Crowdfunding involves a large group of people contributing money towards startup capital, or to help businesses expand, and is still considered to be a small market in the UK.
However, in newly-published information for consumers, the FSA explained how most crowdfunds are not regulated, meaning there would be no Financial Omnudsman Service or Financial Services Compensation Scheme protection.
And, while there may the possibility of higher returns than mainstream investments, the regulator also highlighted the rarity of dividends, the possibility of shares being diluted and the lack of a secondary market.
It said: “We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money.
“We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.”
The FSA also pointed out the possibility of crowdfunding firms handling client money without our permission or authorisation, removing another layer of protection for consumers.
