Is the phenomenon of "crowdfunding" – where entrepreneurs or more or less anyone asks the public to put cash into their proposed venture – getting out of control?
Numerous websites have sprung up offering one version of crowdfunding or another. The websites allow those seeking finance to publish details of their project including how much cash they need, how they will use it and how investors stand to profit (if at all) in future.
Some of the sites vet the fund-raisers – others don't. In most cases the investors, who can usually subscribe as little as £10 per venture, are offered shares in the business.
But the craze has grown so fast that one high-profile figure who successfully used a crowdfunding website to raise money for a business venture now wants to set up a site of her own. Nicola Horlick, the controversial fund manager who was dubbed "superwoman" in the Nineties for juggling a career and family, announced plans to launch Money&Co, a crowdfunding website, early next year. Ms Horlick has set up the company on the back of her own crowdfunding success, as earlier this year she raised £150,000 for film finance company Glentham Capital in only 22 hours.
According to Ms Horlick, it is a "no-brainer" that crowdfunding has become so mainstream, given that banks are not lending to small business and savers are fed up with receiving paltry interest rates in bank and building society accounts. "Crowdfunding is all about cutting out the middle man and allowing small businesses to get the funding they need without banks taking a slice of their margins in fees from when firms take out business loans," she said. "For savers, these ventures offer the potential for much greater returns."
The websites make money too, of course. This is usually in the form of a percentage – typically 7pc – of money raised. And sometimes the site also takes a slice of returns paid to investors, too.
But what about risk? The watchdog, the Financial Conduct Authority, is taking a close interest in crowdfunding – and wants to ensure private investors fully understand the risks they are taking. Ms Horlick said of her proposed website that each venture seeking to raise capital would have guidance ratings, from one to five stars. And even then, only businesses that pass her vetting will be allowed onto the site. Ms Horlick said this would help savers understand the level of risk they were undertaking for the business ventures they were backing.
Apart from the potential returns, some of the business proposals listed on crowdfunding sites qualify for special tax reliefs under the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) rules. This gives investors generous tax breaks, such as being able to claim back income tax on the money they invest. Here, as a guide to potential investors, Your Money looks at the best-known crowdfunding sites, the types of business they seek to support – and their success to date.
Crowdcube.com is one of the longest-established sites providing a variety of firms, from motor companies to pizza delivery firms, the opportunity to pitch for funding. Many of these businesses are already successfully operating and are seeking investment to expand their footprint in a particular market. Investors can view a business plan and a video, which details why the company is seeking funding and the potential rewards on offer.
All businesses are vetted by Crowdcube and must present business plans with at least three years of financial projections.
Number of businesses hosted: 429
Total money raised: £15.3m
Percentage of businesses withdrawn due to not raising enough money: 80pc
Seedrs.com is another well-known site, but has a greater focus on listing entrepreneurial firms that focuses on helping entrepreneurs gain their first seed capital
Investors can back a start-up firm by providing seed capital, for as little as £10, in exchange for equity.
Seedrs is currently seeking to raise £250,000 for a production of Happy Days, a stage production due to tour Britain, based on the Seventies American sitcom of the same name and featuring the "Fonz".
The company carries out full due diligence with all of the enterprises that list. But the firm also argues it is best "left to the crowd" to decide if the business is worthy enough to invest in.
Number of businesses listed: 300
Total money raised: £2.3m
Percentage of businesses withdrawn due to not raising enough money: 80pc
A newer entrant to the crowdfunding space is SyndicateRoom.com, whose model differs. Here, small investors are sought to "top up" substantial stakes in a business that has already been bought by established "dragons" or lead investors. The lead investors must contribute at least 25pc of a firm's funding.
Because small businesses need to procure funding from angel investors ahead of being listed on the website, arguably these businesses have a greater chance of reaching their full fundraising targets.
Number of businesses listed: Seven
Total money raised: £950,000
Percentage of businesses withdrawn without raising enough money: None to date
An even newer player is InvestingZone, which launched in May 2013. Like other crowdfunding websites, the firm gives investors access to some potentially great early-stage companies. The firm only allows people to invest if they understand the risks they are taking on. Those that want to invest must pass a test on the crowdfunding market.
Number of businesses listed: Nine
Total money raised: £966,000
Percentage of businesses withdrawn without raising enough money: None
Best of the rest
There are plenty of other crowdfunding websites out there, the majority of which operate in niche areas. For instance, Unbound is both a crowdfunding website and a publisher. Another niche player is MoolaHoop, which exclusively lists business ventures from female entrepreneurs.
There are also a number of sites that solely target green-energy crowdfunding. Some of the leaders in this field include Abundance Generation and Trillion Fund, which both specialise in renewable-energy start-ups.
• Get Twitter alerts for all our investing stories: follow @telegraphinvest
• Investment tips every week by email – sign up here
