What happens here is that iShares has issued 300,000,000 shares, while investor statements show 320,000,000 shares. Of those shares, 20,000,000 are borrowed.
It sounds like a game of musical chairs, where if everyone wanted to redeem at once, the last people standing would lose out (like in a ponzi scheme or bank run). However, that isn't the case. In this case, some people own shares of SLV, others own "IOU"s, and have no claim to the silver. Those with shares of SLV could get the silver (in basket quantities, as normal); those with IOUs would have to get the IOUs settled first.
So the short answer is that the 20,000,000 shares in this case are not backed by silver, because the shares do not exist -- they are really IOUs. The short seller is required to replace them at some point.
Second, you need someone willing to lend shares. As we'll see below, this is often people who bought SLV in a margin account.
The short seller must (again, see here) borrow shares of SLV to do this. They go to a brokerage firm, who lends the shares of SLV. Where does the brokerage firm get them from? From their own inventory, the margin account of one of the firm's customers, or another lender (see the SEC 1C).
At this point, the lender is owed the stock. The short seller later will either purchase shares to replace them, or they can deposit silver with an AP to create new shares to give to the lender.
The shares come from the short seller's brokerage firm, the margin account of one of the brokerage firm's customers, or another lender.
So if you own shares of SLV, they could be yours -- but only if your account is on margin. A margin account is where you borrow money from the brokerage firm to buy stocks, and you use the shares you already have purchased as collateral (which gives the brokerage firm the right to lend them out).
The only people at risk of having their shares lent out are people who fully understand the rules (or should), and have agreed to it. Brokerage firms that lend shares obviously know exactly what they are doing, and the risks involved. The other source is shareholders using a margin account.
If you have a margin account, you don't always own the shares in your account; often, you are owed them. And you have agreed to things like margin calls (where you have to pay money if the stocks are losing value), and having the brokerage firm sell your stocks without telling you to meet margin calls (which the can chaynge without notifying you).
Margin accounts can be very risky, and this is simply one of the risks of having a margin account.
However, the prospectus cannot limit short selling. To limit short selling, the SEC would need to get involved and change the regulations first.
However, short selling is part of the stock market, and something that iShares has no control over (just as they could not, for example, prohibit a certain organization or person from buying shares). For iShares to prevent short selling, the SEC would have to get involved.
Note that while SLV APs (the ones that deposit silver into SLV to create new shares) could sell SLV short (depositing the silver later to cover their short position), they would normally only do that if  they could not obtain the silver, and  thought the price of silver was going to go down. If they thought the price of silver was going to go up, and could not find the silver to deposit, they would simply not go short (nothing requires them to create shares).
"The bottom line is that [SLV] is not involved in the arrangements between short sellers and lenders of SLV shares. [SLV] doesn’t deliver silver to any other party...".
That's summarizes things well. If you don't have a margin account, you won't be a lender of SLV shares. If you buy shares of SLV, they may be from a short seller who got them from someone with a margin account; if so, however, the shares are now legally yours, and backed the same as all other SLV shares. The person with the margin account does not own shares of SLV (they are owed them), so they have nothing from SLV backing their IOU.