Sezzle: A Troubled BNPL Platform Propped Up by Short‑Term Gimmicks as Insiders Cash Out via Margin Loans and Stock Sales
Sezzle Inc., a Minneapolis‑based “Buy Now, Pay Later” (BNPL) company founded in 2016, has seen its stock price surge by an astonishing 2,015% over the past year. Investors have piled in, believing the company is finally growing profitably – it recently reported a 71% year‑over‑year revenue increase. Today, Sezzle trades at a lofty 5.5 times forward sales, a 63% premium over its peers, all of which rests on exuberant market expectations.
Yet the reality beneath the surface is dramatically different. Our investigation reveals that Sezzle is borrowing money at expensive rates to fund extremely risky loans through a platform that is rapidly losing both customers and merchants. Meanwhile, insiders are quietly cashing out through stock sales and, more alarmingly, through large‑scale margin loans that expose ordinary shareholders to hidden risks.
Core Findings: Insiders Use Margin Loans and Aggressive Selling to Extract Value
Sezzle’s Chairman and CEO, Charlie Youakim, has pledged $542 million worth of his own shares as collateral for margin loans – representing approximately 30% of the company’s total outstanding shares. This crucial information appears only in a small footnote on page 42 of the September 2024 proxy statement.
Margin loans allow insiders to extract cash from their holdings without actually selling shares and without triggering Form 4 disclosure requirements. These loans are inherently risky – if the collateral (Sezzle stock) declines in value, lenders can issue margin calls, forcing forced selling that further depresses the stock. When key executives quietly tap such facilities, it rarely bodes well for minority shareholders.
Beyond these pledged loans, insiders have directly sold approximately $71 million worth of Sezzle stock this year alone. The most prominent seller is private equity firm Continental Investment Partners, a pre‑IPO investor from Sezzle’s Australian listing days. Continental’s co‑founder and partner, Paul Purcell, resigned from Sezzle’s board on June 6, 2024. Since then, he has filed 62 Form 4 disclosures revealing continuous stock sales, totalling $55.7 million – reducing his position by roughly 87.5%. Additionally, co‑founder Paul Paradis has trimmed his holdings by 43%.
History Repeats: The Australian Listing Debacle and Collapse
Sezzle listed on the Australian Securities Exchange in July 2019, raising $30 million. Initially, investor enthusiasm for the BNPL sector drove the stock to a high of A$11.60 in February 2021. However, by June 2021, local fund manager East 72 Holdings published a detailed report characterising Sezzle as a highly “promotional” company, citing (i) concealment of negative information, (ii) inferior performance versus peers, (iii) lending to high‑risk customers, and (iv) a balance sheet vulnerable to credit tightening.
By February 2022, Sezzle’s stock had crashed over 80% to A$2.00. Later that month, Sezzle announced a definitive merger agreement with rival Zip, valuing Sezzle at A$491 million in an all‑stock deal – widely seen as a lifeline. But in July 2022, the merger fell through. As the Australian Financial Review noted, “bad debts at both companies continued to worsen,” and the deal’s termination “cast a shadow over the notion that BNPL algorithms learn faster with scale, leading to better credit decisions.” Following the collapse, Sezzle’s stock plummeted to A$0.26, with market observers openly speculating about bankruptcy.
The Nasdaq “Rebirth” – No Fundamental Change
Despite its Australian catastrophe, Sezzle surprisingly announced a return to profitability in February 2023 – swinging from a quarterly loss of $25.9 million in Q4 2021 to a net profit of $0.6 million in Q4 2022. Approximately 40% of this improvement came from a drastic reduction in bad‑debt provisions, which fell from 3.5% of underlying merchant sales in Q4 2021 to just 1.2% in Q4 2022. Management attributed this to better collections and its proprietary “Prophet” credit scoring system.
Armed with these “refreshed” numbers, Sezzle announced on March 13, 2023, its intention to transfer its primary listing to Nasdaq. Because the stock price remained depressed, the company executed a 38‑for‑1 reverse stock split in May 2023 to meet Nasdaq’s $4 minimum bid requirement. In August 2023, Sezzle began trading on Nasdaq.
The True Source of Earnings Growth: Lending to Lower‑Quality Borrowers
Sezzle’s business model is straightforward: borrow funds and lend them to consumers for purchases, earning transaction fees and creating use cases for its subscription services. To finance its $151 million total loan portfolio, the company relies on a credit facility with an outstanding balance of $95 million as of the last quarter, carrying an effective interest rate of 12.65%. In 2023, that rate averaged an even higher 16.78%.
In other words, Sezzle trades at a premium valuation but funds its operations with expensive debt, which it then uses to underwrite high‑risk loans to sub‑prime borrowers – individuals who typically cannot qualify for traditional credit cards or other conventional financing.
During the most recent earnings call, Sezzle indicated that bad‑debt provisions would rise in the second half due to seasonality and the company’s decision to “open the funnel to more consumers based on confidence in our underwriting model.” Opening the funnel is corporate speak for taking on greater risk. In the last quarter alone, Sezzle’s credit loss provisions surged 130% year‑over‑year, while the loan portfolio grew only 6% during the same period.
Sezzle has abandoned the granularity of traditional FICO scoring in favour of its proprietary “Prophet” system, which assigns only three risk grades – A, B, and C, with C being the lowest. The company does not clearly map these grades to FICO scores. C‑grade loans (the worst quality) have increased 22% year‑to‑date and now account for 29% of the total portfolio. Meanwhile, loans overdue by 1 to 90 days have skyrocketed by 90% since the end of 2023, reaching $25 million.
Against a backdrop of rising credit card delinquencies among U.S. consumers, Sezzle’s strategy of lending to those with impaired credit histories is particularly concerning for its $151 million BNPL loan book.
Questionable Risk Management: A Chief Risk Officer with No Prior Corporate Experience
Given that Sezzle’s core business is credit risk management, one would expect the “Chief Risk Officer” to be among the most critical executive roles, working closely with the CEO and CFO. One would also anticipate that the company would hire an individual with substantial enterprise‑level credit and risk management experience.
However, Amin Sabzivand joined Sezzle in 2018 after earning master’s degrees in engineering and financial mathematics, and subsequently working as a teaching specialist at the University of Minnesota – his official SEC biography lists no prior corporate employment. Since 2023, Sabzivand has served as Sezzle’s head of “Risk, Data, Engineering, and Product” – a broad portfolio that raises further questions about the depth of specialised risk oversight.
Merchant Exodus: Key Partnerships Quietly Deteriorate
Merchant fees have traditionally been a primary revenue source for Sezzle, which is why BNPL players like Affirm aggressively expand their merchant bases. Affirm reported a 21% year‑over‑year increase in active merchants in Q3 2024. In stark contrast, Sezzle has lost over 51% of its active merchants since 2021:
- End of 2021: 47,000 active merchants
- End of 2022: 42,000 active merchants
- End of 2023: 28,000 active merchants
- Q3 2024: 23,000 active merchants
Not only is Sezzle shrinking in relevance, but its claimed 23,000 active merchants also appear inflated. As of our testing this week, the company’s own website listed only 6,776 live merchants.
More troubling are the silent failures of several high‑profile merchant relationships.
Target: In October 2021, Target announced partnerships with both Sezzle and Affirm to integrate their BNPL options into its checkout experience. However, three years later, in December 2024, when we examined Target’s online payment methods, only Affirm and PayPal were offered as BNPL choices. Sezzle’s current connection to Target appears limited to customers using the Sezzle app to purchase Target goods – it is no longer a direct payment option at Target’s checkout.
Lamps Plus: In May 2021, Sezzle announced a partnership with Lamps Plus. In January 2023, the retailer’s checkout page still displayed Sezzle as a payment method. But by December 2024, PayPal had become the sole BNPL provider on the site. We called Lamps Plus in October 2024 and were told that they now offer only PayPal for instalment payments.
Bellacor: In October 2021, Sezzle announced a merchant partnership with lighting and home decor company Bellacor. When we checked its website this month, Sezzle was no longer listed; instead, Affirm, PayPal, and Amazon Pay appeared as alternatives.
Ministry of Supply: This apparel brand is still featured as a case study on Sezzle’s merchant page. However, when we called the company and reviewed its website, Sezzle was not a checkout option. In our December 2024 call, Ministry of Supply confirmed that PayPal and Shop Pay (powered by Affirm) are the only instalment choices available.
Merchants are the lifeblood of the BNPL ecosystem – they pay the fees (not consumers) and drive customer acquisition. As merchants abandon Sezzle in droves, this virtuous cycle reverses. For consumers, paying a monthly subscription for access to a shrinking, lower‑quality merchant network becomes increasingly unattractive. Ultimately, this dynamic leaves Sezzle with a concentration of riskier consumers and loans – precisely the demographic that historically represents elevated credit losses.
Customer Attrition and Dubious Subscription Enrolment Tactics
Sezzle’s active consumer count has fallen from 3.4 million at the end of 2021 to 2.7 million in the latest quarter – a 20% decline. Meanwhile, its subscription products (“Sezzle Premium” and “Sezzle Anywhere”) have reportedly grown 2.5‑fold, now contributing 33% of quarterly revenue.
This disparity is puzzling. It appears that Sezzle may be using questionable enrolment practices to inflate subscription numbers artificially. The company faces a multitude of consumer complaints alleging that users were enrolled in recurring monthly subscriptions without their knowledge or consent – complaints that are echoed both in user feedback forums and on Sezzle’s own FAQ page.
At the Better Business Bureau (BBB), Sezzle has received 986 complaints over the past three years, with an average rating of just 1.1 out of 5 stars.
Conclusion: Left Far Behind by Competitors
In our view, Sezzle has been thoroughly outmanoeuvred by competitors such as Affirm, Klarna, and Afterpay. The company’s recent financial improvements are largely the result of short‑term accounting gimmicks and risk‑taking that have created a temporary window for insiders to exit. We do not believe Sezzle can survive as an independent going concern over the long term.
Initial Disclosure: After extensive research, we have taken a short position in Sezzle Inc. (Nasdaq: SEZL). This report reflects our opinions only, and we encourage every reader to conduct their own due diligence.
