ESMA publishes guidance on fractional shares

The European Securities and Markets Authority (ESMA) has issued a public statement regarding the investor protection concerns raised by derivatives on fractions of shares.
The statement 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.
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.
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.
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.
ESMA highlights that derivatives on fractions of shares are not corporate shares and that firms should not use the term fractional shares when referring to these instruments. In line with the obligation to make clients reasonably able to understand the nature and risks of the specific type of financial instrument, firms should make clear to the investor that they are buying a derivative instrument. ESMA reminds firms that all information provided to clients on these instruments shall be fair, clear, and not misleading, and that firms must clearly disclose all direct and indirect costs and charges relating to them. Additionally, as derivatives are complex products, they are expected to result in a narrow target market of clients, and an appropriateness assessment needs to be carried out where non-advised services are provided. 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.