(Reuters) - California rejected Sezzle Inc's SZL.AX request for a lending license, dealing the recently listed buy-now-pay-later firm a big blow weeks after bigger rival Afterpay APT.AX got a go ahead, sending Sezzle's shares down by more than a fifth.

Headquartered in Minneapolis and listed in Australia, Sezzle offers U.S. and Canadian consumers small, interest-free loans. In return, it takes over the sales contract between the consumer and merchant for payment processing.

The California Department of Business Oversight determined that Sezzle purchasing these contracts meant the company was already engaged in lending without having a license to do so, and rejected the company’s request for one, Sezzle said in a statement on Thursday.

Sezzle’s stock fell to its lowest ever on Thursday, setting the company up to be worth about A$131 million, about 40% less than what it was worth during its IPO in July.

The company’s troubles are latest in a line of problems these buy-now-pay-later (BNPL) firms have been facing.

Companies like Sezzle, which give young shoppers easy credit to spend online, have gained popularity but their mode of operation attracts scrutiny, with regulators arguing whether such credit should be treated like a bank loan.

In Australia, regulators have questioned the business model and accused Afterpay - considered an industry bellwether - of non-compliance with money-laundering laws.

The country’s central bank is also scheduled to review the payments industry this year.

Afterpay, however, said in a statement that it received the California lending license six weeks back, sending its shares up 4.6%. It did not specify what it did differently to get it.

“Afterpay is much more diversified in multiple regions and I’d assume because of that they are perceived as a lower risk play,” said Mathan Somasundaram, Market Portfolio Strategist at Blue Ocean Equities.

“Whereas Sezzle is only in the U.S. and at a very early stage so the risk will be a lot higher for them if they don’t start on the right foot.”

($1 = 1.4273 Australian dollars)