Fractional investments allow investors to specify the amount they wish to invest in a particular underlying share and, in return, acquire a portion of that share. This makes it possible for retail investors to access shares that would otherwise be too expensive. Additionally, fractional investments allow for better portfolio diversification. 

However, there are also potential drawbacks to fractional investing. It's important for fractional investors to realise that in many cases they are not investing directly in the underlying share, but rather in another type of investment instrument that is issued or created by an entity other than the issuer of the share, with legal and economic characteristics that are substantially different from those of the underlying share. This can lead to different risks and costs than those associated with the underlying share. 

In response to these developments, the European Securities and Markets Authority (‘ESMA’) and the Financial Services and Markets Authority (‘FSMA’) have issued guidance on the legal requirements applicable to fractional investments. 

1.ESMA’s guidance 

ESMA's guidance, released on 28 March 2023, focuses on derivatives that allow investors to participate in share performance by tracking the share price. These derivatives allow investors to participate in the share performance of an issuer by way of an instrument that tracks the share price but is available at a smaller purchase price, namely the pro rata share price of the underlying share. 

The statement clarifies the application of certain investor protection requirements established under MIFID II and covers topics such as: 

  • disclosure requirements (general information and information about costs and fees),
  • product governance, and
  • appropriateness. 

ESMA also clarifies that derivatives on fractions of shares are not corporate shares, and therefore firms should not use the term fractional shares when referring to these instruments and should also make it clear to investors that they are buying a derivative instrument. 

2.FSMA’s guidance 

The FSMA’s communication, published on 29 March 2023, explains the classification of fractional investments, including those involving derivatives and co-ownership, as investment instruments. 

The FSMA’s communication provides an overview of the basic features of the two structures of fractional investments offered on the Belgian market being the fractional investments via derivatives and the fractional investments via co-ownership and notes that these investments come with additional risks beyond those of the underlying shares, such as counterparty risk, liquidity risk, and additional costs and fees. 

Investors should also be aware that a fractional investment may be considered as an investment instrument within the meaning of article 3, §1 of the Law of 11 July 2018 on offers to the public of investment instruments and on the admission of the investment instruments to trading on a regulated market (‘Prospectus Law’). This will be the case when the fractional investment takes the form of a derivative, and this may also be the case when the investment takes the form of a co-ownership. Fractional investment that gives rise to the creation of a separate investment instrument being offered to the public in Belgium requires the prior publication of a prospectus or, if the total consideration within the European Union is less than EUR 5 million over a period of 12 months, of an information note. The fact that a prospectus is available for the underlying share will not affect the requirement to publish a prospectus in relation to the newly created separate financial instrument. 

The absence of prospectus may lead to administrative measures but also civil and criminal sanctions.

For more information about fractional investments in Belgium, feel free to contact the authors.