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Stock Market 5 big revelations in SoFi’s plans to go public, including how the fintech is thinking about the future of student debt and the importance of a bank charter

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Stock Market 5 big revelations in SoFi’s plans to go public, including how the fintech is thinking about the future of student debt and the importance of a bank charter

Chamath Palihapitiya, founder and CEO of venture firm Social Capital Mike Windle/Getty Images for Vanity Fair This story is available exclusively to Business Insider subscribers. Become an Insider and start reading now. Personal finance app SoFi announced plans in early January to go public via a merger with a SPAC backed by Social Capital head…

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Stock Market Chamath Palihapitiya

Chamath Palihapitiya, founder and CEO of venture firm Social Capital

Mike Windle/Getty Images for Vanity Fair

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  • Personal finance app SoFi announced plans in early January to go public via a merger with a SPAC backed by Social Capital head and billionaire Chamath Palihapitiya. The deal would value SoFi at nearly $9 billion.
  • Palihapitiya is no stranger to the SPAC world, having taken Virgin Galactic, Opendoor, and Clover Health public over the past two years.
  • Social Capital Hedosophia Holdings Corp V, the SPAC set to acquire SoFi, spoke to more than 33 companies before picking the fintech.
  • From student debt cancellation to the progress of a new banking charter, SoFi’s S-4 registration filed Monday with the SEC highlighted a few key risks the company is watching as it goes public.
  • Visit Business Insider’s homepage for more stories.

You can add another company to the growing SPAC frenzy.

News broke January 7 that personal-finance startup SoFi, last valued at $4.3 billion, is preparing to go public via special purpose acquisition company Social Capital Hedosophia Holdings Corp V (SCH).

The SPAC, raised by billionaire tech investor Chamath Palihapitiya, founder and CEO of venture firm Social Capital, raised capital in July of 2019 and is the product of a partnership between Social Capital and Hedosophia, a venture firm led by Ian Osborne. In October, SCH hit the public markets.  

See more: SoFi to go public via SPAC backed by billionaire investor Chamath Palihapitiya

Palihapitiya, meanwhile, is no stranger to the SPAC world. In 2020, SPACs backed by Palihapitiya initiated mergers that took the likes of Clover Health and Opendoor public (and in 2019, Virgin Galactic). 

The deal will nearly double SoFi’s valuation to $8.7 billion, and the company is expected to see more than $2.4 billion in proceeds. 

One Monday, SoFi filed its S-4 paperwork, which outlines its plans to go public. Here are five items that stood out in the soon-to-be-public company’s filing.

Stock Market SCH spoke to more than 33 companies (and evaluated more than 100) before picking SoFi

One of the most interesting notes from the filing is how many companies SCH looked at before picking SoFi. The wide net cast by SCH is indicative of how competitive the market has gotten for SPACs. In 2020, more than 200 SPACs launched, raising over $73 billion

SCH analyzed “over 100 potential business combination targets,” connecting with 33 of them to discuss a potential deal, the filing noted. Among the companies SCH looked at were those involved in healthcare, sports, semiconductors, and e-commerce, among other industries. 

“SCH considered businesses that it believed had attractive long-term growth potential, were well-positioned within their industry and would benefit from the substantial intellectual capital, operational experience, and network of SCH’s management team,” the filing said.

And while the SPAC ultimately entered into non-disclosure agreements with three companies, a meeting between SoFi CEO Anthony Noto and SCH’s president and director Ian Osborne on Dec. 16 culminated in a non-binding letter of intent to bring the fintech public. 

Stock Market Anthony Noto SoFi Anthony Noto, SoFi CEO

Sean M. Haffey/Getty Images

Stock Market SoFi’s considering offering riskier home loans

SoFi likes to hammer home its customers’ high FICO scores as proof that it’s a responsible lender, but the company said in Monday’s filing that its exploring a move into offering mortgages to riskier customers, which could put them at risk of litigation.

“We do not currently offer but may expand product selection to offer non-qualified home loans, which, unlike qualified home loans, do not benefit from a presumption that the borrower has the ability to repay the loan,” the filing said.

Non-qualified mortgages are ones that don’t meet typical borrowing standards, with different requirements for things like income verification and credit scores.

And while legislation in the wake of the Great Recession and housing crisis of the 2000s provided that lenders typically can’t be held liable in court should qualified home loans go south, those same protections don’t apply to non-qualified ones.

That being said, SoFi is not looking at expanding the ‘credit box’ of home loans currently offered — in other words, weakening their credit standards — but are more interested in loosening some of the technical restrictions typically associated with qualified mortgages, like debt-to-income ratios.

Stock Market A national bank charter is key to SoFi’s future plans

The S-4 detailed why SoFi thinks a national banking charter, which it filed an application for in July, will benefit its business. 

“A key element of our long-term strategy is to secure a national bank charter, which we believe would enhance the profitability of our lending capabilities and improve the value proposition of our SoFi Money product,” the filing said.

SoFi Money, which launched in 2019, is a digital deposit account service for customers. But since SoFi isn’t a bank, it’s had to partner with ones to offer cash management services. The company received conditional approval of the charter from the Office of Comptroller of the Currency in October. But a denial of the charter could send SoFi’s stock price lower once its public.

See more: SoFi just filed an application for a national banking charter, and CEO Anthony Noto told employees it’s a critical strategic step for the $4.3 billion fintech

To be sure, the fintech is still considering other ways to obtain a charter. SoFi mentioned in its S-4 filing that the company is exploring the purchase of a bank as one means to quickly acquire a banking footprint.

It’s a move that would be subject to further regulatory approval from the Federal Reserve and OCC, but could be more efficient than building what they call a de novo bank from the ground up.

At least one other startup has taken a similar route. LendingClub announced in early 2020 its plans to acquire Boston-based digital bank Radius Bank for its charter.

Stock Market COVID-19 debt programs could hurt the lender’s bottom line

Palihapitiya has been outspoken throughout the pandemic about the need for the US federal government to do more to help average Americans during the COVID-19 pandemic.

However, debt-assistance programs implemented over the past year could hurt SoFi’s bottom line and represent a risk to its business. 

“In response to the COVID-19 pandemic, states and other regulatory authorities across the United States are implementing various debt collection restrictions, including in some cases bans on collections or creditors’ normal legal remedies. To the extent these regimes apply to us, they could limit our ability to service our defaulted loans and pursue collections from members, which in turn could lead to higher losses and associated loss rates,” the S-4 filing noted.

Some states, for example, prohibited debt collectors from garnishing the $1,200 relief check distributed as part of the federal CARES Act last spring.

And some states prohibited new debt collection effort suits in the early days of the pandemic. The latest round of federal relief passed in December, meanwhile, included language that would prevent debt collectors from garnishing relief checks. 

That being said, SoFi has typically tended to make personal loans to higher-income, higher-credit individuals in the past, with default rates for personal loans generally remaining stable throughout the pandemic, according to a source familiar with the situation. 

Stock Market SoFi is worried about the future of student debt

While SoFi has broadened its offering to including saving, investing, and trading, the company got its start focusing on refinancing student loans. However, a new regulatory regime could put that line of business in question. 

A key stipulation of the CARES Act was the forbearance of federal student loans beginning March. That’s since been extended to Jan. 31, and likely will be extended again under the Biden administration.

That’s to say nothing of Biden’s proposal to cancel a minimum of $10,000 in federal student loans after he takes office.

Stock Market Joe Biden President-elect Joe Biden

Susan Walsh/AP

“If student loans were forgiven or cancelled in any meaningful scale, our profitability, results of operations, financial condition, cash flows or future business prospects could be materially and adversely affected as a result,” SoFi said in the filing.

Read more: Consumer-banking regulators will be ‘reinvigorated’ during Joe Biden’s presidency. Here’s how firms can prepare.

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A source familiar with the situation said SoFi is generally supportive of the $10,000 cancellation, but would prefer to see more targeted — or “means tested” — student debt forgiveness coming out of the Biden administration.

Apart from student debt cancellation, the COVID-19 pandemic has also led to lower potential students enrolling in college, meaning lower volumes of loan origination for SoFi.

“According to the National Student Clearinghouse, there has been a material decline in the number of students entering college in the class of 2024 as compared to the number of students in the class of 2023, which has contributed in part, and may continue to contribute, to a reduction in the volume and amount of the in-school loans we originate and student loans we refinance,” the filing noted.

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