The Financial Conduct Authority (FCA) will ban the mass marketing of mini-bonds to the general public.
The City watchdog said customers have been drawn in by claims of high interest, fixed over three to five years, but they can leave people with nothing at all if things go wrong.
FCA chief executive Andrew Bailey said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved.
"This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status."
The ban comes into force on 1 January 2020, and will initially last a year while the FCA consults on making the rules permanent.
The ban applies to bonds where the money raised is then lent to a third party, invested in other companies or used to buy or develop properties.
The regulator said there is also evidence of an increasing number of scams that follow a similar theme - where criminal promise high returns from investing you money.
Moira O’Neill from interactive investor said: “Savers are now in the unfortunate position where even if they can lock their money away for four years, they will only get 2% interest. So the prospect of lending money to a company via a mini-bond for a similar period and getting four times that amount, or more, is tempting.
“But mini-bonds are paying higher rates than bank accounts precisely because they do contain an element of risk - essentially the risk that the company could go out of business.
“And it’s often too difficult for customers to assess if are they paying enough to take that risk."
Gareth Shaw, Head of Money at Which?, said: “Savers have been put at risk of losing their life savings by misleading adverts for high-risk investments for too long, so this strong action from the regulator banning the mass marketing of these products is positive.
"Until it comes into effect, savers should approach these adverts with caution, as if the returns look too good to be true, they probably are. Any adverts promoting high-risk investments with guaranteed returns after the ban is in place should be avoided, as these will almost certainly be scams."
The FCA ban means unlisted speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth.
Marketing material made or approved by authorised firms also has to include specific risk warnings and costs or payments to third parties that are deducted from the money raised from investors.
Bailey said: “We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”
