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London - Britain's financial watchdog has proposed tighter controls for websites that allow members of the public to put money into small businesses, in order to protect inexperienced investors.
Crowdfunding, which allows people to lend to individuals or small businesses or buy shares in unlisted companies, has developed to help fill a gap left by a reduction in bank lending caused by tougher capital rules and greater regulatory scrutiny.
The rapid growth of the sector, now worth around £360m ($580m) in the UK, has prompted some concern that not all individuals are aware of the risks involved.
"Consumers need to be clear on what they're getting into," Christopher Woolard, the Financial Conduct Authority's (FCA) director of policy, risk and research said on Thursday.
Industry members, who have been calling for clearer regulation as they believe it will help the market develop, welcomed the proposals.
The FCA proposed that websites soliciting investments, through which people can back companies for as little as 10 pounds, would be subject to restrictions on how they promote themselves, designed to ensure they were aimed only at those who understood the risks or could afford any losses.
Investors would be required formally to confirm they were either sophisticated investors, wealthy individuals, or were receiving regulated investment advice.
Those who do not fit into these categories would have to certify they were not committing more than 10 percent of their investment portfolio to unlisted shares or debt securities.
"This reflects the fact that most investments in start-up businesses result in a 100% loss of investment," the FCA said, citing Office for National Statistics research showing that 50-70% of business start-ups fail completely.
Some in the industry had been worried the regulator would impose a minimum investment requirement, preventing the smallest investors from taking part.
"The consultation achieves a reasonable balance between consumer protection and access to finance for the businesses," said Julia Groves, chair of the UK Crowdfunding Association.
"It is good that we now have high standards consistently applied across the industry ... and it does allow some participation by ordinary investors."
The US Securities and Exchange Commission also set out rules this week for how small companies would be allowed to solicit funds from the public over the internet.
The FCA considers loan-based sites, often referred to as peer-to-peer lenders, as less risky, but also proposed new rules relating to these, including giving both borrowers and lenders a 14-day "cooling off" period to change their minds and making sure they do not play down the risks.
Rhydian Lewis, founder and chief executive of peer-to-peer lender RateSetter, said being regulated would help significantly boost the growth of the industry.
"We estimate the current run rate of loans could triple after regulation because of the increase in consumer confidence," he said.
The FCA also set minimum prudential requirements for the peer-to-peer platforms, which from April 2017 will have to hold as reserves a certain percentage of the total amount of loaned funds, or a minimum of £50 000 - whichever is higher.
Until then, they will have to hold minimum capital of £20 000.
The FCA's consultation will run until December 19.
