ITEM 1A. RISK FACTORS
RISK FACTORS
Investing in our common stock involves a high degree of risk. The risks and uncertainties described below should be carefully considered, together with all of the other information in this Annual Report on Form 10-K, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
SUMMARY OF RISK FACTORS
The material risks that may affect our business, financial condition or results of operations include, but are not limited to, those relating to the following:
• Our business has been and will continue to be adversely affected by economic conditions and other factors that we cannot control.
• If we are unable to maintain diverse and resilient loan funding to our marketplace from institutional investors or successfully manage risks associated with committed capital and other co-investment arrangements, our growth prospects, business, financial condition and results of operations could be adversely affected.
• Our loan funding and financing arrangements with lending partners, institutional investors, securitization programs, and warehouse credit and risk retention financing facilities expose us to certain risks, and if we fail to successfully manage such risks, our supply of capital may decrease or we may be required to seek more costly or less efficient capital for our marketplace.
• If we are unable to continue to improve our artificial intelligence (“AI”) models or if our AI models are ineffective, including by failing to accurately or timely reflect changes in economic conditions on borrowers’ credit risk, our growth prospects, business, financial condition and results of operations would be adversely affected.
• If we are unable to approve a significant number of borrowers for loans through our marketplace, our growth prospects, business, financial condition and results of operations would be adversely affected.
• A limited number of lending partners account for a significant portion of loan originations and revenue on our marketplace, and our business depends on our ability to retain existing lending partners and attract new ones.
• We have incurred net losses in the past, and we may not be able to sustain or achieve profitability in the future.
• If we are unable to manage risks associated with the loans on our balance sheet, our business, financial condition and results of operations may be adversely affected.
• Our quarterly results may fluctuate significantly, which could adversely affect our business and the trading price of our common stock.
• If we are unable to manage the risks associated with the Upstart Macro Index (UMI), our credibility, reputation, business, financial condition and results of operations could be adversely affected.
• Our reputation and brand are important to our success, and failure to maintain, protect and promote our brand may harm our business.
• If we are unable to manage the risks related to our loan servicing and collections obligations, our business,
financial condition and results of operations could be adversely affected.
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• A significant portion of our business has historically depended on a single loan product, and shifts in product demand or mix could adversely affect our business.
• We are continuing to introduce and develop new loan products and service offerings, and if these products are not successful or we are unable to manage the related risks, our growth prospects, business, financial condition and results of operations could be adversely affected.
• Security breaches, improper access to our or borrowers’ data, or other security incidents may harm our reputation, adversely affect our results of operations and expose us to liability.
• Any significant disruption of, or failure in, our technology systems, including our AI lending platform, could adversely affect our business, financial condition and results of operations.
• We rely on strategic relationships with loan aggregators to attract applicants to our marketplace, and if we cannot maintain effective relationships with loan aggregators or successfully replace their services, our business could be adversely affected.
• Our business is subject to a wide range of laws and regulations, many of which are evolving, and failure or perceived failure to comply with such laws and regulations could harm our business, financial condition and results of operations.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Our business has been and will continue to be adversely affected by economic conditions and other factors that we cannot control.
Uncertainty, volatility and negative trends in general economic conditions historically have created a difficult operating environment for our industry. Many factors, including factors that are beyond our control, have impacted and will continue to impact our business, financial condition and results of operations by affecting the supply of capital to our marketplace from our lending partners and institutional investors, the demand by borrowers for Upstart-powered loans, and borrowers’ ability and willingness to repay their loans.
Adverse macroeconomic conditions and resulting uncertainty and volatility have had, and may have in the future, a material adverse effect on our business and results of operations. Such conditions can reduce borrower demand, approval and acceptance rates, loan origination volume and loan funding from lending partners and institutional investors, reduce liquidity in the capital markets, increase funding costs, and increase our reliance on our balance sheet. Many borrowers that access our marketplace have poor, limited or no credit history and may be disproportionately affected by inflation, higher interest rates, unemployment or recessionary conditions, which can reduce their ability or willingness to borrow or repay loans. During economic downturns, borrowers may prioritize secured obligations over unsecured personal loans, and higher interest rates may further increase payment burdens, leading to higher delinquencies, defaults, charge-offs and lower recoveries. Because our operations are concentrated in U.S. consumer credit, developments affecting the U.S. economy or consumer credit markets could have a impact on our business. In addition, changes in fiscal, monetary or regulatory policy priorities across presidential administrations may contribute to economic and uncertainty. Any sustained in borrower approvability, loan acceptance or origination volume, or any increase in or beyond our expectations, could materially affect our business, financial condition and results of operations.
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If we are unable to maintain diverse and resilient loan funding to our marketplace from institutional investors or successfully manage risks associated with committed capital and other co-investment arrangements, our growth prospects, business, financial condition and results of operations could be adversely affected.
Our business depends on sourcing and maintaining diverse and resilient sources of capital from institutional investors to our marketplace, including through the purchase of whole loans and interests in loans through pass-through certificates and asset-backed securities. A significant portion of loans transacted on our marketplace are purchased by institutional investors. The availability and capacity of capital from institutional investors depends on many factors that are outside of our control, such as economic and market conditions, interest rates, liquidity in the capital markets and regulatory requirements or restrictions, which are subject to change. We cannot be sure that the existing capital sources will continue to be available, or any new capital sources will become available, on commercially reasonable terms or at all. Decreased capital from institutional investors has negatively impacted our business in the past, and may negatively impact us in the future. Any sustained decline in investor demand for Upstart-powered loans or securities secured by such loans may adversely affect our financial results.
A significant portion of our loan funding from institutional investors comes from committed capital and other co-investment arrangements, which may include downside credit risk protection, subject to certain limits and conditions. Under these arrangements, we may be required to compensate investors if loan credit performance deviates from expectations. We may also be required to compensate investors if committed loan sale volumes are not achieved. If loans do not perform as expected for any reason, including due to changes in borrower behavior or ability to pay, borrower demand declines, or our credit performance expectations are inaccurate, our financial results could be adversely affected, including through unfavorable fair value adjustments. We may also experience declines in revenue and transaction volume if existing arrangements do not provide funding on agreed terms or if we are unable to secure additional arrangements on commercially reasonable terms or at all.
Capital arrangements entered into during periods of higher interest rates may become more costly if interest rates decline and the terms of such arrangements remain in place. Despite our efforts, marketplace capital constraints may persist, and we may be required to rely more heavily on our balance sheet, incur higher funding costs or agree to less favorable terms to maintain loan origination volume, which could adversely affect our business, financial condition and results of operations.
Our loan funding and financing arrangements with lending partners, institutional investors, securitization programs, and warehouse credit and risk retention financing facilities expose us to certain risks, and if we fail to successfully manage such risks, our supply of capital may decrease or we may be required to seek more costly or less efficient capital for our marketplace.
We have facilitated securitizations, and may in the future facilitate additional securitizations, of Upstart-powered loans to allow institutional investors, certain lending partners, and/or us to liquidate or finance such loans through the asset-backed securities markets or other capital markets products. In securitization transactions, we sell and convey pools of loans to special purpose entities (“SPEs”), which issue notes or certificates pursuant to indentures and trust agreements. We also finance certain loans on our balance sheet through warehouse credit facilities, including by selling loans to warehouse trust SPEs and borrowing under associated credit facilities. Securities issued by securitization SPEs and borrowings under warehouse facilities are secured by the loan pools owned by the applicable SPEs, and we, our lending partners and/or institutional investors may contribute loans to such SPEs in exchange for cash and/or debt or equity interests.
When we act as sole sponsor of securitizations, we are required under Regulation RR to retain a portion of the credit risk of the underlying loans for a specified period of time. We may finance some or all of these retained interests through risk retention financing facilities. If retained interests decline in value, or if we are unable to finance or refinance retained risk positions on acceptable terms, our liquidity, funding costs and results of operations could be adversely affected. We may also retain subordinated or residual interests beyond minimum risk retention requirements, which are exposed to greater credit risk and may lose value, including becoming worthless. Regulatory requirements applicable to securitizations, including under the Dodd-Frank Act, the Investment
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Company Act of 1940, and the “Volcker Rule,” as well as changes in state licensing requirements, may limit the type or structure of securitizations we are able to complete, and failure to comply with applicable securitization laws or regulations could restrict our ability to access securitization markets or require us to restructure or discontinue certain financing arrangements.
Servicing fees generated by our loan servicing activities for loans sold to institutional investors or contributed to asset-based securitizations and pass-through certificate transactions also represent a material portion of our earnings, and investor demand for Upstart-powered loans and related securities may fluctuate based on loan performance, pricing and servicing economics, macroeconomic conditions, investor risk appetite, regulatory or accounting considerations and the availability of funding and liquidity in the capital markets.
In connection with our asset-backed securitizations, pass-through certificate transactions, warehouse credit facilities and whole loan sale arrangements, we make representations and warranties concerning the loans transferred. If such representations and warranties are inaccurate and are not timely cured, we may be required to repurchase loans, make payments or provide indemnification to financing parties. Failure to satisfy these obligations could constitute a default or termination event under the applicable agreements and could require us to fund repurchases or make other payments at a time when liquidity may be constrained. If repurchase or payment obligations were to increase, or if we are unable to fund such obligations when required, our liquidity, financial condition and results of operations could be adversely affected, and a high volume of repurchases or payments could harm our reputation as a loan seller and servicer. If securitizations, warehouse facilities or risk retention financing are not available or economical, we may need to seek alternative financing, rely more heavily on our balance sheet or reduce loan originations, which could affect our business, financial condition and liquidity.
We are also subject to counterparty risk arising from derivative instruments, beneficial interests, warehouse facilities and custodial arrangements, and a counterparty’s failure to perform could result in losses and adversely affect our business, financial condition and results of operations.
If we are unable to continue to improve our AI models or if our AI models are ineffective, including by failing to accurately or timely reflect changes in economic conditions on borrowers’ credit risk, our growth prospects, business, financial condition and results of operations would be adversely affected.
Our ability to attract borrowers and facilitate loan originations on our marketplace depends in large part on the effectiveness of our AI models in evaluating borrower creditworthiness and pricing loans appropriately. Our overall operating efficiency and margins further depend in part on our ability to maintain a high degree of automation in our application process and achieve incremental improvements in the degree of automation. If our AI models contain errors, rely on inaccurate assumptions or data, or otherwise fail to perform as expected, loans may be sub-optimally priced or incorrectly decisioned, which could result in losses that are higher than expected, reduced borrower demand, and decreased loan originations. For example, as of December 31, 2025, the quarterly vintages of core personal loans that originated in the fourth quarter of 2023 and the first quarter of 2024 were forecasted to underperform relative to their target returns set at the time of loan origination. Our AI models and related decisioning processes also depend on the availability, accuracy and timeliness of data and other inputs, including information provided by applicants and third-party sources. If the data or inputs used to train, operate, calibrate or monitor our AI models are , , biased or otherwise , or if our access to key data sources is or , our models may not perform as expected and our ability to evaluate credit risk or price loans may be affected.
In addition, we may make errors in the development, validation, testing, governance, or implementation of our AI models or related tools and processes, and such errors may not be detected prior to deployment. Or, our AI models may not be able to accurately predict borrower behavior or loan performance under all circumstances, particularly during periods of economic uncertainty or rapid changes in macroeconomic conditions.
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Underperformance of Upstart-powered loans relative to expectations may also reduce demand from lending partners and institutional investors, constrain capital and negatively affect our financial results. If our AI models do not accurately or timely reflect changes in economic conditions affecting borrowers’ credit risk, the performance of Upstart-powered loans may be worse than anticipated, which could harm our reputation, erode trust with lending partners and institutional investors, and adversely affect our business, financial condition and results of operations. If model performance deteriorates, our lending partners and investors may change or tighten their underwriting or pricing requirements, reduce demand for Upstart-powered loans, require additional credit enhancement or other structural protections, or impose less favorable terms across our loan funding arrangements, any of which could adversely affect our business.
If we are unable to manage the risks associated with the Upstart Macro Index (UMI), our credibility, reputation, business, financial condition and results of operations could be adversely affected.
UMI is our effort to quantify the level of macroeconomic risk, in terms of the losses or defaults, within Upstart-powered unsecured personal loan portfolios, excluding small dollar loans. As we continue to refine UMI, we have revised previously published values and may further revise current or historical values in the future. Significant changes or revisions to UMI could harm our credibility and reputation with lending partners and institutional investors, which could adversely affect our business. Furthermore, the correlation between UMI and actual macroeconomic risk, including loan losses or defaults, may not be as meaningful or reliable as we expect. If UMI fails to accurately or adequately reflect macroeconomic risk, or is perceived as misaligned or misleading, lending partners and institutional investors may distrust or disregard UMI, which could negatively affect their willingness to use our marketplace or fund loans.
UMI is based on our analysis of the losses within Upstart-powered unsecured personal loan portfolios, excluding small dollar loans, and is specific to our borrower base, which changes over time. UMI may not be an appropriate indicator of risk for specific loan products, borrower segments or non-Upstart loan portfolios, and it is not intended to measure or predict broader economic conditions, future loan performance, our results of operations or our stock price. Investors, lending partners or analysts may misunderstand, misinterpret or misuse UMI for unintended purposes, which could harm our reputation, reduce confidence in our disclosures and impair our ability to attract and retain lending partners and institutional investors. Any failure to manage these risks could adversely affect our ability to maintain diverse and resilient loan funding and harm our business, financial condition and results of operations.
If we are unable to approve a significant number of borrowers for loans through our marketplace, our growth prospects, business, financial condition and results of operations would be adversely affected.
The vast majority of our revenue comes from platform and referral fees and servicing fees on loans facilitated through our marketplace. To increase the number of loans facilitated through our marketplace, we must have an adequate supply of capital from lending partners and institutional investors, and borrowers must satisfy the requirements for approval established by our models and our lending partners.
While we continue to improve the accuracy of our AI models, which we believe is key to our long-term success, such improvements may not result in an increase in the number of borrowers approved on our platform. These improvements have led us in the past and may lead us in the future to reevaluate our credit decisioning process, including the risks associated with certain borrowers. Changes in borrower default patterns and credit performance have in the past and could in the future result in fewer borrowers being approved for loans on our platform.
In addition, our lending partners’ credit requirements and the target returns our lending partners and institutional investors demand in order to provide capital to our marketplace have, and could continue to, negatively impact our ability to extend loan offers with competitive terms or at all to certain borrowers on our marketplace. If we are not able to fill purchase commitments for our institutional investors or maintain a platform meeting the origination requirements of our lending partners, we risk jeopardizing our marketplace.
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Macroeconomic environments fluctuate over time, and the costs and risks associated with consumer borrowing evolve in response to economic conditions. During periods of challenging macroeconomic conditions, including periods of elevated borrowing costs and heightened consumer credit risk, the pool of qualified borrowers may become smaller, and fewer applicants may receive or accept loan offers on our marketplace. Approving more borrowers can also be limited as we have historically limited the maximum annual percentage rates offered on Upstart-powered loans due to regulatory reasons. These factors have adversely affected, and may in the future adversely affect, transaction volume on our marketplace and therefore our revenue. If we are not able to maintain or increase transaction volume on our marketplace, or attract and retain qualified borrowers, our growth prospects, business, financial condition and results of operations would be adversely affected.
A limited number of lending partners account for a significant portion of loan originations and revenue on our marketplace, and our business depends on our ability to retain existing lending partners and attract new ones.
Our success depends in significant part on the continued participation of lending partners in our marketplace, which provide both loan funding and a substantial portion of our revenue. A limited number of lending partners account for a significant portion of loan originations and revenue on our marketplace.
If one or more significant lending partners reduce, suspend or cease their business with us for any reason, or if we are unable to attract and onboard new lending partners to replace or supplement existing relationships, loan origination volume and revenue could decline. Our ability to attract new lending partners may be limited by lengthy or complex onboarding processes, prospective partners’ diligence requirements, or changes in target returns, funding costs or risk tolerance. Prospective lending partners may also be cautious in adopting our platform or in purchasing loans originated on the Upstart platform due to regulatory uncertainty, AI model governance or fair lending compliance considerations, as well as the time, cost and operational changes required to integrate our technology, which can delay onboarding and make the timing and volume of related revenue difficult to predict.
We enter into a separate agreement with each of our lending partners. These agreements are non-exclusive and may contain minimum fee amounts. Lending partners may decide to stop working with us, seek to modify agreement terms in a cost-prohibitive manner when their agreement is up for renewal, or enter into exclusive or more favorable relationships with our competitors. In addition, lending partners may adjust or terminate their business with us based on macroeconomic conditions, funding costs, regulatory requirements, credit performance, internal priorities, competitive dynamics or changes in business strategy. Federal or state regulators may also require lending partners to terminate or limit their business with us, or impose regulatory pressure that constrains their ability or willingness to participate in our marketplace. If we are unable to retain existing lending partners or attract new lending partners on acceptable terms, our business, financial condition and results of operations could be adversely affected.
We have incurred net losses in the past, and we may not be able to sustain or achieve profitability in the future.
Although we have been profitable in certain periods, we have also incurred net losses and may do so again in the future. We have made, and expect to continue to make, significant investments in our business, and we may not be able to increase revenue sufficiently to offset these costs, which could prevent us from achieving or sustaining profitability. These investments include investment in our proprietary AI models, product development, borrower acquisition, platform enhancements and expansion of our loan offerings.
We have incurred losses in the past, and may incur losses in the future, due to a variety of factors, including the other risks described in this section, macroeconomic conditions, unforeseen expenses, operational challenges, and delays in executing our business strategies. Any failure to maintain or increase revenue at a pace sufficient to support our investment levels and other operating expenses could adversely affect our ability to achieve or sustain profitability. If we are unable to successfully address these risks and challenges as they arise, our business, financial condition and results of operations could be adversely affected.
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If we are unable to manage risks associated with the loans on our balance sheet, our business, financial condition and results of operations may be adversely affected.
We have held more Upstart-powered loans on our balance sheet in recent years and may continue to do so in the future. We have used, and may continue to use, our balance sheet to support our research and development activities for new loan products and borrower segments. In addition to research and development activities, we have used and may continue to use our balance sheet to purchase Upstart-powered loans from lending partners to address fluctuations in supply and demand in our marketplace.
We hold loans on our balance sheet at fair value and estimate fair value using a discounted cash flow methodology. Increases in market interest rates may reduce the fair value of loans held on our balance sheet, which have negatively affected, and may in the future negatively affect, the fair value of such loans. In addition, for loans held on our balance sheet and any future loans to be held on our balance sheet, we bear the credit risk in the event of borrower default. Our exposure to rising borrower default rates and their volatility has increased, and may continue to increase, as we hold more Upstart-powered loans on our balance sheet. Also, loans for research and development purposes make up a substantial portion of the loans held on our balance sheet and are generally more risky and more likely to default than the core personal loans.
At times, default rates and charge-offs for certain loan categories have been higher than expected, resulting in unfavorable fair value adjustments to the loans on our balance sheet. Unfavorable fair value adjustments have negatively impacted our revenue in the past and may do so again in the future if loan performance deteriorates or fails to meet expectations. Furthermore, a portion of our revenue is interest income derived from loans held on our balance sheet, and increasing the number of loans we hold would increase the mix of our revenue that comes from interest on loans. From a liquidity perspective, a growing number of loans on our balance sheet increases our liquidity risk. If we are unable to sell loans held on our balance sheet on commercially reasonable terms or at all, our liquidity position could be adversely affected. Any of the foregoing could adversely affect our business, financial condition and results of operations.
Our quarterly results may fluctuate significantly, which could adversely affect our business and the trading price of our common stock.
Our operating and financial results have, in the past, and may, in the future, fluctuate significantly from period to period due to a variety of factors, many of which are outside of our control. Factors that may cause these fluctuations include, among others, changes in macroeconomic conditions; fluctuations in borrower demand and loan origination volume, including seasonal patterns; changes in the availability and cost of loan funding; changes in credit performance; shifts in product mix; the timing and success of new products, partnerships or funding arrangements; changes in interest rates; changes in regulatory requirements or enforcement priorities; and changes in our operating expenses.
In addition, we typically experience seasonality in the demand for Upstart-powered loans, which has been generally lower in the first quarter. This seasonal slowdown has been primarily attributable to high loan demand around the holidays in the fourth quarter and the general increase in borrowers’ available cash flows in the first quarter, including cash received from tax refunds, which temporarily reduces borrowing needs.
As a result of these and other factors, our operating and financial results for any given period may fall below the expectations of investors or securities analysts, which could cause the trading price of our common stock to decline. Fluctuations in our operating results may also make it difficult for investors to evaluate our business and future prospects, which could further contribute to volatility in the market price of our common stock.
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Our reputation and brand are important to our success, and failure to maintain, protect and promote our brand may harm our business.
We believe maintaining a strong brand and trustworthy reputation is critical to our success and our ability to attract borrowers to our marketplace, attract new lending partners, maintain diverse and resilient loan funding and sustain good relations with regulators. The maintenance of our brand and reputation depend on a number of factors, including the performance and perceived effectiveness of our proprietary AI models, the quality and pricing of our products, the reliability and scalability of our platform, regulatory compliance, loan performance outcomes and our ability to innovate and respond to evolving customer and partner needs. In addition, the availability and perceived attractiveness of alternative products or platforms from our competitors may influence how our brand and value proposition are perceived. Competitive pressures may result in reduced demand for Upstart-powered loans, pricing pressure, increased costs or loss of market share, any of which would harm our reputation and brand. If we are unable to differentiate our platform and maintain trust with borrowers, lending partners, institutional investors, and other third parties, our business, financial condition and results of operations could be affected.
Furthermore, negative publicity about us or the consumer lending industry, including regarding our AI-powered credit decisioning models, loan performance, servicing or collections practices, marketplace model, use of AI, regulatory compliance, data privacy and cybersecurity practices, litigation or regulatory actions, or the experience of participants on our platform, even if inaccurate or unfounded, could harm our reputation and reduce confidence in our platform. Such reputational harm could reduce usage of our platform and adversely affect our business, financial condition and results of operations.
If we are unable to manage the risks related to our loan servicing and collections obligations, our business, financial condition and results of operations could be adversely affected.
Our success depends in part on our loan servicing and collection efforts. A meaningful portion of our revenue from fees is generated from loan servicing fees. The vast majority of Upstart-powered loans are unsecured and are not guaranteed or insured by any third party or backed by any governmental authority. As a result, our ability to collect amounts owed on such loans on behalf of lending partners, Upstart, institutional investors, and financing lenders is limited if borrowers are unwilling or unable to repay. Even where loans are secured, including auto loans or HELOCs, we may be limited in our ability to recover amounts owed if collateral cannot be located or recovered or if collateral values decline.
Our ability to collect on loans is largely dependent on borrowers’ financial health and may be adversely affected by factors such as unemployment, illness, bankruptcy, economic downturns or other circumstances beyond a borrower’s control. Federal and state laws, including bankruptcy and insolvency laws, may further limit recoveries. If delinquencies, defaults or bankruptcies increase, our collections and recovery rates may decline, which could reduce fees payable to us, negatively affect lending partner and institutional investor demand for Upstart-powered loans, erode trust in our marketplace or increase loan funding costs.
We conduct collection activities for certain lending partners, institutional investors, and financing lenders. Because we have limited experience conducting first-party or in-house collection activities, we cannot be certain that we will be able to effectively manage risks associated with such activities. We also rely on third-party collection agencies and, in certain cases, litigation strategies to collect from certain delinquent borrowers. If our collection efforts or those of third-party vendors are ineffective, inconsistent, unprofessional or otherwise harm borrowers, our reputation could be damaged, borrower demand could decline and delinquencies and charge-offs could increase.
We act as servicer for most loans facilitated through our marketplace, including loans sold in whole loan transactions, contributed to securitizations and pass-through securities, and pledged in warehouse facilities. Loan servicing is a highly regulated and operationally complex activity, involving manual processes and regulatory compliance obligations. Errors in servicing, failures to comply with servicing requirements or inadequate performance could expose us to liability to borrowers, lending partners, institutional investors or financing lenders, and harm our reputation. If the costs of servicing exceed the servicing fees we earn, our results of operations could be adversely affected.
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Auto loans facilitated through our marketplace and retail installment contracts purchased from motor vehicle dealers are secured by vehicles that may depreciate rapidly and may be difficult to locate. We rely on third-party repossession vendors to recover collateral, and repossession may not result in full recovery of amounts owed. Failures by such vendors to adhere to applicable law and regulations could result in loss of the collateral, regulatory action, litigation and/or reputational harm. As we scale our auto lending business, we may face increased operational and compliance risk in coordinating repossession activity and managing title and other collateral requirements that vary by state. For home-secured products such as HELOCs, collections and recovery may involve enforcing liens or pursuing foreclosure-related remedies that can be time-consuming, costly and subject to heightened regulatory and reputational scrutiny.
Servicing and collection activities are subject to extensive and evolving federal and state laws and regulatory oversight. If we fail to comply with applicable servicing, collection or licensing requirements, we could lose licenses, become subject to enforcement actions, sanctions or litigation, or be restricted from servicing loans or operating in certain jurisdictions, which could adversely affect our business, financial condition and results of operations.
A significant portion of our business has historically depended on a single loan product, and shifts in product demand or mix could adversely affect our business.
A significant portion of the loan originations facilitated through our marketplace has historically consisted of unsecured personal loans. While the market for unsecured personal loans has experienced periods of growth, the extent to which this market will continue to grow, or remain attractive to borrowers and capital providers, is uncertain. A variety of factors could adversely affect demand for unsecured personal loans, including macroeconomic conditions, increased interest rates, changes in consumer credit behavior, competition, regulatory developments and other conditions in the credit markets. If demand for unsecured personal loans declines or grows more slowly than expected, our business, financial condition and results of operations could be adversely affected.
Unsecured personal loans are seen as a more risky credit product because they are not backed by collateral. As such, borrowers may choose not to prioritize repayment of unsecured personal loans, particularly during an economic down cycle, and instead prioritize repayment of secured indebtedness obligations over unsecured personal loans. If we are unable to effectively manage risks associated with our core personal loan product, our business, financial condition and results of operations could be adversely affected.
While the unsecured personal loan product represents the majority of our business, we offer other loan products on our marketplace and may continue to expand and scale additional products over time. Newer loan products may have different margins or default rates than our core personal loan products. Offering and scaling multiple products introduces additional operational, regulatory, funding and servicing complexity and exposes us to risks that differ from those associated with a single product offering. In order to preserve and expand our relationships with lending partners and institutional investors, it may become important for us to offer a broader range of loan products than we have historically offered. Our competitors may also seek to gain or maintain market share by underpricing certain loan products or accepting lower returns, even if such practices result in losses. These competitive dynamics could reduce demand for loans facilitated through our marketplace or adversely affect the economics of our platform.
We are continuing to introduce and develop new loan products and service offerings, and if these products are not successful or we are unable to manage the related risks, our growth prospects, business, financial condition and results of operations could be adversely affected.
We have introduced auto loans, retail installment contracts purchased from motor vehicle dealers, small dollar loans, and home equity lines of credit products and are continuing to invest in developing these products and other new credit products and service offerings. We have limited operating history with respect to certain of these products, and new initiatives are inherently risky, as each involves unproven business strategies, new regulatory
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requirements and new financial products and services with which we, and in some cases our lending partners, have limited or no prior development or operating experience.
As part of our growth strategy, we may continue to offer and scale multiple loan products with distinct borrower profiles, underwriting considerations, regulatory requirements, funding sources and servicing obligations. While these newer products currently represent a small portion of our business, they are expected to grow at a different rate than our core personal loan product. We cannot be sure that we will be able to develop, commercially market and achieve market acceptance of any new products and services. In addition, our investment of resources to develop new products and services may be insufficient or result in expenses that are excessive in light of the benefits actually derived from these new offerings, particularly in the near term. Investment in new products or services may also need to be delayed, modified or deferred due to market, macroeconomic or other conditions.
We may also have difficulty securing adequate loan funding from lending partners or institutional investors for new loan products and services, which may require us to hold more loans on our balance sheet for extended periods of time. If the borrower profile for new products differs from that of existing products, our AI models may not accurately evaluate credit risk and we may not be able to obtain loan funding for such products on commercially reasonable terms, or at all. New products may also experience higher levels of delinquencies or defaults as our models calibrate to different borrower populations or data sets. Furthermore, new products and services may raise new or complex regulatory compliance obligations, increase our costs, reduce margins or take longer than anticipated to achieve target margins. Our development efforts may also divert management attention and resources from existing operations. If we are unable to effectively manage these risks, our growth prospects, business, financial condition and results of operations could be adversely affected.
If we do not compete effectively in our target markets, our business, results of operations and financial condition could be harmed.
The consumer lending market is highly competitive and increasingly dynamic as emerging technologies continue to enter the marketplace. Our inability to compete effectively could result in reduced loan volumes, reduced average loan sizes, reduced fees, increased marketing and borrower acquisition costs or a failure of our marketplace to achieve or maintain broader market acceptance, any of which could adversely affect our business and results of operations.
We compete to varying degrees with other sources of consumer credit, including banks, non-bank lenders, retail-based lenders and other financial technology platforms. Because personal loans may serve as a replacement for credit cards, we also compete with the convenience and ubiquity of credit cards and buy now, pay later products. Many competitors operate under different business models, have different funding sources, cost structures or regulatory obligations, or focus on different segments of the market. We may also face competition from banks or companies that have not previously competed in consumer lending, including companies with access to large amounts of consumer-related data that could be used to develop their own credit risk models, and many current or potential competitors have significantly greater financial, technical and marketing resources than we do.
Our competitors may have longer operating histories, greater brand recognition and loyalty, lower costs of capital, more diversified products, broader borrower or partner relationships, more diversified funding sources or greater balance sheet capacity than we do. Competitors may also modify their pricing or business models to compete more directly with us, including by offering lower pricing or more flexible terms. Our ability to compete will also depend on our ability to provide lending partners with a competitive suite of loan products and services. In addition, competitors may pursue acquisitions or strategic alliances that provide access to lower-cost capital, expanded distribution or enhanced regulatory capabilities, further intensifying competition.
Our industry is driven by constant innovation, including rapid advances in AI and machine learning. If we fail to anticipate or respond adequately to technological developments, or if competitors develop credit models or technologies that are superior to ours, our ability to compete effectively could be adversely affected. If we are unable to compete effectively or keep pace with innovation in our industry, demand for our marketplace could stagnate or decline, which could harm our business, results of operations and financial condition.
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If we are unable to manage the risks associated with fraudulent activity, our brand and reputation, business, financial condition and results of operations could be adversely affected.
Fraud is prevalent in the financial services industry and may increase as perpetrators become more sophisticated. We are subject to the risk of fraudulent activity associated with borrowers, employees and third parties that handle borrower information, and in limited circumstances we cover certain fraud-related losses of our lending partners and institutional investors. Fraud rates may also increase during economic downturns.
We use a combination of proprietary AI models and third-party tools to detect and prevent fraud by validating applicant-reported data and information obtained from third-party sources. However, these efforts may not be sufficient to identify all fraudulent activity. If fraud detection controls are ineffective, fraud-related losses on Upstart-powered loans could increase, erode confidence in our marketplace, and adversely affect our financial condition and results of operations. Fraud perpetrators may also target our platform due to the high degree of automation in our credit decisioning processes. In addition, we, our lending partners or institutional investors may be unable to recover amounts disbursed on loans made in connection with inaccurate statements, omissions or fraudulent activity.
Significant increases in fraudulent activity could result in heightened regulatory scrutiny or intervention, increase compliance and operating costs, and harm our brand and reputation. Further, if higher levels of fraud lead to increased human review of loan applications, the level of automation on our platform could decline, negatively affecting our operating efficiency and unit economics. If we are unable to effectively manage fraud-related risks, our business, financial condition and results of operations could be adversely affected.
We depend on our key personnel and other highly skilled personnel, and if we fail to attract, retain and motivate our personnel, our business, financial condition and results of operations could be adversely affected.
Our success depends on the continued service of our senior management team and other highly skilled personnel. Our success also depends on our ability to identify, hire, develop, motivate and retain highly qualified personnel.
Competition is high for skilled personnel, including engineering and data analytics personnel, particularly in the San Francisco Bay Area where our headquarters is located. While we have transitioned to what we call a “Digital First” work model that allows us to recruit from a wider talent pool, we have experienced, and expect to continue to face, difficulty identifying and hiring qualified personnel, especially as we pursue our growth strategy. We may not be able to hire or retain such personnel at compensation or flexibility levels consistent with our existing compensation structure and policies. We periodically review our compensation levels to ensure they remain competitive, and we may need to further increase compensation in response to competition, inflation or labor shortages, which would increase our operating costs. Many companies with which we compete for experienced employees have greater resources and may be able to offer more attractive terms of employment. In addition, the current regulatory environment related to immigration is uncertain, including with respect to the availability of H1-B and other U.S. visas. If a new or revised U.S. visa program is implemented, it may impact our ability to recruit, hire, retain, or effectively with qualified skilled personnel.
Furthermore, we have reduced our workforce in the past and may do so again in the future to lower operating costs or streamline operations. Workforce reductions may adversely affect employee morale, culture and productivity, and our ability to attract and retain personnel, result in the loss of institutional knowledge, disrupt operations, or impair our ability to pursue new initiatives due to reduced resources. We may not realize the anticipated benefits or cost savings from workforce reductions, and any failure to effectively manage such actions could adversely affect our business, financial condition and results of operations.
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Borrowers may prepay a loan at any time without penalty, which could reduce our servicing fees and deter our lending partners and institutional investors from investing in loans facilitated through our lending marketplace.
A borrower may decide to prepay all or a portion of the outstanding principal amount on a loan at any time without penalty. If the entire outstanding unpaid principal amount of a loan is prepaid, we would not receive a servicing fee for the period after the loan is prepaid in full. Our AI models are designed to predict prepayment rates, but prepayment may occur for a variety of reasons. If a significant volume of prepayments occur that our AI models do not accurately predict, the amount of our revenue from servicing fees would decline and returns targeted by our lending partners and institutional investors would be adversely affected, which would harm our business and results or operations and our ability to attract new lending partners and institutional investors.
The long-term impact of operating with a Digital First workforce on our business, financial condition and results of operations is uncertain.
Since our announcement of a Digital First work model, remote work with less time in the office has been the primary experience for most of our employees. Our workforce is principally distributed across the U.S., with only limited presence in Canada, and we expect this to continue. There is no guarantee that we will realize any anticipated benefits from this model.
Our Digital First model could lead to a negative long-term impact on our operations, the execution of our business plans and sales and marketing efforts, our company culture, or the productivity and retention of key personnel and other employees necessary to conduct our business, or otherwise cause operational failures. The increase in remote working may also result in increased exposure to consumer privacy and data security incidents, or fraudulent activity. If we are unable to successfully address the foregoing risks and challenges as we encounter them, our business, financial condition and results of operations could be adversely affected.
Unfavorable outcomes in legal proceedings may harm our business and results of operations.
We are, and may in the future become, subject to lawsuits by private parties or governmental agencies, other claims, examinations, investigations, enforcement actions, legal and administrative cases and proceedings, whether civil or criminal, all of which may affect our financial condition and results of operations. These claims, lawsuits and proceedings could involve a wide range of legal and regulatory matters, including consumer protection, employment, intellectual property, data privacy, securities and other commercial or statutory claims. For example, we are a defendant in a number of securities class actions and other related lawsuits. See the “ Legal ” section under “ Note 11. Commitments and Contingencies ” in Part II, Item 8 of this Annual Report on Form 10-K.
In addition, due to the consumer-oriented nature of our business and the application of certain laws and regulations, participants in our industry are regularly named as defendants in litigation alleging violations of federal and state laws and regulations, including consumer protection laws. See the risk factor titled “—If loans originated by our lending partners were found to violate state law, loans facilitated through our marketplace may be unenforceable or otherwise impaired, we or our lending partners, institutional investors or warehouse lenders may face fines and penalties, and our commercial relationships may suffer, each of which would adversely affect our business and results of operations” for more information.
If we were subject to such litigation or enforcement, then any unfavorable results of pending or future legal proceedings may result in contractual damages, fines, penalties, injunctions, the unenforceability, rescission or other impairment of loans originated through our marketplace or other censure that could have an adverse effect on our business, results of operations and financial condition. Even if we adequately address the issues raised by an investigation or proceeding or successfully defend a third-party lawsuit or counterclaim, we may have to devote significant financial and management resources to address these issues, which could harm our business, financial condition and results of operations.
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We may pursue acquisitions or investments in other businesses or technologies, which could disrupt our business and may not achieve anticipated benefits.
We may pursue acquisitions or investments in other businesses or technologies as part of our growth strategy. These transactions may require significant management attention, involve the integration of different business models, technologies, systems, controls or cultures, and divert resources from our existing operations.
We may encounter difficulties integrating acquired businesses, technologies or personnel, or fail to realize anticipated synergies, cost savings or strategic benefits. In addition, acquisitions or investments may expose us to unforeseen liabilities, integration costs, impairment charges, regulatory scrutiny or other risks. If we are unable to successfully manage or integrate these transactions, or if they fail to achieve their intended objectives, our business, financial condition and results of operations could be adversely affected.
Our financial reporting relies on significant estimates, judgments, key operating metrics and effective internal controls, and inaccuracies or control failures could adversely affect our business.
The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures, including with respect to revenue recognition, loan valuation, credit losses, fair value measurements and other areas. Although we believe these estimates and assumptions are reasonable, they are inherently uncertain, may change as new information becomes available, and may differ materially from actual outcomes.
Our ability to produce timely and accurate financial statements and other periodic reports depends on the maintenance of appropriate information systems, processes and controls. In addition, we regularly assess, and report on, the effectiveness of our internal control over financial reporting. If we or our independent auditors identify deficiencies in internal controls that are deemed to be material weaknesses, or if significant deficiencies or material weaknesses are identified in the future, our financial reporting may be delayed or unreliable.
Our operating and financial results also depend on certain operating and financial metrics that we disclose, including key measures of loan performance, revenue and related performance indicators. These metrics are based on underlying data that involve estimates and assumptions, may not be comparable to similarly titled measures used by other companies, and may change over time as our business evolves. In addition, certain processes used to aggregate, validate and report underlying operating and financial data may involve manual workflows, which may be time-consuming, difficult to scale, and more susceptible to human error. If actual results differ materially from the estimates used in preparing our operating and financial results, or if inaccuracies or incomplete data result from such processes, or if changes in the way we or others define and use key metrics make those metrics less useful or reliable, our business, financial condition and results of operations could be adversely affected. In addition, we may from time to time publish certain operating or performance metrics on a more frequent basis in our Regulation FD channels, which are subject to the same inherent limitations, estimates and potential variability as our other metrics.
Deficiencies in our disclosure controls or internal control over financial reporting could lead to material errors in our financial statements, restatements, regulatory scrutiny, loss of investor confidence and reputational harm. Any of the foregoing could adversely affect our business, financial condition and results of operations.
We maintain cash deposits in excess of federally insured limits, and adverse developments affecting financial institutions could adversely affect our liquidity and financial performance.
We regularly maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. Adverse developments affecting financial institutions or the broader banking system, including bank failures, liquidity constraints or disruptions in the financial or credit markets, could impair our ability to access such funds in a timely manner, which could adversely affect our liquidity, financial condition and results of operations. There can be no assurance that our deposits in excess of the FDIC or other
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comparable insurance limits will be backstopped by the U.S. treasury, or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions or by acquisition in the event of a failure or liquidity crisis.
Our business is subject to the risks of natural disasters and other catastrophic events, many of which are becoming more acute and frequent due to climate change, and to interruption by human-induced problems.
Significant natural disasters or other catastrophic events, such as earthquakes, fires, hurricanes, blizzards or floods (including those associated with climate change), as well as power losses, telecommunications failures, strikes, epidemics or pandemics, cyber incidents, system failures or failures of financial institutions, could adversely affect our business, results of operations and financial condition. The effects of climate change may increase the frequency or severity of certain natural disasters. Our operations, including our headquarters in the San Francisco Bay Area and our office in Columbus, Ohio, are located in regions that may be vulnerable to earthquakes, wildfires, severe weather events or other climate-related conditions. Although we maintain disaster response plans and insurance, such events could our business, the operations of our lending partners or third-party suppliers, and result in and additional costs to maintain or resume operations. Our insurance coverage may be to compensate us for all that may occur. In addition, for loans secured by collateral, events may also or collateral or affect collateral values, which could reduce recovery amounts and increase .
Acts of war, armed conflict, terrorism, geopolitical unrest, disruptions in global trade, or travel restrictions could cause business disruptions and lead to interruptions, delays or loss of critical data. If our business continuity or disaster recovery plans prove inadequate, or if our personnel, systems or data centers are affected, we may experience interruptions or delays in our operations. To the extent these events adversely affect borrowers’ ability to repay their loans, our business, financial condition and results of operations could be negatively affected.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY AND PLATFORM DEVELOPMENT
Security breaches, improper access to our or borrowers’ data, or other security incidents may harm our reputation, adversely affect our results of operations and expose us to liability.
We are increasingly dependent on data, information systems, services and infrastructure to operate our business. In the ordinary course of our business, we collect, transmit, store and otherwise process large amounts of sensitive information, including personal information, credit information, and other sensitive data of borrowers and potential borrowers. It is critical that we do so in a manner designed to maintain the confidentiality, integrity, and availability of such information. We also rely on third-party vendors and service providers, including those that support our information technology infrastructure, and certain of these third parties may have access to our systems or sensitive information.
Our information technology systems, as well as those of our third-party vendors and service providers, are vulnerable to inadvertent or intentional security breaches, attacks, outages, disruptions and other incidents. The size, complexity, accessibility and distributed nature of our information technology systems, including systems operated by third parties on our behalf, may increase the likelihood or severity of such incidents. These risks may arise from actions by employees, contractors, vendors, lending partners, institutional investors or other third parties, as well as from malicious threat actors. While we continue to invest in security controls and monitoring, no system can provide absolute security, and our controls and any related actions may fail to prevent, detect, or remediate security incidents promptly or at all. In addition, our use of advanced technologies, including AI, may introduce additional cybersecurity risks or be by actors, increasing the complexity of managing our security environment.
Like other financial and technology services firms, we and certain vendors and service providers that support us have been, and continue to be, the targets of actual or attempted unauthorized access, mishandling or misuse of information, computer viruses or malware, distributed denial-of-service attacks, other cyberattacks, security breaches or incidents, or other similar events. Security breaches, attacks, outages, disruptions, or other
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incidents affecting us or our vendors or service providers could compromise the confidentiality, integrity or availability of our systems, proprietary models, algorithms, or data, cause service interruptions, disrupt our operations, degrade the user experience of our platform, or result in unauthorized access to, disclosure of, or other processing of sensitive information, including borrower data. Such incidents could adversely affect borrowers, lending partners and other third parties that rely on our platform and could harm our reputation, reduce transaction volume or otherwise adversely affect our business.
Security incidents, whether actual or perceived, may trigger notification obligations, regulatory investigations or enforcement actions, litigation, contractual liability, significant remediation costs, or negative publicity. Any of these consequences could cause borrowers, lending partners, or other third parties to lose confidence in our platform and could harm our reputation. We maintain insurance policies intended to cover certain cybersecurity and privacy-related risks; however, this coverage may be insufficient, unavailable on acceptable terms, subject to exclusions or deductibles, or contested by insurers. Any security incident could adversely affect our business, financial condition, and results of operations.
Any significant disruption of, or failure in, our technology systems, including our AI lending platform, could adversely affect our business, financial condition and results of operations.
Our business depends on the continuous operation, availability and security of our AI lending platform and related technology systems. We rely on these systems to process loan applications, service loans, support underwriting and pricing decisions, and manage data and reporting for our lending partners and institutional investors. Our reliance on electronic loan origination, disclosures and signatures, rather than paper-based processes, may increase the risk of errors or system failures.
We are also dependent on a number of third-party infrastructure and services, including cloud computing, data storage and network services, to operate our platform. If these services are interrupted, degraded or terminated, whether due to system failures, cyber incidents, human error or other causes, we could experience disruptions in our operations and delays in loan processing or servicing. For example, we host our AI lending platform using Amazon Web Services (“AWS”), a provider of cloud infrastructure services. In the event that our AWS service agreements are terminated, there is a lapse of service, interruption of internet service provider connectivity, or damage to AWS data centers, we could experience interruptions in access to our platform, as well as delays and additional expense if we must secure alternative cloud infrastructure services, which could reduce confidence in the reliability of our platform and cause lending partners or institutional investors to reduce, or funding or other participation on our marketplace.
We also collect, store, and process large volumes of sensitive borrower and applicant information, as well as proprietary information, including data used to develop, train, and operate our AI models and related technologies. Unauthorized access to or use of our systems or data, or other security breaches or incidents could result in service disruptions, loss of data, including proprietary or AI-related data, regulatory investigations and other proceedings, litigation, remediation costs and reputational harm.
Our disaster recovery, business continuity and information security controls may not be effective in all circumstances. As our business grows and our technology systems become more complex, we may need to make significant investments to maintain the capacity, reliability and security of our platform. Any failure to effectively manage these risks could adversely affect our business, financial condition and results of operations.
Our platform and internal systems rely on software that is highly technical, and if our software contains undetected errors, our business could be adversely affected.
Our platform and internal systems rely on software that is highly technical and complex and depend on the ability of such software to store, retrieve, process and manage high volumes of data. The software on which we rely has contained, and may in the future contain, errors, bugs or defects, some of which may not be discovered until after deployment.
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Any real or perceived errors, bugs, or defects could result in incorrect or delayed processing of loan applications, inaccurate pricing or disclosures, failures in compliance or fraud-detection controls, disruptions to our platform or services, or other operational issues. Any such failures could harm our reputation, reduce borrower or lending partner confidence, cause lending partners or institutional investors to reduce, suspend or terminate their participation or funding, increase regulatory scrutiny, expose us to fines, penalties or liability, or otherwise adversely affect our business, financial condition and results of operations.
It may be difficult and costly to protect our intellectual property rights, and we may not be able to ensure their protection.
Our ability to operate our platform depends, in part, upon our proprietary technology. We may be unable to protect our proprietary technology effectively, which may allow competitors to duplicate our AI models or AI lending marketplace and adversely affect our ability to compete with them. We rely on a combination of copyright, trade secret, patent, trademark laws and other rights, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology, processes and other intellectual property. We have limited patent protection, and our current patent applications may not be successful. A third party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. Our failure to secure, protect and enforce our intellectual property rights could adversely affect our brand and adversely impact our business.
Our proprietary technology, including our AI models, may actually or may be alleged to infringe upon third-party intellectual property rights, and we may face intellectual property challenges from such other parties. We may not be successful in defending against any such challenges or in obtaining licenses to avoid or resolve any intellectual property disputes. If we are unsuccessful, such claims or litigation could result in a requirement that we pay significant damages or licensing fees, be required to cease using certain technology, or make changes to our business to avoid such infringement, which could negatively impact our financial performance. such could also be , time-consuming and management attention.
Moreover, it has become common in recent years for individuals and groups to purchase intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies such as ours. Even where we believe such claims are without merit, defending against them may be expensive and time-consuming. In addition, contractual protections or insurance may be insufficient or unavailable to cover all such costs or liabilities.
Finally, if we are unable to protect, enforce or obtain rights to our proprietary technology, or if third parties successfully challenge those rights, our competitive position and ability to differentiate our platform could be adversely affected, which could in turn harm our business, financial condition and results of operations.
Some aspects of our business processes include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
We incorporate open source software into processes supporting our business. Some of this open source software is governed by licenses such as the GNU General Public License and the Apache License. The terms of various open source licenses have not been definitively interpreted by U.S. courts, and there is a risk that such licenses could be construed in a manner that limits our use of the software, inhibits certain aspects of our systems or otherwise adversely affects our business operations. Certain open source licenses may require that modifications or derivative works be made available under the same license terms. Third parties may seek to enforce the terms of applicable open source licenses, including by demanding the release or licensing of modifications or derivative works. If portions of our proprietary software or AI models are determined to be subject to an open source license, or if license terms are interpreted or change in a manner that imposes additional obligations, we could be required to publicly release source code, re-engineer portions of our platform or models, obtain alternative licenses or change our business practices, any of which could adversely affect our business operations and competitive position.
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In addition, open source software is generally provided without warranties or assurances regarding its origin, functionality or performance. As a result, open source software may contain vulnerabilities, defects or other issues that could adversely affect our systems. Many of the risks associated with the use of open source software cannot be eliminated and could adversely affect our business, financial condition and results of operations.
The use of generative or agentic AI technologies by our employees or contractors could expose us to unexpected liability.
Our employees and contractors use generative AI technologies in connection with their work, and the use of such technologies presents risks and challenges that could adversely affect our business. Despite policies governing their use, employee or contractor errors, misuse or unauthorized use of generative AI technologies could result in security incidents and could otherwise introduce security, legal, compliance, or operational risks. Even authorized use of generative AI technologies may generate content, including software code, that is inaccurate, misleading or contains security vulnerabilities. In particular, generative AI tools may produce outputs that appear accurate but are factually incorrect or incomplete, which could result in incorrect information being relied upon by employees or contractors. Use of such technology by employees, contractors or others could result in reputational , competitive or legal liability. In addition, generative AI technologies may introduce cybersecurity risks if are incorporated into our systems or products. We also use, or may in the future use, agentic AI tools to support servicing or other customer-facing functions, such as customer support, which may increase the risk of , outputs or to adhere to our policies, regulatory obligations or customer expectations.
Many aspects of the legal framework governing intellectual property rights, licensing, and liability related to generative AI remains unsettled, and our use of such generative AI technologies may expose us to claims of copyright infringement, other intellectual property claims, or reputational harm. While we have taken, and continue to take, steps designed to mitigate risks associated with the use of generative AI in our business, including through policies and controls governing the use of generative AI technologies, our use of AI may present ethical, reputational, legal, competitive, and regulatory risks that could adversely affect our business, financial condition, results of operations, and future prospects.
RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES
Our proprietary AI models rely in part on the use of loan applicant and borrower data and other third-party data, and if we lose the ability to use such data, or if such data contain inaccuracies, our business could be adversely affected.
We rely on our proprietary AI models, which are statistical models built using a variety of data sets. Our AI models rely on data collected from applicants and borrowers, data obtained from credit bureaus and other third parties, and our historical credit performance data. If the data used by our AI models are inaccurate, incomplete, outdated, biased or otherwise unreliable, or if our access to such data is limited or interrupted, our models may not perform as expected. Evolving regulatory obligations, including “open banking” requirements and obligations associated with data-sharing frameworks, may limit our ability to access, use or control such data or increase the cost of obtaining it. If our access to applicant, borrower or third-party data is restricted, becomes more costly or is otherwise unavailable, our ability to accurately evaluate borrowers, detect fraud and verify applicant information could be compromised, which could negatively affect pricing accuracy, automation levels and loan volume.
Data obtained from third-party sources or provided by applicants may be inaccurate, incomplete, outdated or misleading, including due to reporting errors, staleness or applicant misrepresentation. In particular, data from credit bureaus or other consumer reporting agencies may not accurately reflect an applicant’s or borrower’s actual credit history due to reporting errors, staleness, incompleteness or other inaccuracies. In addition, limitations on data access or data quality could impair our ability to train, validate and improve our AI models over time, and could require us to modify our models or data-usage arrangements, or to require us to share proprietary data, which could reduce our competitive advantage. Any of the foregoing could adversely affect our ability to attract borrowers, lending partners and institutional investors and our business, financial condition and results of operations.
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We rely on strategic relationships with loan aggregators to attract applicants to our marketplace, and if we cannot maintain effective relationships with loan aggregators or successfully replace their services, our business could be adversely affected.
A significant number of consumers that apply for a loan on our platform learn about and access our platform through the websites of loan aggregators, typically with hyperlinks from such loan aggregators’ websites to landing pages on our website. While we are continuing to expand our direct acquisition channels, we expect to remain significantly dependent on relationships with loan aggregators to maintain and grow our business. For example, a significant amount of our loan originations has been derived from traffic from Credit Karma, one of the loan aggregators with whom we partner. Loan aggregators are not required to display offers from our lending partners and may work with our competitors. If traffic from loan aggregators decreases in the future for any reason or if loan aggregators implement policies that adversely impact our business, our loan originations and results of operations could be adversely affected. There is no assurance that loan aggregators will continue to partner with us on commercially reasonable terms or at all, and our competitors may be effective in providing incentives to loan aggregators to favor their products or services.
Loan aggregators also face litigation and regulatory scrutiny for their part in the consumer lending ecosystem, and as a result, their business models may require fundamental change or may not be sustainable in the future. For example, loan aggregators may be required to obtain and maintain licenses or comply with additional regulatory requirements in certain jurisdictions, which could subject them to increased supervision and more stringent business obligations. While we require loan aggregators to make certain disclosures in connection with our lending partners’ offers and restrict how loan aggregators may display such loan offers, loan aggregators may fail to comply with these requirements, which could result in liability to us. Further, we do not have control over any content on loan aggregator websites unrelated to our product, and it is possible that our brand and reputation may be adversely affected by being associated with such content. Borrowers or regulators could also assert claims based on the content presented on a loan aggregator’s website, which could result in litigation, regulatory scrutiny or reputational .
We rely on third-party vendors, and if such vendors do not perform adequately or terminate their relationships with us, or if regulatory scrutiny of vendor relationships increases, our business could be adversely affected.
Our success depends in part on our relationships with third-party vendors that provide services critical to the operation of our platform. In some cases, our third-party vendors are one of a limited number of sources of such services. For example, we rely on national consumer reporting agencies for a significant portion of the data used in our AI models, as well as third-party verification technologies and services that are critical to maintaining a high level of automation on our platform. We also rely on third-party payment processors or banks to access payment networks and process loan payments.
Many of our vendor agreements are terminable by either party without penalty and with little notice. If any third-party vendor terminates its relationship with us or refuses to renew its agreement on commercially reasonable terms, we would need to identify an alternative provider and may not be able to secure similar terms or replace such services in an acceptable time frame. We also rely on other software and services supplied by vendors, and our business may be adversely affected if such services do not meet our expectations or experience disruptions or outages.
If our third-party vendors fail to comply with applicable laws, regulations or contractual obligations, including with respect to privacy, data protection or security, we could experience service disruptions, regulatory enforcement actions, consumer demands or litigation, and suffer economic or reputational harm. Regulators have increasingly emphasized that supervised financial institutions may be held responsible for the actions of their third-party service providers. As a service provider to regulated financial institutions, we are subject to increased regulatory expectations regarding vendor oversight, due diligence and ongoing monitoring. If we or our vendors fail to meet these expectations, we or our lending partners could be subject to supervisory actions, enforcement
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proceedings or remedial requirements, which could adversely affect our business, financial condition and results of operations.
We are subject to counterparty risk with respect to the capped call transactions.
The counterparties to the capped call transactions entered into in connection with certain of our convertible notes (the “Notes”) are financial institutions, and we are subject to the risk that one or more of the counterparties may default or otherwise fail to perform their obligations under the capped call transactions. Our exposure to the credit risk of the counterparties will not be secured by any collateral. Adverse global economic conditions could affect the financial condition of these counterparties. If a counterparty to a capped call transaction becomes subject to bankruptcy or other insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under the relevant capped call transaction. Our exposure will depend on many factors but, generally, our exposure will increase to the extent there is an increase in our common stock market price and in the volatility of the market price of our common stock. In addition, if a counterparty fails to perform or its obligations under a capped call transaction are terminated, we may consequences and may experience dilution of our common stock than we otherwise would have expected. We can provide no assurance as to the financial or viability of any of the counterparties.
RISKS RELATED TO REGULATION AND LITIGATION
Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and other adverse consequences.
In the ordinary course of business, we have been named as a defendant in various legal actions, including securities class action lawsuits and other litigation. These matters may arise from claims relating to consumer protection, lending, servicing, collections, credit reporting, marketing or other aspects of our business. Legal and regulatory actions are inherently unpredictable and, regardless of the merits of the claims, are often expensive, time-consuming, disruptive to our operations and resources, and distracting to management.
Certain matters may involve claims for substantial or indeterminate damages, including statutory damages, penalties assessed on a per-violation basis, or class-wide relief, which could exceed amounts we earned from the underlying activities and may not be fully covered by insurance. Our involvement in any such matters could also cause significant harm to our or our lending partners’ reputations, even if the matters are ultimately resolved in our favor. If resolved against us, such actions could result in significant monetary damages, injunctive or equitable relief, remediation requirements or other adverse consequences that may affect our financial condition and how we operate our business.
In addition, participants in the consumer financial services industry, including financial technology companies, have been subject to state attorney general actions and regulatory enforcement proceedings alleging violations of consumer protection, lending, licensing, fair lending or other laws. Any such actions involving us could require significant operational changes, remediation payments or restrictions on our business. In addition, if our arbitration provisions were found to be unenforceable or otherwise limited, our exposure to class action litigation and related costs could increase. From time to time, we may also identify compliance issues that require operational changes or remediation to impacted borrowers, which could result in additional costs, litigation or regulatory scrutiny. The outcome of pending and future legal or regulatory matters could be material to our results of operations, financial condition and cash flows and could materially adversely affect our business.
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Our business is subject to a wide range of laws and regulations, many of which are evolving, and failure or perceived failure to comply with such laws and regulations could harm our business, financial condition and results of operations.
We are subject to numerous federal, state and local laws and regulations aimed at consumer protection in the financial services industry. These laws and regulations are complex, evolving and subject to varying interpretations, including with respect to the application of AI and machine learning technologies and the bank partnership model. The application of these laws and regulations may change over time as new products are introduced, regulatory priorities evolve, or judicial or administrative interpretations develop.
New laws, regulations and regulatory interpretations continue to be adopted and may subject us to increased scrutiny, compliance obligations or operational constraints. As we expand into new markets, introduce new financial products and services and continue to evolve our AI models, additional regulatory requirements may apply. In some cases, we may be required to obtain or maintain licenses or approvals, and regulators could deny applications, delay approvals, impose conditions, levy fines or penalties, or otherwise restrict our ability to operate our marketplace.
We may also be subject to heightened regulatory supervision or enforcement at the federal or state level, including by the CFPB, state attorneys general or other regulatory agencies. Federal and state regulators have increased scrutiny of fees and practices that may be viewed as unfair, deceptive or abusive, and fees charged in connection with loans facilitated through our marketplace could be subject to challenge or refund.
State regulators have also increased scrutiny of financial technology companies and bank partnership arrangements, including through licensing requirements, enforcement actions or the adoption of laws regulating such relationships. Our business and the activities we facilitate for our lending partners are subject to extensive federal and state laws governing consumer lending, loan servicing and collections, credit reporting, fair lending, privacy and data protection, debt collection, electronic payments, marketing and communications, and related financial services activities.
Furthermore, the regulatory framework governing the development and use of AI and machine learning technology is evolving and remains uncertain. Federal and state regulators have increased scrutiny of AI-driven decision-making, including in consumer lending, and have proposed or adopted laws, regulations and guidance addressing AI governance, transparency and discrimination risks. Regulators may require us to demonstrate robust governance, testing, validation, monitoring, documentation and explainability for our AI models and related decisioning processes. In some cases, regulators may seek explanations for specific model outputs or outcomes, which may be difficult, costly or impractical given the complexity of our models. If we are unable to satisfy evolving expectations relating to AI governance or explainability, we may be required to modify, destroy, limit or discontinue certain models, features, data or products, increase manual review or incur additional compliance costs. Certain state laws regulating “high-risk” AI systems may impose additional compliance, governance, disclosure and risk management obligations.
Our use of AI and automated decision-making may also expose us to increased risk of regulatory enforcement actions and other proceedings, supervisory findings or private litigation, including claims alleging discriminatory or disparate impact, unfair or deceptive practices or improper reliance on automated decision making. Such actions or claims, regardless of merit, could result in significant legal costs, remediation requirements, civil penalties, other liabilities, reputational harm or restrictions on our business.
While compliance is a business priority, it is costly, time-consuming and may limit our operational flexibility. Changes in law, regulation or regulatory interpretation could restrict interest rates, fees or loan structures, require additional licensing or compliance obligations, or otherwise limit the availability of loans facilitated through our marketplace. If we are found to be non-compliant with applicable laws or regulations, we could be subject to fines, penalties, enforcement actions, loss of licenses or authorizations, litigation or other remedies, and loans facilitated through our marketplace could be rendered void, unenforceable, capped at state specific rates or subject to rescission, any of which could harm our business, financial condition and results of operations. For additional
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discussion of risks related to regulation of our bank partnership model and true lender considerations, see the risk factor titled “—If loans originated by our lending partners were found to violate state law, loans facilitated through our marketplace may be unenforceable or otherwise impaired, we or our lending partners, institutional investors or warehouse lenders may face fines and penalties, and our commercial relationships may suffer, each of which would adversely affect our business and results of operations” for more information.
We have been in the past and may in the future be subject to federal and state regulatory inquiries, investigations or enforcement actions, which could adversely affect our business.
We have received, and may continue to receive, inquiries, examinations or investigations from federal, state or local regulatory authorities regarding our business, including our marketplace activities, marketing practices, underwriting and pricing, fair lending compliance, licensing and registration requirements. Responding to such matters can be time-consuming and costly, may divert management attention and resources, and could result in supervisory findings, enforcement actions, fines, penalties, remedial requirements and/or restrictions on our operations.
Regulatory inquiries or investigations, whether or not they result in formal enforcement action or are ultimately resolved in our favor, may be made public and could harm our reputation, increase scrutiny from other regulators or market participants, and negatively affect borrower, lending partner or investor confidence. The initiation or perception of regulatory investigations could also adversely affect the market price of our common stock. Any adverse outcomes arising from regulatory matters could materially affect our business, financial condition, results of operations and cash flows.
The CFPB and other consumer protection regulators have broad authority over our business, and increased supervision or enforcement could adversely affect our business.
The Consumer Financial Protection Bureau (“CFPB”) has broad authority to regulate and enforce compliance with federal consumer financial protection laws, including the prohibition on unfair, deceptive or abusive acts or practices (“UDAAP”), and laws governing lending, servicing, collections, credit reporting and related activities. The CFPB also has supervisory authority over certain banks, thrifts and credit unions and certain participants in the consumer financial services market and larger participants in other areas of financial services, including some of our lending partners and our home lending business, and has authority to supervise or investigate other non-bank entities it determines may pose risks to consumers.
Consumer complaints, supervisory findings or enforcement actions, whether involving us, our lending partners, or other market participants, could increase regulatory scrutiny of our business. If the CFPB were to subject us or our subsidiaries to supervision or initiate enforcement proceedings, it could require operational changes, remediation to borrowers, civil monetary penalties, restrictions on our activities or other remedial actions.
We cannot predict how the CFPB or other regulators will exercise their authority in the future or how changes in regulatory priorities or interpretations may affect our business. The CFPB and other regulators have increased scrutiny of the use of alternative data, machine learning and AI-based decision-making in consumer lending, including with respect to fair lending compliance. If regulators determine that aspects of our AI models, disclosures, servicing or collections practices do not comply with applicable laws, we could be required to modify or discontinue products or practices, incur additional compliance costs or face enforcement actions.
Although we have committed resources to enhancing our compliance programs, regulatory actions involving us, our lending partners, or other market participants could result in reputational harm, loss of lending partners, borrowers or institutional investors, or reduced demand for loans facilitated through our marketplace. Any of the foregoing could adversely affect our business, financial condition and results of operations.
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If loans originated by our lending partners were found to violate state law, loans facilitated through our marketplace may be unenforceable or otherwise impaired, we or our lending partners, institutional investors or warehouse lenders may face fines and penalties, and our commercial relationships may suffer, each of which would adversely affect our business and results of operations.
When establishing the interest rates and fee structures charged to borrowers on loans originated through our marketplace, our lending partners rely on federal law preemption of state law to export the interest rate requirements of their home states. We, our securitization vehicles, our institutional investors, and warehouse credit facilities similarly rely on the ability to enforce the agreed-upon loan terms following the sale or assignment of such loans. States have enacted, and may continue to enact, laws or take regulatory or enforcement actions that seek to limit interest rate exportation, challenge federal preemption, impose additional licensing requirements or otherwise restrict bank-partnership lending models.
Usury, fee and disclosure-related claims involving Upstart-powered loans may be raised through litigation, government enforcement or other challenges. Certain courts, regulators and private plaintiffs have challenged, and may continue to challenge, the enforceability of bank-originated loans following their sale or assignment to non-bank entities.
In addition, states have enacted, and may continue to enact, “true lender” or similar laws or apply regulatory or judicial tests to determine whether a non-bank platform is deemed to be the lender for purposes of state consumer lending laws. If a borrower or state authority were to successfully assert that we, rather than our lending partners, are the true lender of loans facilitated through our marketplace, such loans could be unenforceable, subject to limits on the interest that can be collected, rescission or otherwise impaired, and we or other program participants could face monetary, injunctive or other penalties.
Loans originated through Upstart’s marketplace are originated in reliance on our lending partners being the “true lenders” for such loans. Their status as the originating lender determines various loan program details, including the interest rates and fees permissible at origination, since the loan terms and lending practices are set by duly chartered banks or credit unions. Because the loans facilitated by our marketplace are originated by our lending partners, many state consumer financial regulatory requirements, including state usury restrictions, licensing requirements and certain requirements under state consumer credit laws, are inapplicable to the loans, based on principles of federal preemption.
While we have taken steps to structure our programs in compliance with applicable laws and guidance, there can be no assurance that future regulatory, legislative or judicial developments will not adversely affect the enforceability or transferability of Upstart-powered loans, or the willingness of lending partners or investors to participate in our marketplace.
The collection, use, storage, sharing and other processing of personal information subjects us to privacy and data protection laws and regulations, and failures to comply could adversely affect our business.
We receive, transmit, store and otherwise process large volumes of personal information and other sensitive data from applicants and borrowers. In some cases, this information may include sensitive or biometric data as defined by applicable state law. We share personal information with lending partners and, in more limited circumstances, with institutional investors, subject to contractual, legal and regulatory requirements.
We and our lending partners are subject to a growing body of federal and state privacy and data protection laws and regulations governing the collection, use, disclosure, storage, safeguarding and other processing of personal information. These laws and regulations are evolving and subject to differing interpretations, and impose obligations relating to disclosure, consent, data security, data use, data retention, automated decision making and other aspects of data processing. For example, we are subject to privacy and data protection requirements under laws such as the Gramm-Leach-Bliley Act, which are enforced by regulators including the CFPB and the FTC, and violations may be treated as unfair or deceptive acts or practices.
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Regulators have increased scrutiny of data security practices, third-party data sharing and user interface or design practices that may be viewed as unfair, deceptive or manipulative. In addition, state privacy laws, including those adopted in California and other jurisdictions, as well as biometric privacy laws such as the Illinois Biometric Information Privacy Act, impose additional compliance obligations and have been the basis for increased regulatory enforcement and private litigation.
Our efforts to comply with current and future privacy and data protection laws and regulations could result in increased compliance, technical or operating costs and may require us to modify our data infrastructure, data processing practices or business operations. Any actual or perceived violations of these laws and regulations could result in regulatory investigations, enforcement actions and other proceedings, litigation, contractual liability with lending partners, investors, or vendors, remediation costs, reputational harm or restrictions on our ability to operate our business, which could adversely affect our business, financial condition and results of operations.
If we are deemed to be an investment company, investment adviser or broker-dealer, or if our securities-related activities fail to comply with applicable laws, our business could be materially adversely affected.
We believe that neither we nor our subsidiaries are required to register as an investment company under the Investment Company Act of 1940, as amended, because we are primarily engaged in operating an AI-based lending marketplace and providing technology and related services to lending partners. However, the SEC or its staff could disagree with our analysis, including with respect to whether loans or interests in loans held on our balance sheet constitute “investment securities.”
If we were deemed to be an investment company, we could be required to institute burdensome compliance requirements and be subject to restrictions on our activities, transactions with affiliates, borrowings and capital structure, as well as additional reporting and governance obligations, any of which could materially adversely affect our business.
We also believe that neither we nor our subsidiaries are required to register as an investment adviser under the Investment Advisers Act of 1940, as amended, or as a broker-dealer under the Securities Exchange Act of 1934, as amended, based on the nature of our activities and applicable guidance. However, regulatory interpretations or guidance could change, or regulators could disagree with our positions. If we or any of our subsidiaries were required to register or notice-file as an investment adviser or broker-dealer, or otherwise become subject to such regulatory regimes, we could be required to make significant changes to our business operations, compensation structures, marketing practices or financing activities.
Certain transactions involving institutional investors or loan financing arrangements may rely on exemptions from registration under the Securities Act of 1933, as amended, including Regulation D or Section 4(a)(2). If such transactions were found not to qualify for an exemption or otherwise violate securities laws, we could be subject to rescission claims, enforcement actions, civil penalties or restrictions on future financing activities, including potential “bad actor” disqualification. Any of the foregoing could materially adversely affect our business, financial condition and results of operations.
Anti-money laundering, sanctions and anti-corruption laws could adversely affect our business.
We are subject to anti-money laundering, counter-terrorism financing, economic sanctions and anti-corruption laws and regulations, including the Bank Secrecy Act, the USA PATRIOT Act, sanctions administered by the Office of Foreign Assets Control and the Foreign Corrupt Practices Act, either directly or through our lending partners who are subject to such laws. These laws impose obligations related to borrower due diligence, transaction monitoring, recordkeeping, reporting and restrictions on dealings with sanctioned persons or jurisdictions.
Despite our compliance efforts, we cannot provide assurance that our policies, procedures and controls will be effective to prevent violations of these laws by us, our employees, agents, vendors, lending partners or other third parties. Violations or perceived violations of these laws could result in significant fines, penalties, remediation costs,
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contractual liability, restrictions on our activities and reputational harm, any of which could adversely affect our business, financial condition and results of operations.
RISKS RELATED TO INDEBTEDNESS
We rely on borrowings under our warehouse credit facilities and risk retention financing facilities to fund certain aspects of our operations, and any inability to meet our obligations as they come due or to comply with various covenants or representations contained in our warehouse credit facilities could harm our business.
We rely on borrowings under warehouse credit facilities and risk retention financing facilities to fund certain aspects of our operations, including financing loans and retained interests. These facilities are collateral-based and are secured by loans or securitization-related assets held by special purpose entities. Our ability to access and maintain these facilities depends on the performance and value of the underlying collateral, compliance with applicable covenants and representations, and the continued willingness of lenders to provide financing.
Our warehouse credit facilities and risk retention financing facilities contain operating and financial covenants and other requirements, and under certain circumstances lenders may reduce availability, require repayment of outstanding borrowings, impose additional conditions or terminate their commitments. If we fail to comply with these requirements or experience an event of default, we could be required to repay borrowings, post additional collateral, liquidate assets at unfavorable prices or seek alternative financing, which may be more costly or unavailable.
Any reduction, suspension or termination of these financing arrangements could limit our ability to purchase or hold loans, reduce loan origination volumes, increase our funding costs or require greater reliance on our balance sheet. If we are unable to obtain replacement financing on acceptable terms, or at all, our business, financial condition and results of operations could be adversely affected.
Corporate and asset-backed debt ratings could adversely affect our ability to support loan funding for our marketplace at attractive rates, which could negatively affect our results of operations, financial condition and liquidity.
Our unsecured senior corporate debt may be unrated or rated by a limited number of credit rating agencies. Asset-backed securities sponsored or co-sponsored by us may be rated by a limited number of credit rating agencies. Ratings assigned to us or to asset-backed securities backed by Upstart-powered loans reflect rating agencies’ opinions regarding the credit performance of the underlying receivables, the ability of cash flows to service interest and repay principal, and the performance of us and other service providers under the applicable transaction documents.
Our asset-backed securities have been subject to downgrades in the past, and any future downgrade, withdrawal or non-publication of ratings could reduce investor demand, increase funding costs or otherwise limit our ability to provide liquidity or financing to our lending partners and institutional investors. The absence of a corporate debt rating, limited ratings coverage, or adverse rating actions with respect to our asset-backed securities could adversely affect our liquidity, financial condition and results of operations.
We may need to raise additional funds in the future, including through equity, equity-linked, or debt financings, to support business growth, and those funds may not be available on acceptable terms, or at all.
We may continue to make investments to support our business growth and may require additional funds to respond to business challenges, including developing new loan products, enhancing our AI models, supplementing loan funding, improving our operating infrastructure, acquiring complementary businesses or technologies, or making strategic investments. As a result, we may need to raise additional capital through equity, equity-linked or debt financings.
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If we raise additional funds by issuing equity or equity-linked securities, our stockholders may experience dilution. Debt financing, if available, may involve protective provisions or covenants that restrict our operations or financial flexibility, and any financing we obtain may contain terms that are not favorable to us or our stockholders. If we are unable to obtain adequate financing on satisfactory terms when required, we may be unable to pursue certain business opportunities, respond effectively to business challenges or continue to support our business growth, which could adversely affect our business, financial condition and results of operations.
We have issued the Notes and may issue additional equity-linked or debt securities in the future. Holders of the Notes may have the right to require us to repurchase their Notes upon the occurrence of certain events, and upon conversion we may be required to make cash payments unless we elect to settle conversions solely in shares of our common stock. We are also required to repay the Notes in cash at maturity unless earlier converted, redeemed or repurchased. We may not have sufficient cash or be able to obtain financing at the times required to meet these obligations, and our ability to do so may be limited by law, regulatory authority or agreements governing our indebtedness. Any failure to meet these obligations could result in defaults or cross-defaults that adversely affect our liquidity, financial condition and results of operations.
Provisions in the Indentures governing the Notes may deter or prevent a business combination that may be favorable to you.
If a fundamental change (as defined in the applicable Indenture governing the Notes) occurs prior to the maturity date for a series of Notes, holders of the applicable series of Notes will have the right, at their option, to require us to repurchase all or a portion of such Notes. In addition, if a make-whole fundamental change (as defined in the applicable Indenture governing the Notes) occurs prior to the maturity date of the applicable series of Notes, we may be required to increase the conversion rate for holders that elect to convert their Notes in connection with such make-whole fundamental change, in the manner specified in the applicable Indenture.
Furthermore, the Indentures restrict our ability to engage in certain mergers, consolidations or similar transactions unless, among other things, the surviving entity assumes our obligations under the Notes. These and other provisions in the Indentures could discourage, delay or prevent a third party from acquiring us or otherwise engaging in a transaction that may be favorable to our stockholders.
RISKS RELATED TO TAXES
Our ability to use our deferred tax assets to offset future taxable income may be subject to certain limitations, which may have a material impact on our result of operations.
As of December 31, 2025, we have recorded a valuation allowance to recognize only deferred tax assets that are more likely than not to be realized in the United States federal, state and local tax jurisdictions. We assess available positive and negative evidence to determine whether sufficient future taxable income will be generated to utilize our deferred tax assets. Certain deferred tax assets may expire unused or underutilized, which could prevent us from offsetting future taxable income.
We may also be limited in the portion of net operating losses (“NOLs”) that we can use to offset taxable income for U.S. federal and state income tax purposes. The Tax Cuts and Jobs Act made significant changes to the utilization of NOLs. In addition, under Section 382 of the Internal Revenue Code, an ownership change may limit our ability to utilize NOLs. Future changes in our stock ownership, including equity issuances, share repurchases or other transactions, could result in an ownership change for this purpose. Limitations may also apply under state and local law.
We continue to assess the realizability of our deferred tax assets, and future adjustments to our valuation allowance may be required, which could materially affect our results of operations.
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Changes in tax laws could have a material adverse effect on our business, financial condition and results of operations.
We are subject to federal, state and local taxes in the jurisdictions in which we operate, and applicable tax laws and rates vary and are subject to interpretation and change. We may be subject to examination by tax authorities on income, employment, and other tax matters. Although we regularly assess the adequacy of our tax provisions, there can be no assurance that such provisions will be sufficient or will not be subject to challenge or that an adverse determination would not have a material effect on our business, financial condition and results of operations.
Further, the ultimate amount of tax payable in a given financial statement period may be impacted by changes in tax laws, interpretations, accounting rules or the geographic mix of our earnings, which could cause our tax obligations to differ materially from amounts recorded in our financial statements. As a result, our tax provision involves significant judgment and uncertainty, and fluctuations in our ultimate tax liabilities could materially affect our results of operations.
Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, gross receipts, value added or similar taxes and may successfully impose additional obligations on us, and any such assessments or obligations could adversely affect our business, financial condition and results of operations.
The application of indirect taxes, such as sales and use tax, value-added tax, digital services tax, gross receipts tax, and other similar taxes to platform and financial technology businesses is complex and evolving. Many of the statutes and regulations that impose these taxes were established before the adoption and growth of the Internet and e-commerce. Significant judgment is required to evaluate applicable tax obligations, and as a result, amounts recorded are estimates and are subject to adjustments. In many cases, the ultimate tax determination is uncertain because it is not clear how new and existing statutes might apply to our business. Proposed or newly enacted laws or interpretations regarding indirect taxes could increase our compliance obligation. Any failure by us to prepare for or comply with applicable reporting and record-keeping requirements could result in penalties and other sanctions and could adversely affect our financial condition and results of operations.
We have faced, and may face in the future, indirect tax audits in various U.S. jurisdictions. Tax authorities may challenge our calculation, reporting or collection of taxes and may require us to collect taxes in jurisdictions in which we do not currently do so or to remit additional taxes and interest, and could impose associated penalties and fees. Although we have recorded reserves for potential payments of past tax liabilities in our financial statements, a successful assertion by one or more tax authorities could result in substantial tax liabilities in excess of such reserves as well as penalties and interest, and could harm our business, financial condition and results of operations. As a result, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements, and any such difference may adversely impact our results of operations in future years in which we change our estimates of our tax obligations or in which the ultimate tax outcome is determined.
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RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
The trading price of our common stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may be volatile and could fluctuate significantly in response to various factors, many of which are beyond our control. These fluctuations could cause you to lose all or part of your investment. Factors that could affect the trading price of our common stock include general market and economic conditions, volatility in the trading prices of financial technology and technology companies, changes in interest or inflation rates, a reduction in the availability of loan funding and liquidity from lending partners and institutional investors, quarterly fluctuations in demand for the loans we facilitate through our marketplace, changes in our operating performance or results of operations, sales or issuances of shares of our common stock, whether in connection with an acquisition or upon conversion of some or all of the outstanding Notes, analyst coverage or reports, announcements by us or our competitors, litigation or regulatory actions, data security incidents, changes in laws or accounting standards, developments relating to our intellectual property, market perception of our AI models, changes in the competitive landscape, and other events or factors beyond our control.
The stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of individual companies. As a result, the market price of our common stock may be affected by factors unrelated to our operating performance. In addition, securities class action litigation such as the litigation we are subject to has often been instituted following periods of market volatility, which could result in substantial costs and divert management’s attention and resources, potentially harming our business.
We cannot guarantee that our share repurchase program will be fully consummated or that it will enhance long-term shareholder value. Share repurchases could also affect the trading price of our stock, increase volatility of our stock and diminish our cash reserves.
Although our Board of Directors has authorized a share repurchase program that does not have an expiration date, the program does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares of our common stock. We cannot guarantee that the program will be fully consummated or that it will enhance long-term stockholder value. The timing and number of shares repurchased under the program will depend on a variety of factors, including stock price, trading volume, and general business and market conditions. The program could affect the trading price of our stock, increase volatility and diminish our cash reserves. Our Board of Directors will review the program periodically and may authorize adjustments of its terms if appropriate. Any announcement of a suspension or termination of this program may result in a decrease in the trading price of our stock.
The capped call transactions entered into in connection with the issuance of certain of the Notes may affect the market price of our common stock.
In connection with the issuance of certain of the Notes, we entered into privately negotiated capped call transactions with certain financial institutions as counterparties. These capped call transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of the applicable Notes and/or offset any cash payments we may be required to make in excess of the principal amount of such converted Notes, as the case may be, with such reduction and/or offset subject to a cap.
From time to time, the counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the applicable series of Notes. This activity could also cause or prevent an increase or a decrease in the market price of our common stock.
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Certain insiders have significant voting power, which could limit your ability to influence the outcome of key transactions, including a change of control.
Our directors, officers, and stockholders who own greater than 5% of our outstanding capital stock and their affiliates, in the aggregate, beneficially own a significant portion of the outstanding shares of our capital stock. As a result, these stockholders, if acting together, are able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions, or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale, and might ultimately affect the trading price of our common stock.
The large number of shares of our capital stock eligible or registered for public sale could depress the market price of our common stock.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock, or the perception that such sales could occur. Subject to applicable vesting conditions and compliance with our insider trading policies, shares issued upon the settlement of equity awards or other equity issuances may be available for resale in the open market. In addition, shares may be sold into the market in connection with “sell-to-cover” transactions to satisfy tax withholding obligations upon the vesting of equity awards, which could increase selling pressure on our common stock.
We may from time to time register shares for resale or issue shares in connection with financings or other transactions. We have an effective shelf registration statement on Form S-3ASR that permits us to offer and sell shares of our common stock, including through an “at-the-market” offering program. Sales of our shares could make it more difficult for us to sell equity securities in the future at times and prices that we deem appropriate, could cause the trading price of our common stock to decline, and could make it more difficult for stockholders to sell their shares.
You may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise.
We may issue additional shares of our common stock in the future in connection with financings, acquisitions, investments, our equity incentive plans or otherwise. We expect to continue granting equity awards to employees, directors and consultants under our equity incentive plans, and we may also raise capital through equity financings in the future. Any common stock that we issue pursuant to equity incentive plans, financings or acquisitions could dilute the percentage ownership held by existing stockholders and could result in a decline in the per-share value of our common stock.
Transactions relating to the Notes may dilute the ownership interest of stockholders, or may otherwise depress the price of our common stock.
If the Notes are converted by holders, we are required under the applicable Indentures to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of common stock, at our election. If we elect to deliver shares of common stock upon conversion of the Notes, it would dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, certain holders of the Notes may engage in short selling to hedge their position in the Notes. Anticipated future issuances of shares of our common stock upon conversion of the Notes could depress the price of our common stock.
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Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our common stock.
Our status as a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder unless certain conditions are met, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make the acquisition of our company more difficult, including the following:
• our Board of Directors is classified into three classes with staggered three-year terms and directors may only be removed for cause;
• vacancies and newly-created seats on our Board of Directors will be able to be filled only by our Board of Directors and not by stockholders;
• only the Chair of our Board of Directors, our Chief Executive Officer, our president, or a majority of our entire Board of Directors are authorized to call a special meeting of stockholders;
• certain litigation against us or our directors, stockholders, officers or employees can only be brought in Delaware;
• advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders; and
• any amendment of the above anti-takeover provisions in our amended and restated certificate of incorporation or amended and restated bylaws will require the approval of at least 66 2/3% of the combined voting power of our then-outstanding shares of our capital stock.
These anti-takeover defenses could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our capital stock, and could also affect the price that some investors are willing to pay for our common stock.
Our amended and restated bylaws designate a state or federal court located within the State of Delaware (or any federal district court for Securities Act claims) as the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to choose the judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by law, the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, stockholders, officers, or other employees to us or our stockholders, (iii) any action arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation, or our amended and restated bylaws, or (iv) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court in Delaware or the federal district court for the District of Delaware), in all cases subject to the court having jurisdiction over the claims at issue and the indispensable parties; provided that the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.
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Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws also provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United are the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. Although we believe these provisions are enforceable, there is uncertainty as to whether a court would enforce such forum-selection provisions, and if a court were to find them unenforceable, we could incur additional costs associated with resolving disputes in other jurisdictions.
Any person or entity purchasing, holding or otherwise acquiring any interest in any of our securities shall be deemed to have notice of and consented to this provision. This exclusive-forum provision may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers, and other employees. This exclusive forum provision does not apply to any causes of action arising under the Exchange Act or any other claim for which the federal or other courts have exclusive jurisdiction. If a court were to find either of the exclusive-forum provisions in our amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could harm our results of operations.
Our common stock market price and trading volume could decline if equity or industry analysts do not publish research or publish inaccurate or unfavorable research about our business.
The trading market for our common stock will depend in part on the research and reports that equity or industry analysts publish about us or our business. The analysts’ estimates are based upon their own opinions and are often different from our estimates or expectations. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our securities would likely decline. If few securities analysts commence coverage of us, or if one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our securities could decrease, which could cause the price and trading volume of our common stock to decline.
We do not intend to pay dividends for the foreseeable future.
We have never declared nor paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation and expansion of our business, as well as to fund our share repurchase program, and we do not expect to declare or pay any dividends in the foreseeable future. In addition, the terms of our corporate debt agreements may preclude us from paying dividends. As a result, capital appreciation of our common stock, if any, will be the only way for stockholders to realize any future gains on their investment for the foreseeable future.
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