Upstart Holdings (UPST) risk factors, FY2024 10-K

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

1. 01Our business has been and will continue to be adversely affected by economic conditions and other factors that we cannot control
2. 02If 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
3. 03If we are unable to continue to improve our AI models or if our AI models contain errors or are otherwise ineffective, our growth prospects, business, financial condition and results of operations would be adversely affected
4. 04If our AI models do not accurately reflect the impact of economic conditions on borrowers’ credit risk in a timely manner, the performance of Upstart-powered loans may be worse than anticipated and our AI models may be perceived as ineffective
5. 05If 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
6. 06If our existing lending partners cease or limit their participation in our marketplace or if we are unable to attract new lending partners to our marketplace, our business, financial condition and results of operations will be adversely affected
7. 07We have a relatively limited operating history, which may result in increased risks, uncertainties, expenses and difficulties, and makes it difficult to evaluate our future prospects
8. 08If we are unable to manage the risks associated with the Upstart Macro Index (UMI), which we introduced in 2023 and which does not have a long history or proven track record, our credibility, reputation, business, financial condition and results of operations could be adversely affected
9. 09We have incurred net losses, and we may not be able to achieve profitability in the future
10. 10If 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
11. 11Our revenue growth rate and financial performance in the past may not be indicative of future performance
12. 12Our quarterly results are likely to fluctuate and as a result may adversely affect the trading price of our common stock
13. 13Dodd-Frank Act, the Investment Company Act of 1940, as amended, or the Investment Company Act, the so-called “Volcker Rule,” and states licensing requirement changes to include SPEs, may affect the type of securitizations that we are able to complete
14. 14Our top three lending partners account for a significant portion of loan originations on our marketplace and our revenue
15. 15Our 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
16. 16orders against any of our lending partners, it could impact the viability of the bank partnership model or require additional actions by us and the lending partner to mitigate risks identified
17. 17If 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
18. 18Substantially all of our revenue is derived from a single loan product, and we are thus particularly susceptible to fluctuations in the unsecured personal loan market
19. 19The sales and onboarding process of new lending partners could take longer than expected, leading to fluctuations or variability in expected revenues and results of operations
20. 20We are continuing to introduce and develop new loan products and services 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
21. 21Misconduct and errors by our employees, former employees, vendors, or service providers could harm our reputation and subject us to significant legal liability
22. 22If we do not compete effectively in our target markets, our business, results of operations and financial condition could be harmed
23. 23Our business is heavily concentrated in U.S. consumer credit, and therefore our results are more susceptible to fluctuations in that market than a more diversified company
24. 24If 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
25. 25Our success significantly 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 for all areas of our organization
26. 26If we fail to effectively manage the fluctuations in our business, our business, financial condition and results of operations could be adversely affected
27. 27Security 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
28. 28Our 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
29. 29factors within our proprietary models, which helps mitigate this risk, it does not eliminate the risk of an inaccurate individual report
30. 30Borrowers 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
31. 31Our marketing efforts and brand promotion activities may not be effective
32. 32Unfavorable outcomes in legal proceedings may harm our business and results of operations
33. 33unenforceable, subject to rescission or otherwise impaired, we or other program participants may be subject to penalties, and/or our commercial relationships may suffer, each which would adversely affect our business and results of operations” for more information
34. 34The long-term impact of operating with a Digital First workforce on our business, financial condition and results of operations is uncertain
35. 35Our 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
36. 36If our estimates or judgments relating to our critical accounting policies prove to be incorrect or financial reporting standards or interpretations change, our results of operations could be adversely affected
37. 37If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired
38. 38Some of our estimates, including our key metrics in this report, are subject to inherent challenges in measurement, and any real or perceived inaccuracies may harm our reputation and negatively affect our business
39. 39We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance

RISKS RELATED TO OUR INTELLECTUAL PROPERTY AND PLATFORM DEVELOPMENT

1. 40It may be difficult and costly to protect our intellectual property rights, and we may not be able to ensure their protection
2. 41Any significant disruption in our AI lending platform could prevent us from processing loan applicants and servicing loans, reduce the effectiveness of our AI models and result in a loss of lending partners, institutional investors, applicants or borrowers
3. 42Our platform and internal systems rely on software that is highly technical, and if our software contains undetected errors, our business could be adversely affected
4. 43Some 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
5. 44Some open source licenses contain requirements that we make source code available at no cost for modifications or derivative works we create based upon the type of open source software we use
6. 45The use of generative AI technologies by our employees or contractors could expose us to unexpected liability

RISKS RELATED TO OUR DEPENDENCE ON THIRD PARTIES

1. 46We 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
2. 47We rely on third-party vendors and if such third parties do not perform adequately or terminate their relationships with us, our costs may increase and our business, financial condition and results of operations could be adversely affected
3. 48publicity related to quality standards or safety concerns, could adversely affect our reputation and brand, and could potentially lead to increased regulatory or litigation exposure
4. 49Failure by our third-party vendors or our failure to comply with legal or regulatory requirements or other contractual requirements could have an adverse effect on our business
5. 50We are subject to counterparty risk with respect to the capped call transactions

RISKS RELATED TO OUR REGULATORY ENVIRONMENT

1. 51Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses
2. 52We contest our liability and the amount of damages, as appropriate, in each pending matter. The outcome of pending and future matters could be material to our results of operations, financial condition and cash flows, and could materially adversely affect our business
3. 53We are subject to or facilitate compliance with a variety of federal, state, and local laws, including those related to consumer protection and lending requirements
4. 54Internet-based loan origination processes may give rise to greater risks than paper-based processes and may not always be allowed under state law
5. 55If we are found to be operating without having obtained necessary state or local licenses, our business, financial condition and results of operations could be adversely affected
6. 56The CFPB has sometimes taken expansive views of its authority to regulate consumer financial services, creating uncertainty as to how the agency’s actions or the actions of any other agency could impact our business
7. 57We have been in the past and may in the future be subject to federal and state regulatory inquiries regarding our business
8. 58The collection, processing, storage, use and disclosure of personal information could give rise to liabilities as a result of existing or new governmental regulation, conflicting legal requirements or differing views of personal privacy rights
9. 59As the regulatory framework for AI and machine learning technology evolves, our business, financial condition and results of operations may be adversely affected
10. 60If we are required to register under the Investment Company Act, our ability to conduct business could be materially adversely affected
11. 61If we are required to register under the Investment Advisers Act, our ability to conduct business could be materially adversely affected
12. 62If we are required to register with the SEC or under state securities laws as a broker-dealer, our ability to conduct business could be materially adversely affected
13. 63Anti-money laundering, anti-terrorism financing, anti-corruption and economic sanctions laws could have adverse consequences for us
14. 64Our securitizations are subject to regulation under federal law, and failure to comply with those laws could adversely affect our business

RISKS RELATED TO INDEBTEDNESS

1. 65We rely on borrowings under our warehouse credit 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
2. 66We, through our warehouse trust special purpose entities, have entered into warehouse credit facilities to partially finance the purchase of certain loans from certain lending partners that originate loans through our marketplace, which credit facilities are secured by the purchased loans
3. 67Corporate 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
4. 68We 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
5. 69Provisions in the Indentures governing our 2026 Notes, 2029 Notes and 2030 Notes may deter or prevent a business combination that may be favorable to you

RISKS RELATED TO TAXES

1. 70Our 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
2. 71Changes in tax laws could have a material adverse effect on our business, financial condition and results of operations
3. 72past tax liabilities on 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

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

1. 73The trading price of our common stock may be volatile, and you could lose all or part of your investment
2. 74We 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
3. 75The capped call transactions entered into in connection with the issuance of each of the 2026 Notes and the 2029 Notes may affect the market price of our common stock
4. 76Certain insiders have significant voting power, which could limit your ability to influence the outcome of key transactions, including a change of control
5. 77The large number of shares of our capital stock eligible or registered for public sale could depress the market price of our common stock
6. 78Our common stock does not provide any rights directly related to the loans we hold
7. 79You may be diluted by the future issuance of additional common stock in connection with our equity incentive plans, acquisitions or otherwise
8. 80Transactions relating to our 2026 Notes, 2029 Notes and 2030 Notes may dilute the ownership interest of stockholders, or may otherwise depress the price of our common stock
9. 81To the extent a large number of shares of our common stock are sold in connection with any “sell to cover” transactions upon vesting of restricted stock units (RSUs) issued to our employees, our stock price may fluctuate
10. 82Delaware 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
11. 83Our 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
12. 84The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members
13. 85We do not intend to pay dividends for the foreseeable future