LCF went into administration a year ago with losses of up to 237 million pounds after the Financial Conduct Authority (FCA) intervened to direct the firm to withdraw promotional material for so-called "mini bonds".
The Financial Services Compensation Scheme (FSCS) said it will protect 159 bondholders who switched from stocks and shares to the unregulated LCF bonds, which were issued to raise funds for small firms.
"Whilst FSCS maintains that the act of issuing mini bonds is not a regulated activity, and is therefore not something FSCS protects, FSCS has concluded there will be some customers who were given misleading advice by LCF and have valid claims for compensation as a result," the FSCS said in a statement.
"However, FSCS expects that many customers will not be eligible for compensation on this basis."
It said it could not help the 283 bondholders who dealt with LCF before the investment firm was authorised to carry out financial services business on June 7, 2016.
The FSCS said that being given incorrect information about LCF bonds does not constitute misleading advice in this case.
"For that reason, and based on its investigations so far, FSCS believes many LCF customers are unlikely to be eligible for compensation on the basis of misleading advice," it said.
Some 16,700 bonds were issued by LCF and an independent review of the FCA's handling of the investment firm has already begun.
"I appreciate that the initial decisions and outlook we are announcing today are likely to be disappointing to many LCF customers," FSCS CEO Caroline Rainbird said.
"We are, however, working as quickly as we can to establish a suitable process for determining customers' claims, and expect to be in a position to start this process in the next few weeks."
Britain's Serious Fraud Office has opened its own investigation into LCF.
By Huw Jones
