Financial Services Authority (FSA) on Monday approved for the first time a "crowdfunding" website which allows members of the public to take a direct stake in small unlisted businesses.
Volatile markets, low interest rates and crimped bank lending have boosted the popularity of crowdfunding, which, according to Massolution, a firm specialising in the sector, raised 1.2 billion euros ($1.6 billion) globally in 2011.
Many such websites now offer members of the public small stakes in companies for investments of as little as 10 pounds ($16), and both British and U.S. regulators have warned investors of the risks involved.
There is no Europe-wide regulation in place for crowdfunding websites and the United States is in the process of drafting rules that would govern the sector.
Crowdcube, which has raised 5 million pounds since launching two years ago and has more than 28,000 registered investors, is now regulated by the Financial Services Authority (FSA).
Prospective Crowdcube investors will have to complete a questionnaire to check they understand the risks involved, co-founder Luke Lang told Reuters, and deposits of up to 85,000 pounds will be reimbursed should Crowdcube collapse.
"It gives us a lot of credibility and it gives investors confidence that the FSA have looked at our systems processes and resources and we have passed all of their tests," Lang said.
The only other crowdfunding website to be authorised by the FSA, Seedrs, varies from the Crowdcube model. It holds shares in a company as a nominee and manages them on investors' behalf.
Crowdfunding providers and peer-to-peer lenders, which help businesses and individuals borrow from companies and members of the public, have said rules tailored to suit more traditional markets were holding back development of a vital funding source.
The government said last year it would begin regulating peer-to-peer lenders from April 2014.
(Reporting by Kylie MacLellan; Editing by Louise Ireland)