BERLIN, April 23 (Reuters) - The German parliament approved tighter rules on Thursday for firms selling financial products, including online platforms that support fledgling businesses through crowdfunding, in order to protect small investors against heavy losses.

Crowdfunding allows individuals and small businesses to raise funds, often via the Internet, from pools of investors who put money into peer-to-peer schemes or securities such as unlisted shares.

Worried that German companies are falling behind in the digital age, Chancellor Angela Merkel's government is keen to promote innovation and start-ups.

The lawmakers softened the draft legislation by adding exemptions for online platforms such as Startnext and Kickstarter and by loosening plans for a strict ban on Internet advertising for crowdfunding projects.

Consumer protection watchdogs have warned that the crowdfunding industry, which raises a billion euros a year globally in alternative financing, falls between the cracks of existing regulation.

Since crowdfunding platforms can skirt requirements for businesses to publish a prospectus, investors often have little information and face high failure rates.

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