Most investment crowdfunding websites play down the risks involved while over-egging the potential gains, City watchdog the Financial Conduct Authority (FCA) has found.
The FCA took over regulation of the investment-based and loan-based crowdfunding sectors last year, and recently published an update following a review of the market.
In a survey of equity crowdfunding firms - in which investors buy unlisted shares in a fledgling firm - it found that most fall short of requirements to provide clear and complete information and not mislead customers.
Michael Trudeau explores crowdfunding, and the opportunities to gain from both tax relief and - hopefully - future growth in the February issue of Money Observer. New customers can pick up their free copy here; returning readers can subscribe and receive three copies for just £1.
- an unbalanced emphasis on the potential benefits, without giving proportionate prominence to the risks;
- insufficient, incomplete or cherry-picked information, potentially giving an unrealistically optimistic view of the investment; and
- the downplaying of important information, for example by qualifying risk warnings with claims that no capital has been lost.
The FCA is also concerned that negative comments are being deleted from forums on some sites, compounding the problems of risks being overlooked.
The investment-based crowdfunding market grew from £28 million in 2013 to £84 million in 2014, and the FCA estimates that just under two-thirds of patrons are unsophisticated retail investors.
If you are neither a sophisticated nor a high-net-worth investor the FCA recommends you put no more than 10 per cent of your portfolio into such assets.
Gonçalo de Vasconcelos, founder of equity crowdfunder SyndicateRoom, says: 'It is crucial for investors and the reputation of the sector that those companies that have been misleading customers take immediate steps to improve their openness and honesty.
'Sadly these shortfalls in the behaviour and practices of just a few of the platforms can hurt the reputation of the whole zone, which is both unfair and unhelpful to everyone concerned, including investors.'
He adds that SyndicateRoom was not one of the crowdfunding platforms warned by the FCA to change its ways.
Christopher Woolard, director of strategy and competition at the FCA, says: 'Over the last year we've seen the extraordinary growth of peer-to-peer and equity-based crowdfunding continue. Our aim, with the rules we put in place in April, is to ensure that the growth we're seeing comes with appropriate investor protection in place.'