peer to peer investing limits

[blackfedora]

Hello mustachians,

I've been trying to clear up this financial question for a while but all my google attempts just land me on blogs weighting the positives and negatives of peer to peer lending. My question is this: "Is there a limit to how much capital you can invest in a peer to peer lending site such as lending club or prosper, and if so, what is that limit?"

I live in SC, and when I set up my lending club account I noticed that in the fine print there seemed to be a $250k net worth requirement (minus house value) and then a 10% annual household income limit. It also seemed like these limits are erased once you break the $1mil net worth mark. Is this correct? It seems crazy to me that you'd need to be a millionaire before you're trusted with investing your own money.

Thanks for the help!

[Joet]

I don't think there's any verification attempt. It's just one of those regulatory/disclosure things they force you to agree that you are adhering to.

But 10% of your NW is their recommendation. I'd agree with that. I currently have $10k in a taxable account, right around month 9 or 10 defaults should peak they say on 3-yr notes.

[matchewed]

I don't see why there would be a contribution limit. I can see the other side of it with requiring a certain net worth prior to allowing someone to contribute, think of it as either an investor protection dictated from the outside or an investor protection that they have imposed upon themselves (to be honest not sure which).

It may seem "crazy" that they won't let you invest if you have <$250k net worth. But I'd like investors who already show themselves to be financially secure prior to taking on some of the more risky investments such as P2P lending.

*edit* for greater than/less than symbol failure.

[arebelspy]

I wouldn't do more than 5% of your net worth (well I personally wouldn't do more than 0% of my net worth, but if I were recommending for others, 5%).

As far as a dollar limit, no, not as far as I know.  I know a guy who put $700,000+ into a P2P lending site.

[blackfedora]

OK, great. I just wanted to make sure I wasn't going to be hit with a fine or something when I go to pay taxes on the interest.

I'm not planning anything crazy, 5-10% of my net worth makes sense to me, but my net worth is almost 5 times my annual income now, so 5% of net worth is quite different from 5% annual household income.

[Nords]

OK, great. I just wanted to make sure I wasn't going to be hit with a fine or something when I go to pay taxes on the interest.
I'm not planning anything crazy, 5-10% of my net worth makes sense to me, but my net worth is almost 5 times my annual income now, so 5% of net worth is quite different from 5% annual household income.

Each state has different requirements on peer-to-peer lending qualifications, and above the state laws is the SEC's "accredited investor" rule.  The theory is that if you have a million bucks (or a high annual income) then you know what you're doing, and you wouldn't be able to sue the companies for exploiting any presumption of ignorance.

Nobody has the time or interest in enforcing those rules when you sign up.  You're expected to be telling the truth when you agree to the terms & conditions.  However if for some reason you became involved in litigation against those companies, you might be disqualified from participating in a lawsuit because you "fraudulently" presented yourself as a "qualified" peer-to-peer lender.

The state laws are in the 10Ks and prospectuses on the peer-to-peer lending sites. 

The SEC accredited investor requirements are here:
http://www.investopedia.com/terms/a/accreditedinvestor.asp
http://en.wikipedia.org/wiki/Accredited_investor
http://www.sec.gov/answers/accred.htm

Those requirements came about back when peer-to-peer lending was mainly run by organized crime (real criminals, not financial industry execs), and back when a million bucks was considered to be a lot of money.

I think the peer-to-peer borrowing qualifications have some problems and the default risks are poorly understood, but you've probably already read about that.  For anyone else who's curious:
http://the-military-guide.com/2013/05/30/the-problems-with-peer-to-peer-lending/