The City watchdog has announced a crackdown on the crowdfunding and peer-to-peer lending industry, which is expected to top £1 billion by 2016.

Recent figures show the industry has loaned £24 million to West Midlands businesses since 2010 and the option is gaining popularity among firms struggling to gain bank funding.

The scheme allows firms to borrow between £5,000 and £1 million. But new regulations include stronger protection for investors and tighter regulations for companies seeking cash through crowdfunding.

People who lend money to businesses through peer-to-peer or crowdfunding organisations will be given of a cooling-off period. Lenders – and small firms who borrow from them – will have 14 days to withdraw from deals with no penalty.

Under the proposals, which will come into force next April, ordinary investors will have to certify that they will not invest more than 10 per cent of their portfolio in unlisted shares or unlisted debt securities. The regulator is concerned by the number of new firms that fail, between 50 and 70 per cent.

The growing success of peer-to-peer is seen in UK small business lender Funding Circle, which has announced it is launching in the US, just three years after setting up. It has lent £160 million between 2,800 busineses in the UK at interest rates just above five per cent. The world’s first peer-to-peer lender, Zopa, said it had lent £400 million to UK borrowers since launch in 2005, including £100 million in the last six months.

Pub and brewing company BrewDog, which has an outlet in Birmingham, raised more than £1 million from investor fans of its Punk IPA beer in just 24 hours after launching a crowdfunding scheme to fund expansion plans.

Kevin McCloud, presenter of television’s Grand Designs, raised £1.4 million for his firm Hab Housing, which aims to build well-designed but low-cost housing.

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