The Financial Conduct Authority (FCA) is set to crackdown on the latest craze to sweep through the industry.
The regulator is targeting crowdfunding websites, which aim to raise thousands of pounds from investors for start-up firms.
Typically a business will pitch to potential investors through a website to try and attract contributions from as little as £10. Most crowdfunding platforms required a specified target to be reached during the fund raising period before the money is passed to the business or individual and investors usually receive shares in the business.
According to the Sunday Times, the FCA is understood to be worried that investors are parting with their cash without being fully aware of the risks.
While some websites have been approved by the FCA others operate without regulatory approval.
‘We believe most crowdfunding should be targeted at investors who know how to value a start-up business, and who appreciate the risks involved and that they could lose all of their money,’ The FCA told the Sunday Times.
‘We want it to be clear that investors in the majority of crowdfunds have little or no protection if the business or project fails.’
Kevin McCloud, presenter of Channel 4’s Grand Designs, became the latest high profile businessman to turn to crowdfunding, raising £1 million through website Crowdcube for his new property venture.
In July, Nicola Horlick broke crowdfunding records by raising £150,000 in 22 hours through Seedrs for a film venture.