Thousands of first-time investors who lost their savings after investing with London Capital & Finance (LCF) have been told it is unlikely they will qualify for compensation.
Nearly 12,000 people put £236m into the firm which collapsed a year ago.
The Financial Services Compensation Scheme (FSCS) has announced the majority of people "will not be eligible for compensation".
It is a body blow to many investors, some of whom lost their life savings.
Their hopes were raised last May when the FSCS took the unexpected step of saying it would investigate whether or not people might be refunded.
The FSCS was set up by the government to protect consumers if UK-regulated firms went bust.
But while people who receive misleading financial advice are generally able to apply to the FSCS for compensation, it has told the BBC's Money Box programme that in this case, most LCF investors were given "incorrect information", not misleading advice.
That is a key distinction which it says means the majority of investors will not qualify for compensation.
Potential investors say they were told by LCF marketing staff about how their money would be protected, that the mini-bond products they were investing in were regulated by the Financial Conduct Authority and that their money was safely invested in dozens of companies to spread the risk - none of which was true
Nathan Brown, 29, invested £25,000 of savings with LCF as a nest egg for his future: "I think it's absolutely devastating and heartbreaking for the 11,605 investors in LCF.
"Having been previously led on by the FSCS and the tone of their announcement, that would allude to a much larger proportion of investors being compensated, but it's become quite clear they don't agree."
The FSCS has said it will protect 159 investors who switched from stocks and shares Isas to LCF bonds.
But while it has said it will review claims on a case-by-case basis, most investors are unlikely to be eligible to claim for compensation from the scheme because of the distinction about being given "incorrect information" instead of misleading advice.
LCF advertised itself as a low-risk Isa and promised to spread funds from the sale of mini-bonds between hundreds of companies.
In reality, the fund did not qualify as an Isa and the money was invested in just 12 companies, 10 of which were described as "not independent" from LCF in a report by the fund's administrators.
The Serious Fraud Office is conducting a probe into individuals associated with LCF.
The company's administrators, Smith & Williamson, released a report in March 2019 which found that:
- There were a number of "highly suspicious transactions" involving a "small group of connected people" which led to large sums of investors' money ending up in their "personal possession or control"
- A large number of borrowers do not appear to have sufficient assets to pay back LCF investors
- Some transactions were "highly suspicious" or had "no commercial benefit" to investors
- Investors' money was loaned to a complex web of companies, many of which were controlled by people involved in LCF
- A quarter of all the money invested was paid straight to LCF's marketing company, Surge.
The majority of people who invested will now be pinning their hopes of getting any money back on the administrators of LCF, Smith & Williamson.
They have regularly revised how much money they hope to realise from the firm's assets, but the amount currently stands at 20-25%.
It is also likely to be a long process, with investors being warned it could be many more months before any of that money hits their accounts.