Key takeaways:
- Fractional investing is buying part of an asset, instead of the whole thing.
- Many investors want to diversify beyond stocks and bonds. Physical assets are one way to diversify.
- The Jobs Act and Regulation A+ (“Reg A”) have made fractional investing in physical assets possible for the general public.
What’s fractional investing?
Fractional investing lets investors buy part of an asset instead of the whole thing. Instead of buying one share of a company’s stock, you can buy a fraction of a share. Instead of buying a piece of art, you can buy a fraction of it.
Why does this matter? Stocks and other assets can be expensive. By making it possible to only buy a fraction of an asset, more investors have the chance to invest.
For example, say you want to invest in a company’s stock that’s trading at $1,000 per share, but you only have $100 to invest. In the past, you’d be out of luck. But with fractional investing, you can use your $100 to buy a fraction of the share.
New investors, new investments
Over the last decade, there’s been an explosion of interest in investing from retail investors (aka, non-professional investors). Many of these investors are looking for opportunities to diversify beyond stocks and bonds. Investing in digital assets like NFTs has boomed, but NFTs aren’t the only option available for diversification.
Alternative investments into artwork, trading cards, coins, and other physical assets have also become increasingly popular. Over time, these assets tend to increase in value, and can act as a diversification from typical investments in stocks and bonds. In periods of higher inflation, alternative assets have typically performed better than stocks. They’re also generally not as volatile as digital assets.
How fractional investing works for alternative assets
Thanks in part to regulations that were put in place with the Jobs Act and Regulation A+ (also referred to as “Reg A”), investing in physical assets has become more accessible to retail investors.
In the past, only accredited investors (individuals with over $200,000 in annual income or net worth exceeding $1,000,000), would have had access to private investments in the alternative space.
Now, companies can offer shares to the general public, and a retail investor can participate in the offering as long as they don’t invest more than 10% of their annual income or net worth.
In the alternative investment space, this has democratized the opportunities retail investors have. For example, expensive pieces of artwork that were once only available to wealthy individuals can now be fractionalized by securitizing the asset (legally making the physical assets into securities for investment) and offering them to a wide audience of retail investors.
This same principle can be applied to many different alternative assets, such as collectibles, rare coins, trading cards, luxury goods, and many other asset classes.
How these alternative investment offerings are regulated
Protecting retail investors is a priority for government regulators like the Securities Exchange Commission (SEC), the primary government regulator for securities.
Alternative investment offerings leveraging Reg A have to be qualified by the SEC. A company must complete a detailed, 50+ page document about the offering. The SEC reviews the document and decides whether to qualify the offering.
The SEC also requires companies issuing the offering to work with a broker-dealer to review and approve each investor. Broker-Dealers are regulated by FINRA, a SEC-appointed self-regulatory agency, to help regulate companies working with retail investors. Broker-Dealers have standards that must be met to comply with specific FINRA and SEC rules.
These reviews and procedures help provide investors the trust and confidence to consider investing in a Reg A offering of an alternative asset.
