People investing in small businesses through crowdfunding websites will have to prove they are a sophisticated investor, or limit their investment to 10 per cent of their assets, the City watchdog has decided.
The Financial Conduct Authority (FCA) is introducing a set of regulations for UK crowdfunding platforms, starting this year, aiming to protect the interests of thousands of investors who are funnelling money into them as they increase in popularity.
Christopher Woolard, the FCA's director of policy, risk and research, said: "Consumers need to be clear on what they're getting into and what the risks of crowdfunding are. Our rules provide this clarity and extra protection for consumers, balanced by a desire to ensure firms and individuals continue to have access to this innovative source of funding."
But the crowdfunding industry is opposed to the new rules because it believes the regulation locks the ordinary investor out of crowdfunding.
"Make no mistake, the infamous 10 per cent rule - however it's dressed up - takes the crowd out of equity crowdfunding," says Crowdfunding Centre founder Barry James.
Despite the crack-down, investors who lend money to small companies through crowd lending sites will not be covered by the Financial Services Compensation Scheme (FSCS), which protects investors if they are mis-sold an investment or if the firm through which they invested goes bust.
Gillian Roche-Saunders, head of venture finance at Bovill, said: "While equity investment is covered by the FSCS, debt-based investment is not. It would be better for consumers and more consistent if the FSCS was extended to cover peer-to-peer lending.
"In its proposals, the FCA emphasised the high risk that consumers could suffer losses from peer-to-peer lending platforms because of platform failure, fraud and misrepresentation. These are exactly the kinds of risks that the FSCS is there to protect consumers from, but the FCA has decided not to extend the protection offered by the FSCS to users of these platforms."
