Classification of fractional investments as investment instruments

FSMA issued a communication on the classification of fractional investments as investment instruments.
The communication discusses the rise of online investment firms known as „neo-brokers“ that operate exclusively through websites and apps, often offering fractional investing in multiple EU countries under the MiFID Directive. Fractional investing allows investors to determine the amount they wish to invest in a share, making expensive shares more accessible and portfolio diversification easier.
However, investors should be aware that they are not investing in the share itself but in another investment instrument, which may carry different risks and costs. Two structures of fractional investments are offered on the Belgian market: fractional investing via derivatives and via co-ownership.
In fractional investing via derivatives, the investor acquires a debt claim that reflects a portion of the financial value of the underlying share, with no voting rights, and is not transferable to other investors. In fractional investing via co-ownership, investors do not invest in a full share or a debt claim against the offeror, but in a part of a co-ownership of the shares, also with no voting rights and not transferable to other investors.
There are risks associated with fractional investing, such as counterparty risk and liquidity risk. In fractional investing via derivatives, investors are exposed to the risk that the counterparty may become insolvent, and there may be operational difficulties accessing fractions if a financial institution involved in the structuring runs into financial difficulty. In both structures, investors face liquidity risk, as the underlying shares are generally liquid but the fractional investment is not.
Fractional investing can also incur additional costs, such as bid-offer spread differences and varying commissions. Investors should be cautious of these costs, especially as the amount involved in fractional investing may be very slight. Therefore, transparency is essential, and investors should be aware of the structure and characteristics of the fractional shares they invest in.
Of note, ESMA issued a statement on 28 March 2023 clarifying certain obligations under MiFID in relation to fractional investing through derivatives. These obligations include transparency, provision of general information, information about costs and fees, product governance, and appropriateness assessment. ESMA notes that these clarifications may also be relevant to fractional investing through other structures such as co-ownership. The statement also reminds companies offering derivatives on fractions of shares of their obligation under the PRIIPs Regulation to provide a key information document (please see Event#20301 for details).
Finally, Belgian legislators, by implementing the Prospectus Regulation, expanded the scope of the Prospectus Law to include investment instruments beyond securities, such as swaps of cash flows linked to shares and other instruments that allow for financial investments. If fractional investing is organized through derivatives, these derivatives are considered investment instruments, and a separate prospectus or information note must be published for each underlying share.
If a separate investment instrument is indeed offered, it requires prior publication of a prospectus or information note. Failure to comply with these obligations may result in administrative, criminal, and civil penalties. The court may declare the purchase of an investment instrument null and void if a prospectus or information note was not published prior to the transaction.