The fractional share, defined as owning ‘less than one full share of a stock or other security’,1 as a widespread term has emerged relatively recently following the fintech-mediated trend of fractionalisation of assets. Multiple trading platforms permitting such ‘fractional investing’ have been developed since, including, among others:
- M1,2 SoFi (NASDAQ),3 Stockpile,4 Schwab,5 Betterment,6 Stash,7 and Robinhood8 in the US;
- Upstreet,9 Raiz (ASX:RZI),10 Spaceship,11 Sharesies,12 and Stake13 in Australia (noting the collapse of the neobank Xinja14 in 202115); and
- eToro (NASDAQ)16 and Interactive Brokers17 in multiple jurisdictions including Australia and the US.
Many also offer cryptocurrency trading, contracts for difference (CFDs), Exchange Traded Funds (ETFs), futures, options and other financial products.
It was reported in October 2019 that ‘Charles Schwab will offer fractional share trading in an effort to attract younger investors‘18 with The Wall Street Journal commenting at the time that the ‘move would be the first by major online brokerage to allow fractional share trading‘.19 The Robinhood platform has been hitting the headlines in its own right during 202020 and in particular in January 2021 after the GameStop controversy which saw the GameStop share price suddenly shoot up causing losses for Wall Street hedge funds in a ‘short squeeze stampede’ and the platform abruptly barring its users from buying more GameStop stock (among others) in a highly controversial move.21 The platform’s notoriety has rubbed off onto its users giving rise to a term ‘Robinhood trader’.22
In Australia, Upstreet is making waves with a recent capital raise of $3,000,00023 and a focus on cornering the loyalty scheme market.24
The trend has been allegedly caused by the so called ‘democratisation movement’ prompted by ‘the business of executing trades [becoming] more efficient and less costly, with many platforms now offering such services‘25 and fuelled by the pandemic lockdowns.26 Not only the ‘locked-down Americans’ but also hundreds of thousands of locked-down Australian millennials27 have added to the surge. So much so that the Australian Securities and Investments Commission (ASIC) has recently published an information sheet discussing financial products and services online that outlines how the law applies to social media influencers and the Australian financial licensees who recruit them.28
There are multiple stakeholders in the fractional share market with a variety of benefits and risks, some of which are noted in the table below.
|Stakeholders||Example of Potential Benefits||Example of Potential Risks|
|Brokers, Funds, fintech platforms||a new generation of investors29||class actions from investors due to technical glitches or market measures; legal action from individual investors due to e.g. suicide; misleading or deceptive conduct; regulatory compliance|
|Investors (aka 'Robinhood traders')||- access to otherwise inaccessible stock market |
- exposure to dividends, share splits, share buy backs30 and similar corporate actions on a pro rata basis
|class actions from investors due to technical glitches or market measures; legal action from individual investors due to e.g. suicide; misleading or deceptive conduct; regulatory compliance
financial loss, time loss;
lack of voting rights;
no recourse to minority oppression safeguards
|Large Australian companies such as Kogan, Good Guys, Marley Spoon||- a new pool of investors; |
- an alternative loyalty scheme pathway31 that does not involve discounts and resulting in higher customer retention and purchases
- an alternative marketing pathway
|- increased pressure to generate dividends
- potential changes to 'marketable parcel' provisions in the ASX Listing Rules32 and company constitutions
|Tech giants e.g Amazon etc||an alternative to share splitting33||increased pressure to generate dividends, exposure to black swan events e.g. GameStop 'short squeeze stampede'|
|Government regulators||a new area of concern especially in respect of 'misinformation and unlicensed investment advice online and its impact'34||challenges in investigating/ regulating businesses with an extremely high volume of small - scale unsophisticated investors|
The risk profile is different for each stakeholder but it is clear from the outset that the Robinhood traders are the most vulnerable group exposed to potentially more risks than rights. As one critic has noted: “Someone who has only $US5 to invest should not be putting that money into stocks; they should be buying food. Nobody is saving for retirement $US5 at a time.”35 On the other hand, the proponents would argue that the ability to purchase fractional shares (for a corresponding fraction of the share price) allows Australian retail investors the chance to invest in the ASX’s most expensive shares lowering the barriers to entry and making it easier to create a diversified portfolio.
The legal mechanism applicable to most fractional shares and fractionalised assets includes an intermediary – the custodian with an Australian Financial Services Licence (“AFSL”) or an equivalent, holding the fractionalised assets on behalf of a multitude of ‘small unsophisticated’36 ‘inexperienced’37 ‘amateur investors’38 via a managed investment scheme (“MIS”) or a similar structure. This carries more risks for investors than the traditional share or asset ownership as the MIS or a similar entity may become insolvent.39 In addition, there are usually no voting rights attached to the fractional shares, although some contracts with the custodians may provide an opportunity for investors to express a preference regarding how the custodian should vote and such preference may itself be either binding or non-binding on the custodian. At the same time, the usual safeguards such as minority oppression provisions would not be expected to be available to fractional shareholders. Considering these limitations, one may even question whether the word ‘ownership’ can be used to characterise the rights attached to fractional shares from the perspective of the retail investor, especially as in many instances fractional shares are illiquid and/or their trading is restricted to the investors trading within a specific platform or using a shared custodian.
Nevertheless, the opportunities presented by the micro investment options driven by fintech growth may be too attractive to be bypassed by online platforms and large companies who may use these to grow a new generation of investors and/or clients via loyalty schemes and/or other available avenues. Companies would be well advised to seek legal advice before pursuing any of these opportunities to ensure compliance and appropriate structuring.
Below we focus on the conditions included in the Upstreet and Raiz product disclosure statements available at the time of writing.
Upstreet offers investors the opportunity to receive fractional shares in ASX listed companies, foreign listed companies such as Amazon, ETFs and crypto assets (e.g. via an investment in Coinbase).40 When investors make a purchase at selected retailers (referred to as Partners), with whom Upstreet has negotiated prior arrangements, the Partners may reward the investors with a partial rebate of the purchase price of eligible purchases that gets remitted into the investors’ Upstreet accounts. This rebate is invested in an Investment Option nominated by that Partner.41 An investor has a right to request switching between Investment Options, subject to Upstreet’s acceptance of such a request.
Where the Partner is an ASX listed company, the Investment Option is shares in that ASX listed company. For example, when customers make an eligible purchase at The Good Guys they will become entitled to fractional shares in The Good Guys’ parent company JB-HiFi (ASX: JBH).42 However, if Partners are not ASX listed companies then their Investment Option may be a share in a foreign listed entity e.g Ebay (NASDAQ:EBAY)43 or an ETF. Purchases on Belkin, for example, will result in investments in the ETF FANG (ASX: FANG).44
Upstreet purchases whole shares and puts them into a unit trust on behalf of their customers, who receive units in the trust as their ‘reward’ for certain transactions, representing a fractional interest in the underlying shares.45 Customers may hold units in multiple Investment Options if they make purchases with multiple Partners. Upstreet imposes a minimum holding period of 31 days on its investors in any class of units.46
Most share trading platforms charge a flat fee for purchases and sales of shares and ETFs. For example:
- Commsec – fees start at $10 per transaction;47 and
- Superhero – flat fee of $5 per transaction(excluding brokerage on ETF purchases).48
Upstreet charges no fees on Investment Options which are ASX listed shares, however it does charge up to 0.49% for investments in ETFs.49 There are, however, switching fees, contribution and withdrawal fees starting at $1 per transaction.50
Upstreet claims that ‘fractional share rewards can help to increase customer loyalty leading to larger size purchases, more frequent purchases and improved customer sentiment‘.51 To support its claims Upstreet refers to the academic research of Dr Jaakko Aspara conducted in 2009 in Finland suggesting that share ownership in NasdaqOMX Helsinki listed companies by customers has resulted in:
- 36% (26-47%) of customers purchasing more products;
- 30% (23-41%) of customers purchasing more frequently;
- 33% (17-41%) of customers no longer buying competitor products;
- 29% (10-42%) of customers being willing to pay a premium for that company’s products; and
- 38% (21-53%) of customers continuing to buy products despite a price increase.52
Raiz is a micro-investing product53 delivered via an App that allows investors to “invest spare change automatically from everyday purchases into a diversified portfolio”.54 The ‘spare change’ can come in the form of rounding up of purchases, lump sums or recurring deposits. Raiz has 7 diversified portfolios, 6 of which are constructed using ETFs quoted on the Australian Securities Exchange55 and one with a mix of ETFs and Bitcoin (quoted on the Gemini Exchange).56 As there is no exposure to shares as such, Raiz, in their product disclosure statement, refer to ‘fractional interests’ and ‘fractional investing’ instead.57 Raiz state that the portfolios are constructed with help from the Nobel Prize winning economist and father of Modern Portfolio Theory, Dr. Harry Markowitz.58 Perpetual Corporate Trust is named as custodian of the Raiz Invest Australia Fund (the “Fund”).59
According to Raiz’s Product Disclosure Statement, “the Fund is a registered managed investment scheme. If you apply to participate in Raiz, you apply to receive an interest in the Fund known as a Raiz Investment Account. The minimum investment amount is $5.00. You can make regular contributions to increase the value of your Raiz Investment Account, you can withdraw all or part of your investment, and your investments are held beneficially for you (subject to any fractional interests, which are pooled) … You choose the Portfolio best suited to your own goals and financial circumstances.” 60
Customers may switch between Raiz’s investment portfolios and may request to withdraw their funds at any time (with the withdrawal proceeds generally provisioned to be disposed of within 5 business days) without a fee.61
Raiz charges a $3.50 monthly ‘maintenance fee’. In addition, each portfolio has ‘underlying issuer fees’ which Raiz estimates at between 0.04% p.a. and 0.59% p.a. depending on portfolio.62 Other fees may be applicable in accordance with the Raiz Product Disclosure Statement.63
Also within Raiz is the ‘Raiz Rewards’ program that allows customers to receive a cash reward invested back into the investor’s Raiz account every time the investor shops online with the brands listed on Raiz website64 and/or App. The cash reward is invested by Raiz into a diversified portfolio, selected by the investor, rather than, as in Upstreet, the Partner’s selected Investment Option.
While there are structural similarities between Raiz and Upstreet in that financial products are held in a registered managed investment scheme and the investors are issued with units in a fund, there are also obvious differences between their business models and modi operandi. And these are just two examples out of the multiple other exploring similar market opportunities. These market opportunities have arisen out of the global fintech trends enabled by software developments, and further opportunities of this nature may be expected especially with the emergence of metaverse investments, involving digitisation (and therefore fractional asset ownership) of most asset classes, and broader adoption of blockchain-based technologies.
If you are interested in discussing fractional shares, setting up a managed investment scheme offering fractional shares, or seeking advice on a loyalty scheme legal framework involving fractional shares, feel free to reach out to the authors of this article.
This article was written by Thomas Kim, Partner and Marianna Parry, Special Counsel with assistance by Josh Hanegbi, Law-Graduate.
1US Securities and Exchange Commission, “Fractional Share Investing – Buying a Slice Instead of the Whole Share”, 9 November 2020, https://www.sec.gov/oiea/investor-alerts-and-bulletins/fractional-share-investing-buying-slice-instead-whole-share last accessed 29 March 2022.
2 https://m1.com/how-it-works/invest/ last accessed 29 March 2022.
3 https://www.sofi.com last accessed 29 March 2022.
4 https://www.stockpile.com/ last accessed 29 March 2022.
5 https://www.schwab.com/ last accessed 29 March 2022.
6 https://www.betterment.com/ last accessed 29 March 2022.
7 https://www.stash.com/invest last accessed 29 March 2022.
8 https://apps.apple.com/us/app/robinhood-investing-for-all/id938003185 last accessed 29 March 2022.
9 https://www.upstreet.co/ last accessed 29 March 2022.
10 https://raizinvest.com.au/ last accessed 29 March 2022.
11 https://www.spaceship.com.au/ last accessed 29 March 2022.
12 https://sharesies.com.au/ last accessed 29 March 2022.
13 https://hellostake.com/au/invest/ last accessed 31 March 2022.
14 See https://xinja.com.au/ last accessed 31 March 2022; James Eyers, “Xinja collapse a ‘successful failure'”: Byres”, AFR, 30 March 2021, https://www.afr.com/companies/financial-services/xinja-s-collapse-a-successful-failure-byres-20210330-p57f7x last accessed 31 March 2022.
15 Eyers, “Xinja collapse a ‘successful failure’”; Charlotte Grieve, “APRA launches investigation into Xinja’s capital raising tactics”, SMH, 9 August 2021, https://www.smh.com.au/business/banking-and-finance/apra-launches-investigation-into-xinja-s-capital-raising-tactics-20210730-p58eg6.html last accessed 31 March 2022
16 https://www.etoro.com/trading/platforms/ last accessed 31 March 2022.
17 www.interactivebrokers.com.au last accessed 31 March 2022.
18Lisa Beilfuss, “Schwab, in Bid for Younger Clients, to Allow Investors to Buy and Sell Fractions of Stocks”, Wall Street Journal, 17 October 2019, https://www.wsj.com/articles/schwab-in-bid-for-younger-clients-to-allow-investors-to-buy-and-sell-fractions-of-stocks-11571334424 last accessed 29 March 2022; Ben Winck, “Can’t afford a $1,780 share of Amazon? Charles Schwab will offer fractional share trading in an effort to attract younger investors”, 10 October 2019, Business Insider, https://markets.businessinsider.com/news/stocks/charles-schwab-to-offer-fractional-stock-trading-attract-young-clients last accessed 12 May 2022.
19Beilfuss, “Schwab, in Bid for Younger Clients, to Allow Investors to Buy and Sell Fractions of Stocks”. See also the comment from The Lex Column, “Will fractional shares attract a younger investor crowd?”, AFR, 28 October 2019, https://www.afr.com/markets/equity-markets/will-fractional-shares-attract-a-younger-investor-crowd-20191028-p5350j last accessed 29 March 2022.
20See e.g. Aleks Vickovich, “‘Social trading’ fuels market speculation: ASIC”, AFR, 17 August 2020, https://www.afr.com/markets/equity-markets/social-trading-fuels-market-speculation-asic-20200814-p55lrt last accessed on 29 March 2022; Annie Massa and Sarah Ponczek, “The rise and stall of Robinhood’s addictive app”, AFR, 28 October 2020, https://www.afr.com/wealth/investing/generation-robinhood-free-trading-fractional-shares-and-confetti-20201026-p568pz last accessed 29 March 2022.
21Oscar Gonzalez and David Priest, “Robinhood backlash: What you should know about the GameStop stock controversy”, 17 March 2021, CNET.com, https://www.cnet.com/personal-finance/investing/robinhood-backlash-what-you-should-know-about-the-gamestop-stock-controversy/ last accessed on 29 March 2022; Rob Davies and Mark Sweney, “Gamsetop Shares Surge Again as Robinhood Restores Trading”, 30 January 2021, The Guardian, https://www.theguardian.com/business/2021/jan/29/robinhood-to-restore-gamestop-trading-as-it-wins-1bn-backing last accessed 29 March 2022.
22 See Vickovich, “‘Social trading’ fuels market speculation: ASIC”: ‘The Australian Securities and Investments Commission is concerned about misinformation and unlicensed investment advice online and its impact on the growing cohort of so-called Robinhood traders, named for the popular US brokerage platform, now flooding global markets.’
23 Carrie LaFrenz, “Upstreet raises $3m led by Albert Tse’s Wattle Hill Capital”, AFR, 22 March 2022, https://www.afr.com/technology/upstreet-raises-3m-led-by-albert-tse-s-wattle-hill-capital-20220321-p5a6gm last accessed on 28 March 2022.
24 Aleks Vickovich, “Own a Share of the Shop Where You Shop”, AFR, 22 April 2021, also appearing online titled “Big retailers offer small equity stakes to shoppers”, AFR, 22 April 2021 https://www.afr.com/companies/retail/big-retailers-offer-small-equity-stakes-to-shoppers-20210421-p57l5o last accessed 28 March 2022.
25 Jared Dillian, “Fractional shares expose Wall Street greed”, AFR, 14 August 2020, https://www.afr.com/markets/equity-markets/fractional-shares-expose-wall-street-greed-20200814-p55lm1 last accessed 29 March 2022.
26 See e.g. Massa and Ponczek, “The rise and stall of Robinhood’s addictive app”: ‘Robinhood is one of the pandemic’s standout economic successes as locked-down Americans discovered trading on their phones…’; Rachel Williamson, “Fractional investing signals change in the way we think about stocks”, 18 August 2020, https://stockhead.com.au/news/fractional-investing-signals-change-in-the-way-we-think-about-stocks/ last accessed 29 March 2022: ‘The idea was around on the ASX before the COVID-19 pandemic prompted amateur investing to blossom, but it is benefiting from associated tailwinds and a shift in the way younger investors put aside money and think about spending.’ Cf Lex Column, “Will fractional shares attract a younger investor crowd?”.
27 Lucy Dean, “Nearly 300,000 people (mostly Millennials) became traders last year”, AFR, 3 March 2022, https://www.afr.com/wealth/investing/nearly-300-000-mostly-millennials-became-traders-last-year-20220302-p5a151 last accessed 29 March 2022.
28ASIC, INFO 269 Discussing financial products and services online, March 2022, https://asic.gov.au/regulatory-resources/financial-services/giving-financial-product-advice/discussing-financial-products-and-services-online/ last accessed 31 March 2022.
29 Lex Column, “Will fractional shares attract a younger investor crowd?”.
30 Dillian, “Fractional shares expose Wall Street greed”.
31Vickovich, “Own a Share of the Shop Where You Shop”.
32For an ASX listed company a ‘marketable parcel’ of shares should have a minimum value of AUD$500 (see ASX Operating Rules Procedures) and ordinarily an investor cannot acquire a holding costing less than AUD$500.
33 Dillian, “Fractional shares expose Wall Street greed”.
34 Vickovich, “‘Social trading’ fuels market speculation: ASIC”.
35 Dillian, “Fractional shares expose Wall Street greed”.
37 Vickovich, “‘Social trading’ fuels market speculation: ASIC”.
38Michael Janda, “Share investments are often held by custodians. Who are they, what do they do and are they safe?”, ABC News, 5 March 2021, https://www.abc.net.au/news/2021-03-05/share-custodians-holding-your-stocks-explainer/13177716 last accessed 28 March 2022.
40 Upstreet Product Disclosure Statement, https://storage.googleapis.com/publicdocs.upstreet.co/2021-12-Upstreet-Product-Disclosure-Statement-COMBINED-08.pdf last accessed on 22 April 2022.
41 Upstreet Product Disclosure Statement, page 3.
42 https://www.upstreet.co/brands/the-good-guys last accessed on 22 April 2022.
43 https://www.upstreet.co/brands/ebay last accessed on 22 April 2022.
44 https://www.upstreet.co/brands/belkin last accessed on 22 April 2022.
45 Upstreet, Frequently Asked Questions ‘How have you made it possible to offer fractional shares?’ https://www.upstreet.co/faqs last accessed on 22 April 2022.
46 Upstreet Product Disclosure Statement.
47 https://www.commsec.com.au/support/rates-and-fees.html last accessed on 22 April 2022.
48 See Superhero fee schedule at https://docs.superhero.com.au/guides/Superhero+Fee+Schedule.pdf last accessed on 22 April 2022.
49 Upstreet Product Disclosure Statement, page 7.
51 https://www.upstreet.co/business last accessed on 22 April 2022.
52 Upstreet Share Reward Programs, Marketing Strategy White Paper shorturl.at/gtHVW last accessed 2022 April 22.
53 Raiz Product Disclosure Statement, https://d8qsadphi6wpp.cloudfront.net/pds/PDS-Raiz-Invest-2021-08-30.pdf last accessed on 22 April 2022.
54 https://raizinvest.com.au/ last accessed on 22 April 2022.
56 Raiz Product Disclosure Statement, page 1.
57 Ibid, page 2.
58 https://raizinvest.com.au/ last accessed on 22 April 2022.
59 Raiz Product Disclosure Statement, page 7.
60 Ibid, page 1.
61 Ibid, page 2.
62 Ibid, page 5.
63 See Raiz Product Disclosure Statement.
64 https://raizinvest.com.au/rewards/ last accessed on 22 April 2022.