Ryan Feit left behind his lucrative career at a private equity firm to chase the dream of crowdfunding.

Feit, a 33-year-old graduate of the Wharton School of the University of Pennsylvania, went to Washington several times to lobby for a new law that allowed small-time investors to buy stock in start-ups and then set up one of the first websites that list companies trying to raise money.

But what Feit has seen since he set up his site, SeedInvest, has dented his enthusiasm.

Over the last two years, his company, which is based in New York, has turned away dozens of companies that wanted to raise money from investors on his site. Some of the companies had what seemed, to Feit, to be clear red flags for investors, but later showed up on other crowdfunding sites, where they have raised hundreds of thousands of dollars from unsophisticated investors.

One of the early companies he rejected was shut down by regulators who labelled it a fraud after it raised $5 million from investors. And Feit expects it won't be the last.

"I'm legitimately concerned that a lot of people are going to be losing money," Feit said. "Investing in start-ups is really risky, and it's very different than buying a used couch. We definitely do not think you should treat it like Craigslist."

The promise that Feit initially saw in crowdfunding arrived with the 2012 Jumpstart Our Business start-ups, or JOBS Act. The legislation opened the door to new methods of crowdfunding, promoted as a new way to lower the regulatory barriers that have prevented companies from raising money from ordinary people. Steve Case, the founder of AOL, and even the former president, Barack Obama, have praised the law.

With the JOBS Act, companies could raise money on sites like Feit's and offer investors an actual ownership stake, with the promise of financial returns, turning crowdfunding into a much more serious business, than, say Kickstarter.

And there have been success stories. Companies that have raised money so far have included those that the Jobs Act was hoping to help businesses far from Silicon Valley or lacking easy access to venture capital. A craft brewery in Austin, Texas, attracted $1 million from investors in just a few months, while an indoor farming start-up in Indiana has drawn over $600,000.

Yet advocates of crowdfunding, like Feit, have been expressing concern about the low levels of compliance among many of the early companies that have raised money and the bad terms the companies have offered investors.

"Even though a lot of people want to come to the party early, they may ruin the market if the market gets a reputation for being one where people don't comply with the rules," said Joan MacLeod Heminway, a law professor at the University of Tennessee. "There are certain issuers who are definitely engaging in practices that I would consider to be dangerous to a vibrant market."

Heminway has been working with a company called CrowdCheck on a survey of compliance in the industry. CrowdCheck has found that almost none of the companies that have been listed so far are fully in compliance with even the basic rules set down by the Securities and Exchange Commission.

About 40 per cent of all companies, for example, did not get their financial results audited or certified, as is required by the rules, CrowdCheck found. The lower regulatory barriers for crowdfunding mean that the SEC does not individually check whether companies are following the requirements.

That job is left to the sites that list investments, like SeedInvest. Feit's site lists only companies that are deemed by CrowdCheck to be fully compliant. But most sites have been less choosy.

Chris Tyrrell, the chairman of a crowdfunding industry group, the Crowdfund Intermediary Regulatory Advocates, agreed that there was an "industry level risk" because crowdfunding sites are listing investments with a patina of a regulatory approval but little quality control.

"Platforms are putting unvetted offerings out into the marketplace that could have a big blow-up," said Tyrrell, who is also the founder of the site OfferBoard.

He and Feit have been pushing for a set of standards that crowdfunding sites will use when vetting companies seeking to raise funds.

A spokeswoman for the SEC said the agency had no comment on the level of compliance in the industry. But regulators appear to be paying some attention.

In December, the Financial Industry Regulatory Authority announced that it had shut down a Virginia-based site, uFundingPortal, that was listing potential investments without following the most basic terms of the law.

The shutdown of uFunding, though, came only after the site had been live for months, with FINRA's approval, listing more than a dozen investments that complied with almost none of the rules, according to CrowdCheck.

Despite problems like these, the opportunity for companies to blow up and lose money for investors, has been quite small so far. The signature element of the crowdfunding law, which allows companies to sell stock to anyone on the internet, went into effect last May, and only about 200 companies have sought out investments to date. The law caps at $1 million the amount that a single company can raise from ordinary investors.

But Congress is currently considering a change to the crowdfunding law that would make it easier for companies to raise money online.

Sherwood Neiss, the founder of Crowdfund Capital Advisors, a consulting firm, said that he was confident that the crowd had enough wisdom to screen out the bad companies and those that were not providing enough information.

As evidence for that, Neiss pointed to the dozen or so companies that tried to raise money on the uFunding site, without the disclosures required by law. None of the companies raised more than a few hundred dollars before uFunding was shut down.

But the crowd did not manage to catch the problems with Ascenergy, a company in Nevada that raised $5 million on crowdfunding sites with a promise of creating an oil and gas business. The company used a less discussed provision of the Jobs Act that allowed it to raise more than $1 million from more sophisticated investors.

When the SEC shut down Ascenergy in 2015, the agency said the company did not appear to have any of the expertise or contacts in the oil industry that it had claimed in its online material.

By the time Ascenergy was stopped, the company had already spent most of the millions of dollars it collected from 90 or so investors. Much of it was used for the personal expenses of its founder, paying for "fast-food restaurants, Apple stores and iTunes, dietary supplements and personal care products," the SEC said.

A lawyer for Ascenergy did not respond to a request for comment.

Feit, whose site had rejected Ascenergy, said that he was less worried about outright frauds and more concerned about companies that were unlikely to ever pay off and that were not giving investors enough information to judge them.

Feit has been particularly worried about companies that have assigned themselves sky-high valuations that will make it hard for investors to ever make their money back. In several cases, companies that he rejected because of their high valuations have shown up on other sites with the same valuations.

Feit and Tyrrell have been leading an effort through the Crowdfund Intermediary Regulatory Advocates to create a set of industry standards that all crowdfunding sites will adhere to when they vet potential investments, which will include a consideration of valuations and compliance.

Feit and Tyrrell have led two conference calls about the potential standards with other crowdfunding sites, but the site that has hosted the majority of crowdfunding campaigns so far, Wefunder, has not responded to invitations to take part.

Nick Tommarello, co-founder of Wefunder, said that his site had to be sure companies were following all the rules. But he said he did not think, as Feit does, that it is the place of crowdfunding sites like his to argue with companies over their proper value. That, he said, would defeat the purpose of crowdfunding.

"It's not my job to be a gatekeeper," he said. "It's my job to be sure everyone knows the risks they are taking and that they have all the information they need."

To help investors assess risks, Tommarello is preparing to introduce a function on Wefunder that will allow expert investors to weigh in with their analysis of companies listed on the site.

Tommarello also noted that many small-time investors so far were viewing their investments more as donations to businesses they like, rather than as investments that will make money.

Marc Leaf, a lawyer who has analysed the early crowdfunding campaigns for the law firm Drinker Biddle, said that so far many companies were asking for investments on terms that few real venture capitalists would accept.

"I would expect them to be very risky," Leaf said. "The question is: Over time, will we see that there is a wisdom in the crowds or will we see that there is a madness in the crowds?"