The UK’s financial regulator, the Financial Services Authority, has issued its second warning this year about the dangers of venture-capital...

The UK’s financial regulator, the Financial Services Authority, has issued its second warning this year about the dangers of venture-capital trusts, just as a new wave of the trusts are about to be launched in what is likely to be the biggest-ever VCT season.

The regulator is concerned that some firms have been concentrating marketing efforts on the tax breaks and playing down the risks. “There are concerns that some promotional material fails to set out the risks adequately and strike a balance between the positive aspects and the downside risks involved,” said the FSA.

Last year more than £500 million ($920 million) flowed into VCTs, which by their very nature invest in young, illiquid and high-risk companies. Industry commentators are predicting that a record £650 million will be invested by next April.

According to the FSA, in March of this year 22 of the 75 VCTs launched in the past nine years stood below their starting price, even after taking tax relief and dividends into account.

VCTs have increased in popularity since the doubling of income-tax relief to 40 per cent for the 2004/5 and 2005/6 tax years. The maximum investment allowed in VCTs is £200,000.