure of its business, including the acquisition of the investment securities, was not established, and is not operated, for the purpose of creating an investment company within the contemplation of the Act, and the Applicant’s business activities are not of the type intended to be regulated under the Act. APPLICANT’S CONDITIONS: Applicant agrees that any order granting the requested relief will be subject to the following conditions: 1. Applicant will not hold itself out as being engaged in investing, reinvesting or trading in securities other than loans originated through the Platform as described in the Application. 2. Applicant, directly or indirectly, will only hold loans that are originated through the Platform as described in the application. 3. Any loans held to maturity will represent less than 15% of the total volume of loans held, directly or indirectly, by the Applicant on a rolling basis for the last four most recent fiscal quarters combined. 4. Applicant, directly or indirectly, will not hold loans for speculative purposes. 5. Applicant will allocate and use its accumulated cash and any investment securities (other than loans) for bona fide business purposes in accordance with a cash-management investment policy adopted by Applicant’s board of directors and will refrain from investing or trading in securities for short-term speculative purposes. As of the last date of each last fiscal quarter, at least 90% of investment securities other than the loans or ABS held only for purposes of satisfying the Risk Retention Rules, held by the Applicant on a consolidated basis, will be in Capital Preservation Investments. 6. Net revenue earned from interest on the loans will comprise, on a rolling basis for the last four most recent fiscal quarters combined, in combination with interest on any other investment securities, no more than 10% of Applicant’s total net revenue. For purposes of this condition, net revenue excludes (from both the numerator and the denominator) interest generated by cash holdings, Government securities, and risk retention vehicles, as well as fair value adjustments for the loans, and will be calculated net of interest paid on any credit facilities used to purchase the loans. PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 7. Applicant may continue to rely on the order granting the requested relief so long as the operations that gave rise to the request for the exemptive order do not differ materially from those described in this application. For the Commission, by the Division of Investment Management, under delegated authority. J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–25160 Filed 11–12–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90371; File No. SR–NYSE– 2020–66] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend to NYSE Rule 122 Related to Orders With More Than One Broker November 6, 2020. I. Introduction On August 3, 2020, New York Stock Exchange LLC (‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to amend to NYSE Rule 122 (Orders with More than One Broker). The proposed rule change was published for comment in the Federal Register on August 12, 2020.3 On September 22, 2020, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 The Commission has received no comment letters on the proposal. On November 3, 2020, the Exchange filed Amendment No. 1 to the proposed rule change, which replaced and superseded the proposed rule change in its entirety.6 The Commission 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 89500 (Aug. 6, 2020), 85 FR 48738 (Aug. 12, 2020). 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 89962 (Sept. 22, 2020), 85 FR 60854 (Sept. 28, 2020). 6 In Amendment No. 1, the Exchange added the representation that it will monitor, via examinationbased surveillance, member organization compliance with its supervisory obligation 2 17 E:\FR\FM\13NON1.SGM 13NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 220 (Friday, November 13, 2020)]
[Notices]
[Pages 72718-72720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-25160]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 34088; 812-15177]


Upstart Holdings, Inc.

November 9, 2020.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice.

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    Notice of an application under Section 6(c) of the Investment 
Company Act of 1940 (the ``Act'').

Summary of Application:  Applicant requests an order to permit it 
directly, and through wholly-owned subsidiaries, to operate an 
artificial intelligence (``AI'')-based lending platform (``Platform'') 
that facilitates the issuance of small consumer general purpose loans, 
and conduct related activities, without being subject to the provisions 
of the Act.

Applicant:  Upstart Holdings, Inc.

Filing Dates:  The application was filed on November 5, 2020.

Hearing or Notification of Hearing:  An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by emailing the Commission's 
Secretary at [email protected] and serving Applicant with a 
copy of the request by email. Hearing requests should be received by 
the Commission by 5:30 p.m. on November 30, 2020, and should be 
accompanied by proof of service on the Applicant, in the form of an 
affidavit or, for lawyers, a certificate of service. Pursuant to rule 
0-5 under the Act, hearing requests should state the nature of the 
writer's interest, any facts bearing upon the desirability of a hearing 
on the matter, the reason for the request, and the issues contested. 
Persons who wish to be notified of a hearing may request by emailing 
the Commission's Secretary.

ADDRESSES: The Commission, [email protected]; Applicant, 2950 
S. Delaware Street, Suite 300, San Mateo, California 94403.

FOR FURTHER INFORMATION CONTACT: Rochelle Plesset, Senior Counsel, or 
David Marcinkus, Branch Chief, at (202) 551-6821 (Division of 
Investment Management, Chief Counsel's Office).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's website by searching for the file number, or for an 
applicant using the Company name box, at https://www.sec.gov/search/search.htm or by calling (202) 551-8090.

Applicant's Representations: 
    1. Upstart Network Inc. (``UNI''), a Delaware corporation 
established in 2012, originally began as an internet-based platform 
that connected graduates with investors who provided funding in return 
for a portion of the graduate's earnings. As part of its operations, 
UNI used AI and modelling to assess a graduate's future income. In 
2014, UNI adapted its AI model to support the origination of consumer 
loans and changed its business model to that of operating the Platform 
and conducting related activities.
    2. Applicant states that, pursuant to a restructuring, Applicant 
was incorporated in December 2013 to become the holding company of UNI, 
which in turn became its wholly-owned subsidiary. Applicant states that 
it operates its business, directly and indirectly, through UNI. 
Accordingly, Applicant's assets consist entirely of its interest in 
UNI. Applicant has publicly filed a Form S-1 registration statement and 
intends to effect an initial public offering (``IPO'') of its equity 
securities.
    3. Applicant states that UNI develops AI models that are generally 
used by partner U.S. banks to quantify the credit risk of potential 
borrowers and to determine whether to originate a loan if the AI model 
shows the loan meets applicable underwriting standards. UNI also 
operates the Platform, which among other things, aggregates consumer 
demand for the loans, and connects that demand to the banks for 
purposes of originating the loans. Through the Platform, UNI provides 
banks a broad range of services, including an application flow 
interface used to facilitate origination of loans, risk underwriting, 
verification of borrower information, and support for borrowers during 
the origination. Banks can use these services either by originating 
loans on the Platform or by ``white-labelling'' the technology on their 
own websites.\1\

[[Page 72719]]

UNI also services the loans originated through its Platform.
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    \1\ Applicant notes that UNI recently began operating a pilot 
program in which it originates through its Platform a new auto loan 
product. Applicant states that while it generally prefers to 
collaborate with a bank partner, in this instance it could test this 
new product more quickly by originating the auto loans itself. 
Applicant states that UNI in 2020 (through September 30) has 
allocated $5 million to the program (compared with $2.2 billion in 
total loans originated during the same period). If the program is 
successful, UNI plans to offer the auto loan product to partner 
banks, and sell the auto loans in the same manner as it sells the 
consumer loans. Applicant states that UNI may engage in similar 
pilot programs in the future, consistent with building its AI-based 
business, but does not currently have any plans to do so. Applicant 
represents that these pilot programs are expected to represent in 
the aggregate no more than 5% of the loans originated through the 
Platform on an annual basis.
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    4. Applicant states that to help facilitate the origination and 
liquidity of the loans originated through the Platform, UNI purchases 
most of the loans shortly after origination. In 2019, only 23% of the 
loans originated on the Platform were retained by the originating bank. 
In contrast, Applicant states that the vast majority of the purchased 
loans are sold to third parties on the day of purchase from the 
originating bank,\2\ thereby never appearing on the Applicant's 
consolidated balance sheet.\3\ Applicant states that in 2019 loans 
immediately sold to third parties constituted 70% of all loans 
originated through the Platform.
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    \2\ Applicant states that these purchases and sales are for 
exactly the same amount and, accordingly, Applicant does not profit 
from such sales.
    \3\ As a holding company, Applicant asserts that its financial 
data consolidated with its wholly-owned subsidiaries' financial data 
provides a more accurate picture of its business.
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    5. Applicant states that the loans not retained by the originating 
bank or immediately sold to third parties are held indirectly by UNI 
until the loans are eventually sold, placed in securitization vehicles 
that UNI may be sponsored by UNI or an unaffiliated third party, or 
held to maturity. Applicant states that in 2019, these loans 
constituted 7% of the loans originated through the Platform (compared 
to a high of 20% in 2017, which was the year UNI launched its 
securitization program). Applicant states that the amount of loans held 
on its balance sheet has fluctuated because UNI's purchase of these 
loans generally serves as a backstop for excess loans originated on the 
Platform. Applicant explains that UNI holds these loans because the 
Platform supports the origination of more loans than can immediately be 
sold and that providing banks with such liquidity allows the Applicant 
to grow its business more quickly. Nevertheless, Applicant states that 
UNI only holds to maturity those loans that it cannot ultimately sell 
or securitize. Furthermore, Applicant states that the amount of loans 
purchased and held depends on the market for the loans, not on any 
decision regarding whether to purchase particular loans or the amount 
of loans that should be retained. Applicant explains that the average 
length of time that loans remained on its consolidated balance sheet 
was approximately 3.3 months (calculated as weighted average time of 
loans on the balance sheet as of 1Q 2020).
    6. Applicant states that the loans purchased by UNI that are not 
immediately sold are held by UNI's wholly-owned subsidiaries: Upstart 
Warehouse Trust (``UWT''), Upstart Loan Trust (``ULT'') and Upstart 
Loan Trust 2 (``ULT2'').\4\ Applicant explains that UWT and ULT hold 
certain loans originated on the Platform until such loans are sold to 
third parties or placed in the securitization vehicles. ULT2 holds 
loans that are purchased or repurchased by UNI, which UNI believes 
cannot be sold in the future. Such loans are held to maturity unless 
they are ultimately sold to third parties or securitized.
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    \4\ Applicant states that at the time of the application, UWT 
was in the process of being dissolved. ULT and ULT2 will continue to 
operate as described in the application.
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    7. Applicant states that the assets listed on its consolidated 
balance sheet consist primarily of the loans, certain certificates 
issued by the securitization vehicles (``ABS''), cash and cash 
equivalents. Applicant explains that it seeks to hold only the amount 
of ABS it is required to retain for purposes of compliance with 
Regulation RR under Section 15G of the Securities Exchange Act of 1934 
(``Risk Retention Rules'') and will sell them as soon as Applicant is 
no longer required to hold all or part of those interests. Applicant 
states that after the IPO, Applicant intends to invest any proceeds not 
immediately required in Government securities and Capital Preservation 
Investments.\5\
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    \5\ The term ``Capital Preservation Investments'' refers 
collectively to Applicant's investments in short-term investment 
grade and liquid fixed income and money market investments that earn 
competitive market returns and provide a low level of credit risk.
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    8. Applicant states that although loans comprise the vast majority 
of its assets, Applicant's net revenue \6\ is almost exclusively 
derived from Platform fees, loan servicing fees and loan referral fees. 
Applicant states that in 2019, 97% of its net revenue was derived from 
such fees, 71% of which were related to the loans that were immediately 
sold upon origination. Net interest revenue from the loans in 2019 
represented approximately 3% of total net revenues.
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    \6\ Applicant states that because it is still operating at a net 
loss, income may not be the most relevant determinant of its status 
as an operating company; rather, Applicant states that its current 
source of revenues provides a more accurate picture of the nature of 
its business.

Applicant's Legal Analysis: 
    1. Section 3(a)(l)(A) of the Act defines the term ``investment 
company'' to include an issuer that is or holds itself out as being 
engaged primarily, or proposes to engage primarily, in the business of 
investing, reinvesting or trading in securities. Section 3(a)(l)(C) of 
the Act further defines an investment company as an issuer that is 
engaged or proposes to engage in the business of investing, 
reinvesting, owning, holding or trading in securities, and owns or 
proposes to acquire investment securities having a value in excess of 
40% of the value of the issuer's total assets (exclusive of Government 
securities and cash items) on an unconsolidated basis. Section 3(a)(2) 
of the Act defines ``investment securities'' to include all securities 
except Government securities, securities issued by employees' 
securities companies, and securities issued by majority-owned 
subsidiaries of the owner which (a) are not investment companies and 
(b) are not relying on the exclusions from the definition of investment 
company in Section 3(c)(1) or Section 3(c)(7) of the Act.
    2. Applicant states that, based on the Applicant's consolidated 
financial statements for 2019, approximately 87% of assets (of which 
76% were in loans), were in investment securities as defined in Section 
3(a)(2) of the Act. Accordingly, Applicant states that it may meet the 
definition of investment company under Section 3(a)(1)(C). Applicant 
also states that the definition of investment company under Section 
3(a)(1)(A) also may be implicated because the loans may be considered 
to be securities for purposes of the Act.\7\
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    \7\ Section 3(c)(4) of the Act excepts from the definition of 
investment company any person substantially all of whose business is 
confined to making small loans, industrial banking, or similar 
businesses. Section 3(c)(5) of the Act excepts from the definition 
of investment company, in relevant part, any person who is primarily 
engaged in one or more of the following businesses: (A) Purchasing 
or otherwise acquiring notes, drafts, acceptances, open accounts 
receivable, and other obligations representing part or all of the 
sales price of merchandise, insurance, and services; (B) making 
loans to manufacturers, wholesalers, and retailers of, and to 
prospective purchasers of, specified merchandise, insurance, and 
services; and (C) purchasing or otherwise acquiring mortgages and 
other liens on and interests in real estate. Applicant states that 
it is unable to rely Section 3(c)(4) because it is not in the 
business of originating loans. Applicant states that it is unable to 
rely on Section 3(c)(5) because it is not primarily engaged in 
purchasing or acquiring loans, and the loans are not of the types 
specified in the exclusion.
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    3. Applicant, however, states that it views itself, and has 
consistently represented itself publicly, as being

[[Page 72720]]

primarily engaged in the business of providing technology and related 
services to financial institutions and not in the business of being an 
investment company or investing in loans. Applicant explains that most 
of its 374 employees are devoted to developing the AI models, 
facilitating the origination and financing of loans through its 
Platform, performing roles supporting the operations of the Platform 
and servicing those loans. Applicant states that only 9 employees are 
engaged in any activities related to managing the loans held on the 
Applicant's balance sheet. Applicant estimates that these 9 individuals 
spend a negligible amount of time on activities related to the loans. 
In addition, Applicant states that substantially all of its net 
revenues are derived from these business activities. Applicant states 
that the loans and other investment securities that are held by its 
wholly-owned subsidiaries are a byproduct of these activities and are 
acquired not for investment purpose but to support the loan origination 
by its partner banks by finding financing for those loans. Furthermore, 
Applicant states that any net investment income derived from such 
securities is minimal.
    4. Applicant states that it, including its wholly-owned 
subsidiaries, are subject to a range of regulations that cover their 
business activities. Specifically, Applicant states that UNI maintains 
state licenses and registrations related to consumer lending, loan 
brokering and servicing. Applicant also states that the Platform 
generally has been structured to comply with banking regulations, 
consistent with UNI's role as a service provider to its bank partners.
    5. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction or any class or classes of persons, 
securities or transactions from any provision of the Act, or from any 
rule or regulation under the Act, if and to the extent such exemption 
is necessary or appropriate in the public interest and consistent with 
the protection of investors and the purposes fairly intended by the 
policy and provisions of the Act. Applicant requests an order under 
Section 6(c) to permit the Applicant, directly and through its wholly-
owned subsidiaries, to engage in its business activities without being 
subject to the Act.
    6. Applicant states that the requested exemption is necessary and 
appropriate in the public interest, and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act. Applicant states that, directly and through its 
wholly-owned subsidiaries, it is primarily engaged in the business of 
providing technology and related services to financial institutions to 
help facilitate the origination of loans to consumers. Applicant states 
that the structure of its business, including the acquisition of the 
investment securities, was not established, and is not operated, for 
the purpose of creating an investment company within the contemplation 
of the Act, and the Applicant's business activities are not of the type 
intended to be regulated under the Act.

Applicant's Conditions: 
    Applicant agrees that any order granting the requested relief will 
be subject to the following conditions:
    1. Applicant will not hold itself out as being engaged in 
investing, reinvesting or trading in securities other than loans 
originated through the Platform as described in the Application.
    2. Applicant, directly or indirectly, will only hold loans that are 
originated through the Platform as described in the application.
    3. Any loans held to maturity will represent less than 15% of the 
total volume of loans held, directly or indirectly, by the Applicant on 
a rolling basis for the last four most recent fiscal quarters combined.
    4. Applicant, directly or indirectly, will not hold loans for 
speculative purposes.
    5. Applicant will allocate and use its accumulated cash and any 
investment securities (other than loans) for bona fide business 
purposes in accordance with a cash-management investment policy adopted 
by Applicant's board of directors and will refrain from investing or 
trading in securities for short-term speculative purposes. As of the 
last date of each last fiscal quarter, at least 90% of investment 
securities other than the loans or ABS held only for purposes of 
satisfying the Risk Retention Rules, held by the Applicant on a 
consolidated basis, will be in Capital Preservation Investments.
    6. Net revenue earned from interest on the loans will comprise, on 
a rolling basis for the last four most recent fiscal quarters combined, 
in combination with interest on any other investment securities, no 
more than 10% of Applicant's total net revenue. For purposes of this 
condition, net revenue excludes (from both the numerator and the 
denominator) interest generated by cash holdings, Government 
securities, and risk retention vehicles, as well as fair value 
adjustments for the loans, and will be calculated net of interest paid 
on any credit facilities used to purchase the loans.
    7. Applicant may continue to rely on the order granting the 
requested relief so long as the operations that gave rise to the 
request for the exemptive order do not differ materially from those 
described in this application.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-25160 Filed 11-12-20; 8:45 am]
BILLING CODE 8011-01-P

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