ISO Roadmap For 2018
November 26, 2017ISOs, as you finish out a wild year of funding, we’ve put together a roadmap to prepare you for a very successful 2018!
1. Educate yourself. Litigation in the MCA industry skyrocketed in 2017. That means as a salesperson you’re 
more accountable than ever to communicate the products and services you sell in a succinct and truthful manner. Case in point, MCAs are offered by funders, not lenders. Using lending-related terminology at any point during the sales process for non-lending products can open yourself up to both legal or regulatory consequences, even if you’re just an employee. As these fundamentals apply to industry veterans as well as newcomers, your top priority in the new year should be to get a certificate in Merchant Cash Advance Basics.
2. Source your own leads. Sneaking deals out the backdoor or being on the receiving end of ill-gotten leads may yield a couple bucks but it may ultimately come at the expense of your reputation and career. It could also be against the law. The surefire way to become a legitimate top performer in the industry is to generate your own deals. How else do you expect to build a book of business that’s truly yours and relationships with clients that are built on trust and integrity? Need help getting started? Check out this list of lead sources!
3. Participate in industry events. In 2018, it will pay to truly 
know who you’re working with. Sending your deal off to some random person you’ve never met claiming to be a funder or lender is a great way to increase the odds that your deal and potential commission will disappear. Fortunately in the coming year, there are great opportunities to network with industry colleagues. Here’s a link to one AltFinanceDaily hosted this past August at Marine Park Golf Course in Brooklyn. If you’re a sales rep in the South Florida area, you should attend deBanked’s FREE cocktail networking event in South Beach on January 25, 2018. And if you want to better your skills, discuss the issues, and connect with the industry, you should register for Broker Fair 2018 right now! Check out the list of companies that have signed on to sponsor it already. Broker Fair 2018 is the number one don’t-miss event of the coming year.
4. Keep up on the news. Keep up on 
developments taking place across the entire alternative finance spectrum. The best part about AltFinanceDaily magazine is that it’s free to subscribe. We publish six issues a year. Copies can be mailed to your home or office in print free of charge. Magazine content is typically distributed in print before it ever comes online so don’t miss out. Make sure the next AltFinanceDaily magazine will be coming your way in 2018!
5. Choose your partners wisely. In the same way that it’s probably not a good idea to send your deal off to a random funder that cold called you, using old-fashioned methods like Google to discover who’s who can be onerous. That’s why we’ve segmented our sponsor directory by business type so that you can narrow down the right partner to fit your needs fast. While it’s true that these companies pay to advertise here, it’s an excellent starting point. So check out our list of sponsors!
Canadian Merchants Show An Appetite For Capital
November 25, 2017In Canada, the average deal size for a merchant is anywhere between $20,000 and $30,000 in funding, depending on who you ask. That’s why when one startup recently funded a $300,000 CAD advance from its balance sheet to a Canadian merchant, the deal turned some heads. While it’s unclear whether this amount could be indicative of a trend unfolding at our neighbors to the North, Canadian small businesses are preparing for some changes in the industry landscape in 2018.
SharpShooter Funding, whose name depicts the famous wrestling move of the WWE’s Bret “The Hitman” Hart, was behind the $300,000 deal with an Eastern Canadian grocer.
If you’re wondering how a merchant funder and WWE legend became partners, chalk it up to a combination of fate and timing. Paul Pitcher, SharpShooter Funding managing partner, has been Hart’s biggest fan since he was a kid. Pitcher got the opportunity to meet his hero when was just 10 years old. It was then that the green shoots of friendship formed, and today the WWE’s Hart is acting commissioner of SharpShooter Funding, having helped to launch the business.
Canadian Merchant Landscape
To get a taste of the Canadian merchant financing landscape, consider that the three top Canadian funders deploy $20 million and $25 million per month combined, explained David Gens, president and chief executive of Merchant Advance Capital, which is included among the top three funders. That’s up from a range of $15 million to $20 million earlier this year.
And while a $300,000 advance may not seem like something to write home about for U.S. funders, it’s a big deal in the Canadian market. The culture among small businesses in the Great White North is different and more conservative than their US counterparts.
“It’s a function of the size of the merchant,” Gens explained. “The typical single-location storefront merchant is going to qualify for $30,000 to $50,000. It takes a larger and more established business, whether it’s a multi-location merchant or a business that is in the B-to-B space, a manufacturer, distributor or wholesaler to be large enough to qualify for large financing.”
Meanwhile there are some changes to small business taxation that are coming down the pike that may influence demand for credit, Gens noted, though the precise shape any changes to the tax law will take remains unclear.
“They will reduce the small business taxation rate on the face of it. But for businesses where they hold cash or need to hold cash, it’s a gray zone as to whether or not they will be able to hold financial assets in those businesses. The government is going after companies that are holding investments. But there’s a gray line as to what is a holding company that is holding an investment and an operating company holding a buffer because of seasonality or cyclical demand. We have yet to see what the rules end up being exactly,” Gens said.
Anatomy of the Deal
In the case of SharpShooter Funding, the grocer merchant originally came to the funder for less than $300,000 but qualified for more, bringing the funder’s tally for a single day’s deals to more than $500,000.
“We never thought we’d hit this milestone in the Canadian market. But the file was right, and the timing was great,” Pitcher told AltFinanceDaily. Now that they’ve gotten a taste of it, SharpShooter Funding hopes to do more deals of this nature. “For a small funder like us to double the size of a big funder was a big moment for us, especially in the Canadian market,” Pitcher said.
Merchant Advance Capital’s Gens said his company is prepared to take on the risk for deals at even a higher threshold. “Our average is $35,000 to $40,000, and the largest deal we’ve ever done was $600,000. I don’t want to steal their thunder, but there have been larger deals,” said Gens. “A few funders may syndicate when deals get that big, but it’s not an inconceivable size.”
OnDeck, which similarly has Canadian operations, lends up to $250,000 CAD in Canada. OnDeck has extended more than $7 billion in online loans across 70,000-plus customers across the United States, Canada and Australia.
As for SharpShooter Funding, Pitcher said the funder has been on the sidelines for larger deals because they don’t want to grow too fast. He’s been turned off by other funders doing deals within a couple of months of launching and then being forced to close their doors.
“Our capital has always been strong. It’s not that we can’t afford to lend larger amounts. It’s because we want to make sure we’re doing it right from the start,” Pitcher said, adding that SharpShooter Funding has only had its doors open in Canada since June 2015, though its corresponding U.S. business, First Down Funding, has been around since 2012. “It’s been a work in progress, and I love every day of it! We’re only getting started, and I am 100% excited for the future,” he said.
The Canadian grocer reached out to SharpShooter Funding in response to Google advertising. The affiliation with the Bret Hart association didn’t hurt. Pitcher explained there is a seasonality tied to the merchant’s business, evidenced by a couple of months or more each year in which revenue is spotty, that made the grocer unattractive for banks to fund. “That’s why those sized deals are difficult to put out and banks won’t put out, because of seasonality,” Pitcher said.
SharpShooter Funding was not deterred by that. “We were really able to gain in-depth trust and visibility into this merchant from the first call to the last call. There was never a problem with him mixing up stories. Just the honest truth. From his references to his landlord, everyone involved made it clear he was here to work with us and not to play games,” Pitcher said.
Pitcher was impressed by the business owner’s work ethic. “He’s a roll-up-your-sleeves entrepreneur who didn’t borrow $1 million from his father. No bank loans. Six years ago, he rolled up his sleeves and made it work. Now he’s in a situation where banks won’t lend to him. But we will,” he said.
The merchant’s bank statements also made sense to the funder given their consistency, predictability and transparency. “Whenever we ask for finances from someone and that merchant can get them to us in an organized fashion in less than an hour, it speaks wonders. It means they’re honest and ready to play ball. And that’s what we want,” Pitcher exclaimed.
The merchant plans to use the capital for an expansion into a new food product line. If he pays off the advance early the funder will lower the rate.
Kabbage Taps Debt Capital Markets for a Cool $200 Mil
November 16, 2017
Kabbage has been accessing the capital markets fast and furiously, most recently on the debt side. Today they’ve announced a new $200 million asset backed revolving credit facility with Credit Suisse. Just a couple of months ago, Kabbage attracted $250 million in equity to its coffers from SoftBank, which the alternative funder will direct toward ongoing operational expenses and expansion.
With the Credit Suisse deal, the tally for Kabbage’s debt funding capacity reaches $750 million. “The new revolving credit facility will be issued by Kabbage Asset Funding 2017-A LLC, a wholly owned subsidiary of Kabbage Inc,” according to a press release.
Kabbage expects the credit facility will help them to scale faster. They plan to use the credit to add bigger small businesses to its client roster as well as extend higher lines of credit with longer durations.
“The new revolving credit facility with Credit Suisse is a debt round. Those funds are for our small business customers, and will be used to continue to provide them with easy access to working capital,” Deepesh Jain, Kabbage Head of Capital Markets, told AltFinanceDaily.
It’s Kabbage’s maiden credit facility to be rated by credit rating agency DBRS. “The top two classes of the multi-class transaction earned investment-grade ratings of ‘A’ and ‘BBB’ and are collateralized entirely with assets originated through Kabbage’s fully-automated underwriting technology,” according to the press release.
Jain told AltFinanceDaily the DRBS rating is highly significant. “It strongly demonstrates the proven success of Kabbage’s fully-automated platform and its data-driven risk analysis for small business lending. It speaks to the company’s leading position in the SMB-lending marketplace and Wall Street’s confidence in Kabbage,” he noted.
As Jain pointed out, Credit Suisse has been an early supporter of fintech. Indeed, the Swiss bank a year ago similarly provided a $200 million asset-backed revolving credit facility to another alternative funder, OnDeck.
Alternative Funders and Bank Partnerships in the Spotlight
Jain declined to comment on whether Credit Suisse might be interested in Kabbage’s lending platform for its own use. Alternative funder and banking partnerships were recently thrust into the spotlight with a lawsuit filed by a Massachusetts-based small business owner against Kabbage and Celtic Bank, which have had a partnership for at least several years.
The lawsuit alleges that the funding model of the defendants “was designed to evade usury laws,” according to The National Law Review. Apparently, the plaintiffs, which are listed in the public filing as Alice Indelicato and NRO Boston, had several small business loans and now accuse Kabbage of “renting” Celtic’s bank charter. Jain declined to comment on the lawsuit and the plaintiffs couldn’t be reached.
Capital Markets Pipeline
Meanwhile, at the rate they are going, we could see Kabbage tap the capital markets again in 2018. “Capital markets are something we will continue to explore to further diversify our funding options,” said Jain.
Lights, Camera, Crypto-Transaction – How a Lending Journalist Raised Millions to Build Magic Lamps Through the Murky World of Initial Coin Offerings
November 15, 2017
This past July, the winner of the Best Journalist Coverage category at the 2017 LendIt Conference Awards, announced that he would be stepping outside of his journalistic endeavors to raise money for a futuristic lamp company. The product, dubbed Lampix, is described as a lamp with a projector, a camera, specifically placed light-emitting diodes (LEDs), and a cloud-enabled computer. On the company’s “Medium” blog, Lampix promises that the product is “designed to transform any flat horizontal surface into an interactive computer.”
The man behind Lampix, George Popescu (whose Lending Times news site competed against and beat out fellow finalist AltFinanceDaily at the LendIt Awards), makes for an interesting case study in alternative finance. That’s because Lampix shunned traditional capital-raising methods by relying on an Initial Coin Offering (or ICO), an unregulated blockchain-based corporate event which is similar to an initial public offering. Rather than purchasing shares, as is the case in an IPO, investors in an ICO receive digital tokens instead of shares. In August, Lampix raised $14.2 million through its ICO*.
Popescu’s name popped up again a few months after the LendIt award on a regulatory blotter in the UK.
In case details published by the UK’s Insolvency Service on August 1st, the agency announced that Popescu was disqualified from serving as a company director.
Mr Popescu breached his fiduciary duties to act in the best interest of Boston Prime Limited (“Boston Prime”) and/or failed to ensure that both Boston Prime, as the regulated firm, and him individually, as the approved person, complied with the Financial Conduct Authority (“the FCA”) rules and guidance.
$6.2 million was transferred out of the company to a company named FXDD. Boston Prime’s receiver is presently suing FXDD seeking the return of the funds to the company. Proceedings are ongoing. Mr. Popescu is not under investigation and there are no legal proceedings at this time against Mr. Popescu.
It’s an inauspicious beginning for someone financing the “lamp of the future” using an unregulated and controversial strategy. Even so, when its ICO concluded on August 19, Lampix declared its gambit a success after raising $14.2 million through the sale of its digital tokens, which are known as PIX.**
By mid-November, the market value of those digital tokens, which exist on the Ethereum blockchain, had dropped by 50%, causing Lampix investors to suffer losses of $7 million. Unlike shareholders in publicly traded companies, token buyers have few investor protections. It’s not clear they are even considered to be actual investors at all. Buried in the fine print of Lampix’s 85-page “white paper” – a convenient way to avoid the label of prospectus – is a disclaimer. “Buyer should not participate in the [PIX] Token Distribution or purchase [PIX] Tokens for investment purposes. [PIX] Tokens are not designed for investment purposes and should not be considered as a type of investment.”
Additional disclaimers, moreover, declare that the white paper is not a prospectus, that the tokens “are not securities, commodities, swaps on either securities or commodities, or a financial instrument of any kind.”
But the distinction has not deterred people from joining in the frenzy of buying digital tokens like PIX. So much so, TechCrunch reports companies employing this strategy had raised nearly $800 million by means of ICOs in the first half of 2017.
And the SEC is not exactly excited about ICOs. “Fraudsters often use innovations and new technologies to perpetrate fraudulent investment schemes,” a July 29 directive by the SEC states. “Fraudsters may entice investors by touting an ICO investment ‘opportunity’ as a way to get into this cutting-edge space, promising or guaranteeing high investment returns. Investors should always be suspicious of jargon-laden pitches, hard sells, and promises of outsized returns. Also, it is relatively easy for anyone to use blockchain technology to create an ICO that looks impressive, even though it might actually be a scam.”
On September 29, moreover, the SEC brought an enforcement action against REcoin Group, charging Los Angeles businessman Maksim Zaslavskiy and two companies he controls with defrauding investors “in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds,” an SEC press release said.
The SEC alleges that Zaslavskiy and his companies –REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) — have been selling unregistered securities, and that “the digital tokens or coins being peddled don’t really exist.”
Meanwhile, telephone calls and an e-mail to the SEC seeking the federal regulator’s view on Lampix’s ICO drew a terse response from Ryan T. White, a public affairs specialist, who replied that the agency would “decline comment.”
Deborah Meshulam, a partner in the Washington office of law firm DLA Piper and a former SEC enforcement official, told AltFinanceDaily: “Regarding the lack of equity ownership, Lampix is seeking to establish that the tokens are not securities. Whether the SEC would agree should it decide to look into the offering depends on the facts and circumstances. The SEC staff would look past form to substance to assess whether the sale of the tokens constitutes an investment contract under legal standards. If so, then the SEC would view the Lampix offering as a securities offering. It may be that Lampix (or its lawyers) already vetted the offering with the SEC but I don’t know the answer.”
Popescu tells AltFinanceDaily in an e-mail interview, “We had to respect all securities rules and regulations of course, respect the Howey test and so on. There were no hoops to jump through as we are not trying to avoid anything or prevent anything. We honestly built a token to build a community to help us crowdsource (mine) pictures for all applications among which, Lampix.”
“Each PIX token,” the Lampix website explains, “will be used as a form of payment to picture image miners, voters and app developers or to purchase a Lampix, cloud computing and apps.”
Meshulam also notes that the June, 2017, date of the Lampix white paper pre-dates the SEC’s enforcement activity in this area. She adds, “The statement that ‘token sales or ICOs are not currently regulated by the U.S. Securities and Exchange Commission may be very literal in the sense that there is not a specific regulation, but the SEC has stated that, in the right situation, ICOs are subject to the US federal securities laws.”
Erin Fonte, an attorney in the Austin, Texas, office of Dykema Cox, and the leader of the firm’s regulatory & compliance group, says, “The ICO stuff is so up-in-the-air. The SEC is looking at it closely. But it’s fairly new. And some of them (ICO’s) have been tied to fraud and Ponzi schemes. If a client came to us (seeking advice), we’d want to vet the people behind the offering.”
But what of Lampix, the company that won the Augmented and Virtual Reality category of the South by Southwest (SXSW) Accelerator Pitch Event earlier this year in March – and put a pretty feather in the cap of Popescu?
Popescu’s resume is no doubt impressive. He holds a trio of master’s degrees in various scientific and technological disciplines, including one from Massachusetts Institute of Technology. And he is a serial entrepreneur who lays claim to having founded 10 companies: they include, according to his LinkedIn profile, online lending, a craft beer brewery, an exotic sports car-rental space, a hedge fund, a peer-reviewed scientific journal, and a venture-debt fund.
He’s charmed journalists like Forbes contributor Roger Aitken, who declared: “The founders (of Lampix)…believe that Lampix will impact humans as much as computers or smart phones in the future…Think Tom Cruise in Minority Report. Imagine your room in five years: you will be able to use any surface around you as if it was a computer. The ability to transform any surface into an interactive computer (augmented reality) is going to unleash applications we have not even conceived of.”
The Lampix website hyped its ICO with the aid of an infographic listing “active product inquiries” the company has in its pipeline, the likes of which includes Amazon, Apple, Samsung, Microsoft, Sony, IBM, BMW, Bloomberg, PwC, and the Aspen Institute. With all of these names seemingly lining up, it begs the question: Why did Lampix choose the controversial route of an ICO to raise capital?
But it’s hard to determine the seriousness of these corporate relationships. Florin Mihoc, Lampix’s Strategic Partnerships & Development Advisor, said he could not assist us with confirming any of them, citing the slow and cumbersome bureaucracy of dealing with Fortune 500 companies. He did invite us to try reaching out to some of them on our own, which we did.
Bloomberg is one of the few acknowledging a relationship with Popescu’s company. Chaim Haas, head of innovative communication at Bloomberg, told AltFinanceDaily that the New York-based media and financial communications company “collaborated” with Lampix. Bloomberg, he says, “has used Lampix hardware in its fellowship program (Bloomberg AR Fellows) as a prototype for augmented reality applications.” But Haas declined to elaborate on whether Bloomberg’s relationship with Lampix was more than an experimental one.
Edward Caldwell, director of public relations for East Coast markets and sectors at Pricewaterhouse Coopers, the Big Four accounting firm, declined to comment about Lampix. “We can’t discuss individual companies, clients or engagements,” he reports.
Douglas Farrar, senior manager for communications and public affairs at the Aspen Institute, told AltFinanceDaily that he could find no business relationship between Aspen and Lampix. “I have gone down quite a few rabbit holes here,” he said in an e-mail, “But I’m coming up empty.”
When Popescu was directly confronted about this, he wrote, “The companies would only figure [in the infographic] if they actually themselves reached out to us and we exchanged emails with somebody from that entity. Most of these entities have many people and most of the companies’ people will have no idea [that] somebody else in the company is talking to us.”
Telephone calls and e-mail requests for comment to Microsoft were not returned.
A spokesperson using BMW of USA’s official twitter account, however, responded to an inquiry by saying they were a customer of Lampix, “but only for office usage.”
Meanwhile, George Popescu has been on the sales trail. A case in point was his October 5, Youtube interview conducted by Ian Balina, a self-described influential investor in blockchain technology and cryptocurrency – and someone with a reputation as an industry promoter and evangelist. (Balina caters to the get-rich quick crowd and publishes how-to guides trumpeting promises like “How ICOs can make you a millionaire in 3 years” and “make millions with bitcoin.”)
Balina asked Popescu the softball question, could he show viewers a demonstration of the product? Popescu admitted he wasn’t prepared to do that and when he attempted to set one up on the fly, it didn’t work. The incident is notable because Lampix has been promoting the video through its social media network.
Popescu corroborates a number of details about the ICO, however. He confirmed the ICO price of a PIX token to be 12 cents, the US dollar price people had to pay per token. Cryptocurrency exchanges, where token speculators can buy and sell tokens online, show the trading value of a PIX token currently hovering around 6 cents, which translates into roughly a 50% loss in value.
Investors feeling hurt by such a loss can’t contest the purchase of PIX tokens with their credit card issuers. That’s because of a requirement that token sales had to be purchased with ether (ETH), the currency of the Ethereum blockchain. While ether is arguably similar to Bitcoin, it operates on an entirely different blockchain.
To participate in the ICO, in a Youtube video, Lampix also explained to purchasers, for example, how they could first buy ether with dollars through an online exchange known as Coinbase** before forwarding the ether to a digital wallet. Next, investors were instructed to send the ether from the digital wallet to a specially designated PIX address. An automated “smart contract” would then release the appropriate amount of tokens to the buyers’ digital wallets 31 days after the ICO was consummated.
It’s a byzantine procedure. And for investors – especially for those who are not exactly tech-savvy – the rigmarole makes it nearly impossible for them to recover their money should they feel buyer’s remorse. Neither the video nor the Lampix white paper mentions any buyer restrictions. Indeed, Lampix’s white paper specifies that “anyone” in the global market can participate. That means that an investor could theoretically be underage or a citizen of Iran or North Korea. (When asked what steps Lampix took with regards to KYC/AML, Popescu said, we “implemented the standard ones with partners specialized in it.”) Investors could even be citizens of the UK where Popescu is banned from being a company director.
And global they are. AltFinanceDaily interviewed Rudy (whose last name we are withholding), a graduate student who lives in Singapore that says he bought approximately $2,200 worth of PIX tokens during the ICO. The drop in value has gotten him so frustrated that he’s contacted securities regulators in the United States to investigate Lampix. Despite the caveat in the white paper that tokens are not an investment and should not be used for investment purposes, Rudy said he considered himself to be an “investor” and that his reason for buying the tokens was to sell them in the future for a profit.
Popescu, who wasn’t asked about Rudy’s experience specifically, told AltFinanceDaily that Lampix is not selling PIX tokens as an investment but rather to primarily build a community. “What people do with the tokens is their choice and we cannot prevent them,” he asserted.
English is not his first language but Rudy said, “I think that [the] SEC should regulate ICOs in the USA. There are no rules currently, teams can promise anything before the ICO and forget everything after the ICO. Things have to change, there should be legal pressure on crypto teams.”
Rudy added that he was “so enchanted” by Lampix’s ideas that he had promised himself not to sell the tokens for at least two years even if they were losing value. He conceded that he was not a tech expert. But, he says, the award at the SXSW competition was an important milepost to him.
AltFinanceDaily found 700 more people interested in Lampix on the company’s official Telegram channel. The chat history since September 20, which we were able to obtain, has been dominated by talk of the PIX token’s trading value. Those bemoaning the low price regularly use the term “investors” to describe themselves – never mind that the white paper specifies that PIX tokens are not supposed to be an investment or to be used for investment purposes.
The chat’s administrator, who uses the nickname Chester, identifies himself as a “community manager” at Lampix. At one point he too refers to PIX holders as investors. “Hey guys,” he wrote in the channel on October 1, “Lampix is a company, not a single person, we don’t do things that quick, but pretty quick and we try not to confuse our investors by telling you unconfirmed news. Be patient, things will be just fine.”
Laura Toma, another community manager for Lampix, responded to complaints about the depressed price in the channel by saying, “The issue is that people want to get rich in a month.”
Indeed, investors hound not only the community managers, but also Popescu himself, who frequently joins in on the chat and fields questions about the trading price of PIX. “You should care more about the company revenue, clients, users.” Popescu replied to one user.
“Are you serious?” a user calling himself Dante fired back. “We are investors, and we care about the return on investment.” Another user with rough English tells Popescu, “As you know, most people come to ICOs for short-term profit. We cannot deny it.”
Others keep the faith. “PIX will be the real Aladdin’s magic lamp,” writes one user. Another hyperbolically predicts the price will “fly out of the earth, fly to the moon, and finally fly out of the galaxy.”
There is very little discussion about the use of the product itself while numerous inquiries are written in Mandarin. “Lampix has a lot of Chinese investors,” writes one. Other users self-identified as citizens of Russia, Romania, and France. Meanwhile, Toma writes, “Yes, there are investors from USA as well.”
Despite the losses that investors have so far experienced with Lampix, among other concerns, Popescu isn’t limiting himself to just one ICO. According to his online statements, Popescu is connected as an “advisor” to another company engaged in an ICO. AirFox, a Boston-based start-up launched by two Google alumni, provides free data to mobile phone users in return for eyeballing advertising. In early October, Airfox’s ICO raised $15 million. But a month later its AIR tokens, which sold for two cents apiece during the ICO, had lost 75% of their trading value. That means investors in AIR, the company’s ICO ticker symbol (which is becoming an increasingly ironic moniker) have seen more than $11 million go up in smoke almost overnight.
Popescu says in their defense, “The AIR tokens are meant to solve a real problem, of remunerating people who watch ads in exchange of getting more data and minutes on their mobile phone. The ecosystem is still being worked upon, the product is not live. Once the ecosystem is live we will see what really happens. Until then the token is mostly being handled by speculators. The price can therefore vary widely and it doesn’t reflect their true value.”
Even as Lampix and AirFox have been racking up massive losses for investors, Popescu announced on November 5 in a LinkedIn post that he would be involved in five more ICOs.
Among them is DropDeck Technologies, at which Popescu is listed as the chair of the advisor board; its ICO is scheduled for November 21. Another company, Factury, for which he is listed as an advisor, is initiating its ICO on December 15.
He’s an ambitious man.
And his ICO familiarity hasn’t escaped the scrutiny of PIX investors. “I find it strange that you are directing 5 other ICOs,” writes one user in the Telegram chat on November 4. “To make Lampix big, this will require a CEO [who is working] full time working on the project.”
Popescu responds personally. “I am working full time on the project but people have asked me to advise on their ICOs and this grows Lampix’s notoriety a lot in the crypto space,” he writes. He offered further assurances that he wouldn’t be advising those companies’ projects beyond their ICOs.
In an email to AltFinanceDaily, he writes, “I run right now Lending Times, Lampix and Block X Bank only. The ICOs are just customers of Block X Bank. I have built about a dozen companies in 9 years, sold a few, closed a few. Each company has a team to help me, I am not doing this alone. For the ICOs I am more or less involved as an advisor / helping them project-manage their ICOs. How to run 3 companies? It’s about being effective, organized, delegating, partnering and being productive. Oh and I don’t watch TV, so maybe I have a few more hours per day than the average person. I do work long hours.”
Block X Bank, through which Popescu extends his efforts toward other ICOs, is described on the company website as “a boutique investment consulting company specializing in connecting blockchain projects with funding.”
In all of these ICOs, money is seemingly being created out of thin air. A consultant who was hired by AltFinanceDaily to help analyze the technical aspects of both ICOs and smart contracts determined that Lampix raised much more than just the $14.2 million in token sales. In addition to the 114 million PIX tokens sold to investors, our consultant explained, the company also issued 220 million tokens to itself. At the ICO price of 12 cents apiece, those tokens would theoretically be worth $26.4 million – a huge piece of the total ICO pie that Lampix could sell on cryptocurrency exchanges if it wanted to rake in even more money.
There’s a kicker too. At scheduled intervals over the next four years, the smart contract that made PIX tokens possible in the first place is slated to automatically create – and allocate – 330 million new tokens to Lampix. Thus, when Lampix raised $14.2 million in August, the company reserved $66 million worth of PIX tokens for their corporate use.
Popescu said in his e-mail to AltFinanceDaily that these company tokens are for “corporate usage like employee incentives, M&A, other company investments…etc.”
It’s a mind-boggling sum of money for the development of a futuristic lamp whose followers mostly seem to reside on internet chats like Telegram, reddit, and bitcointalk.org.
And this has occurred despite the company’s withholding any information regarding Popescu’s status in the UK. Balina, who interviewed Popescu on Youtube, told AltFinanceDaily he wished he had known about his disqualification in the UK. “This is definitely a big issue and I wish I would have known about it so that either my audience or I could have asked him this directly on the live stream,” he said.
AltFinanceDaily asked Paul Savchuk, Co-founder, CEO, and Chief Product Officer at Cryptocurrency Capital LLC, a US-based hedge fund that only invests in utility tokens as commodities, if Popescu’s ban in the UK would have been relevant information in the Lampix ICO. “Yes, that might be a red flag for us in some cases and require us to perform additional research,” he wrote in an emailed response. “We look at management very seriously – especially since a lot of projects are treated like startups and management is a key component to whether or not many of these ICOs can make it. We try to find such events and spot red flags whenever we conduct our due diligence research on ICOs. The reason: each project has something that needs to be improved. ‘Red flag’ – sometimes conversely can lead to a great opportunity when other market participants ignored it or were too skeptical.”
Mr. Savchuk further said, “Lampix is a perfect example of a coin that on the surface looks very promising, but when you dig a little deeper, you do find red flags that can dampen the excitement for this investment.”
And yet Savchuk spoke rather positively of the Lampix product after reading their white paper. “We believe the project is looking to change the current AR/VR tech industry,” he said, referring to augmented reality/virtual reality. “The project is promising for two reasons. First, they have multiple companies in their pipeline. Second, they have a legitimate product which they will manufacture and sell. They are one of the few blockchain products to offer a tangible product with the ability to disrupt the market.”
“Third,” he went on, “most companies have gaps in building a strong structure at the outset of their existence. Some have bugs in initial code that cause breaches in cybersecurity. Others release product with a low level of usability – the ones who are aware of such problems have a greater chance of success. We would prefer to see publicly known strengths and weaknesses of such companies. Management has to be transparent about their team and product no matter what. Whenever possible, we want to be in touch with the management team.”
With regard to the price drop, Savchuk said, “This is a danger for all purchasers of ICOs. Sometimes it’s caused by token purchasers (swayed by) fear and greed and (hoping for) easy money and fast money. I doubt somebody sold Apple Inc.’s stock right after its IPO. It is also very difficult to restrict exchanges from allowing massive pump and dumps. That’s not even mentioning the difficulty of measuring the value of tokens,” Savchuk concluded. “Consequently, such projects are struggling with low credibility. However, it also creates a possibility for those who believe in the idea and product on a long-term run.”
Popescu downplays the significance of the UK issue. The root of the debacle, he says, is the result of Boston Prime – the company he previously ran – being forced into bankruptcy by the actions of a company he is now suing called FXDD. “FXDD bought the companies and then bankrupted them and that’s why Boston Prime [went bankrupt],” he writes. “Myself personally and each company separately are suing FXDD for this. UK has archaic laws where if you are a director of a bankrupted company you get disqualified from being a director again for a time. Attorneys charge about 40,000 GBP to defend this automatic case and I weighed the pros and cons and decided to ignore it as I have no plans to be a director in the UK for time being.”
Investors unhappy with underperforming ICOs may be willing to challenge their legality. On October 25, for example, a class action lawsuit was filed against Tezos, a computer networking project that raised $232 million in one of the largest ICOs ever. In a complaint, the lead plaintiff alleges that, among other things, Tezos unlawfully engaged in the unregistered offer and sale of securities and fraud in the offer or sale of securities. “In July 2017, Defendants conducted an ICO in which they sold 607,489,040.89 tokens (dubbed ‘Tezzies’ or ‘XTZ’) in exchange for digital currency worth approximately $232 million at the time,” the complaint reads. The plaintiff, who purchased 5,000 Tezzies, feels he was misled about the company and the offering.
Internal squabbling at Tezos which has delayed the release of its product and the sheer amount of money at stake have put the company on the map with the mainstream media and business press. The New York Times, Wall Street Journal, and Fortune as well as news services Reuters and Bloomberg have all covered the allegations of fraud.
The day before the class action lawsuit was filed, moreover, a AltFinanceDaily reporter attended an explosive session at Money2020 in Las Vegas that saw Tezos co-founders, Arthur and Kathleen Breitman, attempting to give a status report of the company. A crowd that had gathered outside prior to the doors opening had attendees speculating whether the Breitmans “would actually show their faces” in the midst of all the drama.
To date, no lawsuits have been filed against Lampix despite the drop in the token’s value.
At a cryptocurrency/ICO meetup in NYC in October, a AltFinanceDaily reporter met with executives at one company preparing an ICO who said they would not allow American investors to participate because of securities-enforcement fears. Pressure is mounting in the Far East as well. Citing their illegality, Chinese regulators in September issued a blanket cease-and-desist order on all ICOs in their country. What that means for Lampix’s Chinese investors bears watching.
Popescu says that Lampix supports regulation in China. “Of course, all Chinese people have to follow Chinese regulation,” he writes.
Meanwhile, on the product front, Popescu says that right now a Lampix lamp can be purchased for $10,000, a tidy sum because they must be hand-made. “We plan to improve the manufacturing costs and then we’re planning to do a kickstarter early next year for around $500 [per] Lampix,” Popescu told AltFinanceDaily in his e-mail interview.
But for investors, it always comes back to the trading value of PIX. On October 25, one investor asks Popescu if the company will buy back its own PIX tokens at the ICO price to pump up their market price. “If you want a pump and dump please go to other companies,” Popescu responds. “We are here for 5-10 years to build a $100 billion dollar company and compete with Apple.”
And it all began with an ICO.
“ICOs also help with bootstrapping the user base – breaking the chicken and egg problem,” Popescu also explains in his e-mail to AltFinanceDaily. “In addition, given that Lampix is looking to crowdsource images, we prefer many different people hold PIX tokens rather than 2-3 VC funds. And last but not least I think tokens are better rewards for the community (liquid, mark to market, etc.) than illiquid instruments.”
Not everyone agrees that PIX is the most liquid instrument to grow the community. US Dollars come to mind, for example. “Let’s say I’m a customer,” one investor poses to Chester, a Lampix community manager. “I want to use the cloud computing service but then I see I have to pay with PIX. I have no experience in crypto and have no idea how to do that. I just want to use your service fast and don’t want to buy PIX coins first before I can make use of it. Will there be a fiat option?”
Chester is awed by the idea. “Well, you are so professional,” he writes. “Man, you are good. You are good, the question you threw just hit the spot seriously. I guess there is always something Lampix needs to figure out and choose the best solution. Technically speaking they are jolly good at this point, but it doesn’t mean it’s perfect.”
Chester, who assures him that he isn’t being sarcastic, goes on to refer to the investor who asked that fairly elementary question as a “big shark” that is “born to bite.”
It remains to be seen if the PIX “user base” shares the same philosophy as Lampix. Ian Balina, who interviewed Popescu on Youtube, separately asked his social media followers: “What’s the first thing you’re going to do once you hit your goals in cryptos?”
The responses fly in:
“Buying my Lambo”
“Travel to Paris”
“Buy an island”
“Buy my mum her dream home”
“Quit my job and start up something for me”
“Pay off mortgage and be financially free”
“Buy house in Miami, buy Lambo, enjoy life”
“Retire”
“Easy. Buy more crypto”
Meanwhile on Telegram, where investors continue to engage Lampix management on a daily basis, Dante offers a sobering reminder of what they’ve bought into, “We don’t have equity, we only have tokens,” he writes. “And we are taking a big risk.”
* The amount of tokens sold multiplied by the 12 cent ICO price doesn’t exactly match the dollar amount Lampix says they had raised. That’s because Lampix not only issued bonus tokens to buyers at each stage of their ICO but also because the market value of ether, which users had to convert to from dollars to buy PIX, had fluctuated when they reported how much they raised. Like Bitcoin, the value of ether is volatile.
** The smart contract Lampix wrote to launch Lampix’s tokens into existence specifically named them PIX tokens and dubbed their publicly identifiable symbol to be PIX.
*** Coinbase is a respected digital currency wallet platform based in San Francisco.
Check Out The Preliminary Agenda of Broker Fair 2018
November 15, 2017The preliminary agenda of Broker Fair 2018 was published to the event’s website on Tuesday evening. While subject to revisions between now and May 14th, Broker Fair is already shaping up to be the hallmark event for the MCA and small business lending industry. Fifteen sponsors have already signed on including National Funding, RapidAdvance, and Funding Metrics as Platinum-level and CFG Merchant Solutions as Gold-level.
Broker Fair 2018 will be the largest gathering of merchant cash advance and business loan brokers in the country. Until now, there’s never been anything like it.
To register, sign up online or contact Sarah@brokerfair.org
We hope to see you in Brooklyn at The William Vale in May!
Update 4-26-18:/strong> Most recent version of the agenda below
From Ineligible to 0% APR – Los Angeles Company Monetizes Startup Leads, Combats Stacking
November 10, 2017
Merchants have no shortage of options when it comes to accessing funding in today’s climate. And while MCAs and loan products have become more pervasive, one company’s solution is to reintroduce traditional financing in a strategic manner. Seek Business Capital finds credit card offers and credit lines for the credit-worthy who may not be eligible or ideally suited for a business loan.
Roy Ferman is an Australia transplant who runs the company out of the Los Angeles headquarters, miles from the usual domicile for alternative funders of Silicon Valley, New York and Austin.
“We liked LA from a perspective of the sunshine, but we also like being away from the rest of the funding industry. It gives us the ability to put our heads down and focus on what we’re doing and not worry about what anybody else is doing,” Ferman told AltFinanceDaily.
Seek Business Capital partners with MCAs and brokers on leads and recently expanded with a new hire in New York. Kunal Bhasin joined the company over the summer as vice president of business development. “We were traveling out there to meet with partners and doing redeye flights. Now someone is on the ground there training partners on how to better find opportunities to use our product,” Ferman said.
Basically, the company tells MCAs and brokers that the startup leads (those that are trying to start a business or have just started one), to send those deals to Seek Capital, instead of throwing them in the trash.
They recently adopted a fully automated underwriting product that delivers an instant decision for merchants though there’s an element of the human touch on the services side of the transaction.
“For us, the biggest driver is FICO. We take someone with a good FICO score but just started their business and we are still able to offer this person funding,” said Ferman, adding that the sweet spot is a credit score of 680 or higher. “Cash flow is always going to be a factor. For us, we’re predominantly based on FICO. Even still, FICO is one thing. That’s the body of the car. Sometimes we want to look under the hood and see what’s really going on,” said Ferman.
Economic Indicator
Seek Business Capital is industry agnostic though some of the more common sectors they work with are retail, restaurants and trucking. “What’s really interesting is we get a little bit of a sneak peek into emerging industries and local economies,” Ferman said.
For instance, when cannabis was legalized for recreational use in Colorado, they saw a spike in demand from “peripheral businesses” such as contractors that were building out the storefronts, security companies and restaurants amid a rise in tourism to the area.
A similar boom is expected in California when cannabis for recreational use becomes legal in the state in 2018 via Prop 64.
Zach Lazarus, CEO of San Diego-based A Green Alternative, a cannabis dispensary and delivery service, said: “You name it, it’s going up in California right now,” in response to Prop 64. He added there are desert towns and farm communities looking to embrace the boom, which he compares to the gold rush of 1849.
“It’s the service providers, architects, contractors, all these different niche needs are the people who are really going to benefit from the boom,” Lazarus said. Contractors especially need access to capital right away; they don’t generally get fully compensated until once the job is complete, and they need to purchase materials in the interim.
Lazarus said banks won’t loan to cannabis businesses and in his experience other lenders have been predatory in nature. He may just not have come across the right funder yet.
Anti-Stacking Tool
One of the problems that Seek Business Capital seeks to solve is that of merchants taking on too many positions. “We found two ways to provide our services. Our bread and butter and our historical performance has always been in startup funding. We’ve evolved to move more upstream with lenders and we’ve become an anti-stacking tool, if you will,” Ferman noted.
The problem with stacking is that it can put a major strain on the cash flow of the merchant and it put the first position funder at additional risk than what they originally agreed to underwrite.
“We offer 0% for the first 12 months. It’s very advantageous and we’re not crushing cash flow. We view it as an anti-stacking tool. There are few lenders and ISOs who use it, taking both our credit card position and the original term loan but protecting the merchant. The merchant gets all the money they need so they’re not interested in stacking,” said Ferman.
Seek Business Capital charges merchants a success fee of 9.9% of whatever funding they receive for them. Payment is made once the small business receives their funding and the merchant will typically choose to pay Seek Business Capital with the capital they receive from the credit extended to them.
Now they’re taking things to the next level with a data product that they plan to license to third party credit aggregators next quarter.
“We’ve seen everything from the credit profile, to income, to the approval rate, the approval score and the amount. We’ve taken all that data and analyzed $150 million worth of credit card approvals for big clients. We now have a strong indicator of which profile is going to get approved from which bank and how much,” Ferman explained.
A customer submits their details into Seek Business Capital’s decision engine, which generates an estimated approval or decline rate in real time. For instance, they might see that their approval likelihood is 25% for one card and 86% for another along with the estimated approval amount. It’s a soft credit pull so customers don’t have to worry about harming their credit. In addition to the decision engine there’s a recommendation engine that makes credit card suggestions to merchants.
Ferman said the biggest competition the company faces is a potential customer taking out a home equity line, dip into their 401(k) or borrow from friends and family.
Former MCA Co-founder Meir Hurwitz Kicks Off New Venture With Kim Kardashian West
November 9, 2017I love how @screenshopit lets you find the exact designer looks you see people wearing online, plus suggests similar items at all price points! #ScreenShop_Ambassador https://t.co/TXZ23agVoT pic.twitter.com/nA8JBDVbU5
— Kim Kardashian West (@KimKardashian) November 7, 2017
An early innovator of the merchant cash advance industry has re-emerged on the business scene in a very different new venture focused on mobile shopping.
Meir Hurwitz, co-founder of Pearl Capital, the MCA company acquired in 2015 by Capital Z Partners Management LLC for as much as an estimated $60 million, is now the chief visionary officer of ScreenShop. The New York startup markets an app designed to enable users to shop for a specific item by uploading a screenshot of the item to the app.
Working on a mobile app is a longer shot than MCA and it doesn’t always pay off, but Hurwitz said Thursday he’s enjoyed learning the business after two years off and visiting 62 countries since selling Pearl Capital.
“It’s new and exciting for me, but I don’t get paid right away,” he said. “It’s something I haven’t done before — it’s kind of exciting for me.”
The app is the first developed by New York-based Craze Ltd. and publicly launched on Nov. 7 with celebrity Kim Kardashian West cited as an advisor. Craze employs 12 technical workers in Israel and five in New York, Hurwitz said.
Hurwitz started in MCA in 2006 and then launched Pearl Capital with partner Abe Zeines in 2010.
Pearl launched with $1 million and generated an $8 million profit in 2012. The following year, the company doubled its profit and reached origination volume of $100 million, Bloomberg reported in 2015. Hurwitz’s ScreenShop profile indicates that he’s a “three-time successful entrepreneur” and cites “over $500 million in funding capital.”
In addition to a real estate business in Puerto Rico, Hurwitz said he’s managing partner of New York-based GS Capital, a convertible debt company lending to small businesses. Zeines lists himself as the CIO of GS Capital, according to his online profile.
At ScreenShop, Molly Hurwitz (Meir’s sister) is listed as the co-creator and co-founder. CEO Mark Fishman was previously a risk manager for Pearl Capital.
The startup’s app, which is free, scans screenshots taken from any app or website on a mobile phone, converting them to similar items that can be bought for various prices. It plans to generate revenue by collecting a commission at the point of sale, Forbes reported.
“The results have been — we’re No. 5 on the app store category of fashion,” Meir Hurwitz said. “We’re just getting started.”
Goodbye Liens and Judgments
October 28, 2017
Justice can require sacrifice. Take the example of a decision by the three major credit bureaus – Equifax, Experian and TransUnion – to stop including some liens and most judgments in their credit reports.
The change makes life a little less unfair for consumers who fell victim to reporting errors. Many invested precious time and large amounts of money trying unsuccessfully to correct their credit histories and restore their reputations.
But for the alternative small-business finance industry, omitting data on liens and judgments increases costs, creates extra work and can even give rise to an unsettled feeling in the pit of the stomach. “You’re not looking at a full credit report anymore, which is kind of scary,” one alt funder admits.
Yellowstone Capital CEO Isaac Stern provides an example to illustrate what’s at issue. “Imagine I’m the Ford Motor Co. and I want to do a lease with you,” he says. “But I don’t have the information that you happen to have judgments from Chrysler, Chevy and BMW, so I approve your lease. Imagine that! Without full information, how do you make accurate decisions?”
Operating without the data could prove dangerous, agrees David Goldin, who sold his U.S. Capify operations to Strategic Funding Source in January but still runs Capify UK and Capify Australia and remains open to U.S. opportunities. “The IRS could come in and seize credit card processing accounts and prevent the lender from getting paid,” he says. “Once you have a judgment a creditor could come in and freeze bank accounts.”
Fears aside, the change in reporting probably won’t dry up alternative small-business credit – even in the short run, Goldin predicts. Alt funders will adjust quickly, he says, noting that they can compare the old and new credit scores of long-time customers to spot patterns and apply those patterns to their calculations. The industry can also tap alternative sources of information.
Even with those reassurances, the transition would have been easier if the industry had more advance notice, alt funders say. “We found out July 31 when a Reuters rep emailed us and said this is going into effect tomorrow,” recalls Stern. “That was really weird – I’ve got to tell you.” Experian didn’t provide a heads-up even though Yellowstone is one of its largest New Jersey customers, he notes. “We were a little bit annoyed, but what are going to do?” Meanwhile, Goldin says he didn’t begin researching the situation until AltFinanceDaily asked him about it. “I don’t think anyone really knew about it” much in advance, he says.
But the industry is finding out and taking action. Yellowstone, for example, is performing a performing a workaround by integrating the judgments and liens section of the Clear investigative platform into the information underwriters see when they open a file, Stern says. The integration required a couple of weeks of hard work by the Yellowstone tech team, he notes.
Clear, which is provided by Thomson Reuters, amasses public records that can date back 20 years and can fill more than a hundred pages, he says, adding that you have to know where to look for the relevant information. “You have to dig through it,” he says.
In the past, Yellowstone performed a Clear report on most files just before funding them, Stern explains. Now, the Clear report is scrutinized more extensively and earlier in the process – before the file is approved. As a result, Yellowstone underwriters will have all the information they need, but it will take them a little longer to get it, he says.
Yellowstone incurred the expense of obtaining additional user licenses from Clear, which cost it $800 to $900 monthly Stern says. Experian now charges the same price for less information, he notes.
Accommodating the changes didn’t require more underwriters but it became necessary to hire four additional data entry clerks to input information until the integration with Clear was completed, Stern says. Now that Clear and the Yellowstone systems are working together, the four extra clerical workers will shift their attention to inputting data from the increasing number of applications coming into the company, he says.
Most Alt funders won’t need to employ more people in their underwriting departments because changes to their models will be automated, Goldin says. “I don’t think this is as much of a game changer as people think it is,” he says of the credit bureaus’ new approach to reporting.” It’s just one extra step. It’s more of a nuisance issue than a manpower issue.”
However, a challenge arises for underwriters because leaving out the liens and judgments will result in higher credit scores for some loan or advance applicants, Goldin says. That means some alt lenders may need to go to the trouble and expense of tweaking their risk models to compensate for the change in the scores reported by the credit bureaus, he maintains.
The impact may be greatest among alt funders who rely on quick online decision-making, Goldin says. Adding extra steps to the process increases the difficulty of maintaining the speed that provides a selling point and a source of pride for those companies.
While Clear is helping to fill the gap at Yellowstone, it’s not the only company providing much-needed data. LexisNexis Risk Solutions isn’t a credit bureau and will thus continue to disseminate information it gathers from courtrooms on lien and judgments, Goldin notes. Alt lenders who weren’t already using the vendor’s service or were using it only when an application reached a predetermined threshold will face added expense because of the credit bureaus’ decision, he says.
Indeed, LexisNexis Risk Solutions views the credit bureaus’ hiatus on some liens and judgments reporting as a business opportunity to increase its sales by supplying the missing data, according to Ankush Tewari, senior director of marketing planning in the company’s business services section. The company was already selling data on liens and judgments and anticipates selling much more of it, he observes.
For 15 years LexisNexis Risk Solutions has been selling RiskView Solutions, a product that contains liens, judgments and other information not generally found on credit reports, such as the assessed value of a consumer’s home or a list of a consumer’s professional licenses. It offers no data on loan repayment but its other information helps define a consumer’s creditworthiness and character, Tewari says. Lenders can combine that peripheral information with credit scores for a more complete customer profile that outperforms the credit score alone, he suggests.
And there’s more. LexisNexis Risk Solutions has reacted to the credit bureaus’ decision by creating RiskView Liens & Judgments Report, which lists only those two types of records. “The credit bureaus announced these changes a year ago, and we knew there would continue to have a need for that data,” Tewari says. The company prices the RiskView information based upon the transaction volume, he notes, so a lender pays less per transaction as volume increases.
With this emphasis on liens and judgments, one might well wonder who tracks down the information. Companies like LexisNexis Risk Solutions gather and disseminate public records on liens and judgments from courthouses throughout the United States, says Tewari. Over the years the company acquired some of its competitors and eventually was spun off from its sister company, LexisNexis, which built its name partly as an aid for lawyers researching cases, he notes.
For decades, LexisNexis Risk Solutions has been providing the credit bureaus with raw data not only on liens and judgments but also on bankruptcies, Tewari says. The bureaus have then parsed those files electronically and appended the data to credit reports, he continues.
Problems arose because the credit bureaus’ tech systems could not always link the court documents to the right person when the courts provided only a name and address, Tewari maintains. Courts often limit information in their records to those two identifiers because they’re reluctant to divulge additional identification that criminals could intercept and use to commit fraud, he says.
Tewari traces the bureaus’ inaccuracies in matching court records to the right people to what he calls the bureaus’ “DNA.” The bureaus are accustomed to receiving “clean” information from lenders on a regularly scheduled basis. Conversely, some of the LexisNexis Risk Solutions data, gathered from obscure places like county deed offices, may arrive in a form that’s far from clean, he notes.
However, that lack of court information or inconsistencies in the presentation of that information doesn’t pose problems for LexisNexis Risk Solutions because the company cleans the data before analyzing it. Tests indicate its linking methodology works accurately with just a name and address more than 99.9 percent of the time, Tewari contends. Thus, the company can establish that John Smith at 1234 Maple Street is the same person as John A. Smith at 1234 Maple Street, he says. He considers that linking technology the core of the company’s operations.
The information LexisNexis Risk Solutions can supply becomes vital to lenders because studies indicate that people who have a lien or judgment on file are twice as likely as people without them to default on a consumer loan and five times as likely to default on a mortgage, Tewari says. “The data didn’t become less important because the credit bureaus decided not to include it anymore,” he maintains. “It’s still just as predictive as it was.”
Meanwhile, other types of information can also help lenders make decisions, notes Eric Lindeen, vice president of marketing for ID Analytics, a credit risk and fraud risk management company that offers a credit score called Credit Optics, which it bases on a combination of traditional and alternative credit data.
Alternative credit data is defined as anything the credit bureaus don’t include in their reports, Lindeen says. Examples include the bills consumers pay for cell phones, utilities and cable television, he notes, adding that rent is also sometimes considered alternative credit data. The category also encompasses records from marketplace lenders.
A consumer’s tendency to pay those bills on time, late or not at all can reflect on creditworthiness, Lindeen maintains. That history becomes relevant for alt funders because the small businesses they serve constitute a hybrid of consumer and commercial credit, he says.
Using that data, ID Analytics can spot people who are good credit risks when the credit bureaus still consign them to “thin file” status — the limbo where applicants don’t have enough credit history to evaluate their creditworthiness, Lindeen maintains. About 60 percent of near-prime applicants qualify for credit when lenders factor in alternative data, according to an ID Analytics study he says. At the same time, alternative data can also expose weaknesses among individuals with excellent traditional credit scores, he observes.
Combining alternative data with traditional data has become more important with the bureaus’ decision to stop supplying data on liens and judgments, Lindeen says. Leaving out that data will raise some credit scores, and the effect will be strongest among near-prime individuals with good but not great traditional scores, he notes. With those consumers, a 10-point shift could make a big difference in qualifying for credit, he says.
“Even though it’s a small population, it’s a critical population,” Lindeen says of those newly minted prime applicants. They may number only one in a hundred of a particular funder’s portfolio, but they may advance to another risk pool and consequently invalidate a risk model, he suggests. Over time, risk managers will adapt to the change and oversee a “risk migration,” he predicts.
Overall, between 6 percent and 9 percent of consumers will see their credit scores rise because of the bureaus’ new policy, Lindeen estimates. The change usually won’t exceed 20 points, he says. Still, about 700,000 will see an improvement of 40 points or more, he continues. “That’s a significant increase for a nontrivial population,” he says. “It’s likely their performance will stay the same as their score goes up.”
A study by VantageScore Solutions, the company that provides the VantageScore credit scoring model to the credit reporting bureaus, projected scores would increase an average of 10 points for slightly more than 8 percent of the scorable U.S. population.
Those changes are characterized as “minimal” by Francis Creighton, President & CEO of the Consumer Data Industry Association, a trade group that represents the three major credit bureaus as well as about a hundred other companies – mostly smaller credit bureaus around the country, resellers of credit bureau information and background screening companies.
The credit bureaus decided to curtail reporting of judgments and liens as part of the National Consumer Assistance Plan, or NCAP, Creighton says. NCAP is an agreement reached in March 2015 among the three major credit bureaus and the attorneys general of 31 states, who were pressing for fairness in credit reports. Many observers call NCAP a “settlement” but the agreement did not result from a lawsuit, he notes.
Under NCAP, the bureaus will continue to include bankruptcies in their reports because the records meet the standard of providing a name, address, Social Security number and date of birth and because visits to the courthouse to update records occur at least every 90 days. About half of liens don’t meet those standards and will be removed from credit reports, and nearly all judgments fail to adhere to the standard and will no longer appear on the reports.
Although Creighton declines to say how many consumers were victims of credit reporting errors, he emphasizes the severity of the problem for each victim. “If you were one of the people who had a name similar to somebody else or a similar Social Security number, it would impact you a lot,” he maintains. “I don’t know how widespread it was, but it was disruptive enough for individual people that it’s better just not to have it.”
A Federal Trade Commission study released in 2013 reported that a sample of 1,000 credit reports indicated that 25 percent had at least one error that could reduce scores, according to published reports. Such findings prompted state attorneys general to seek remedies that resulted in NCAP.
The bureaus planned to implement another major portion of NCAP in September when they were to begin waiting 180 days before reporting medical debts, Creighton notes. At the same time, debts for medical expenses covered by insurance policies were to be omitted from credit reports, he says.
Changes brought by NCAP represent part of ongoing efforts to improve the system, according to Creighton. “We want accurate information in the reports,” he says. “That’s good for everybody.”
