Just a few years ago, it seemed like fractional investing was this hot new revolutionary concept. The idea that anyone could own a piece of a Picasso for a hundred bucks was incredibly enticing — especially to non-accredited investors.
But it wasn’t long until we began to see some enormous cracks in the facade. Business models buckled, companies crumbled to the ground, and in some cases investors were left holding a big bag of 💩
Today, we’re doing a deep dive into the past, present, and future of fractional investing.
We’ll explore:
- The pros & cons of the business model?
- Where did it go wrong?
- What lessons can the industry learn?
- What does the future look like?
Along the way, we’ll share quotes and anecdotes from some innovative founders who are helping breathe new life into the industry.
Let’s go 👇
Note: A big thanks to Alan and Ryan from aShareX, Christian from hobbyDB, Joao from Lympid, and our co-founder Wyatt for helping out with this special issue
Table of Contents
Fractional investing + live auctions 🤝
aShareX is world’s first fractional auction platform for alternative investments
In this issue, we discuss the problems investment platforms have faced in the past.
One of the big problems is arbitrary asset valuations.
aShareX has solved this problem by combining fractional ownership with auctions.
It’s a novel concept. Auctions offer market-determined asset valuations with the potential to revolutionize how investors access high-value alternative assets.
How It works:
- Browse upcoming auctions of unique treasures, like fine art, collectible cars, rare diamonds, and sports memorabilia.
- Bid for fractional shares (or full ownership). You control your entry price. Minimum bids start at $1,000.
- Vote. Shareholders decide whether to sell each asset annually. Unbiased 3rd -party appraisals help you decide.
Get started with the world’s first fractional auction platform for alternative investments.
Disclaimer
What is fractional ownership?
At a high level, fractionalization is a form of shared ownership where multiple investors own a portion or “fraction” of an asset.
- A company identifies the owners of a valuable asset, and convinces them to list it on their platform.
- The company securitizes the asset through legal structures (like LLCs), breaking it into shares.
- Investors can buy the shares for as little as a few dollars each.
In theory, almost anything in the world can be securitized & fractionalized — real estate, artwork, sports memorabilia, wine, the list goes on.
The platform typically manages the asset themselves, facilitates trading, and distributes income generated while the asset is held (like rent, dividends, royalties) and if/when it gets sold.
How do fractional investors make money?
The biggest benefit of fractionalization is obvious — the model allows you to invest in valuable assets without the need to buy them outright.
Grail collectibles are usually much too expensive for normal folks to obtain. But instead of forking over $500,000 for a rare baseball card, you can buy 0.1% of it for $500.
Returns come from dividends, asset sales, or by selling the shares to other investors on a secondary market.
What a great system: The original asset owner makes a sale, normal folks get a chance to invest, and the platform takes a small cut. Win-win all around!
Right?
…Well, that’s the way it works in theory. In reality, there are some critical problems with this model.
Some of these problems have been solved, others have not. But we’ll get to those later.
How do fractional platforms make money?
Platforms can grab a slice of the pie in all sorts of ways:
- Management fees are annual fees based on the asset’s value. They’re meant to cover admin costs (insurance, legal, etc). For example, Fundrise charges a 0.85% annual management fee.
- Buyer’s premium is a one-time, percentage-based fee on top of the purchase price of the shares. This is how traditional auction houses make money. (For example, Sotheby’s auctions charge 10-20% on each successful sale)
- Sourcing fees are similar to a buyer’s premium, but intended to cover research, due diligence, and acquisition costs. For example, Pacaso charges 12%. These fees get added to the “true” acquisition cost for each asset.
- Markup occurs when the platform buys an asset for one price, then sets a higher price for fractional shares of the asset. It sounds a bit sneaky, but there’s nothing inherently wrong with it — it’s just another way of collecting fees. This is the model Rally uses, where the markup for each asset is baked into the share price.
- Asset sale fees. aShareX charges a one-time 10% fee on profits when an asset is sold. It’s essentially a form of carried interest.
- Token sales: Platforms that utilize blockchain/tokenization may generate revenue through the sale of their native tokens. For instance, Lympid’s $LYP token offers early access to investments, higher allocation based on staking, and other perks
Short history of fractionalization
It started with the JOBS Act (2012-2015)
The cornerstone for fractionalization was laid with America’s JOBS Act (Jumpstart Our Business Startups) in 2012.
Signed into law by President Obama, this groundbreaking law loosened restrictions around raising capital and paved the way for Regulation A+, which allows companies to raise up to $75 million from both accredited and non-accredited investors.
Real estate drove the early growth
The first place fractional investing gained traction was in real estate.
This makes perfect sense. Real estate is a universally loved asset class with huge barriers to entry — the perfect candidate for fractional ownership.
Fundrise is generally accepted to be the first company to fractionalize real estate, launching in 2012 immediately following the JOBS Act. This was followed by Crowdstreet in 2013, Roofstock in 2015, and many many more.
The boom times (2017-2022)
Fractionalization kicked into a higher gear during the latter half of the 2010s; due in large part to companies like Rally.
Founded in 2016, Rally fractionalized all sorts of cool collectible assets for the very first time. Beginning with classic cars, they swiftly fractionalized shares of sports memorabilia, comics, video games, and a slew of other fun stuff.
But this surge of interest in fractional investing was partly fueled by temporary, pandemic-related factors, such as stimmy checks, low interest rates, boredom, and the NFT bubble.
This created a favorable environment for alternative asset platforms, until it didn’t.
Christian Braun is the founder of hobbyDB — the world’s largest community of collectors with 700,000 members. Back in 2021 during the fractional collectible mania, he wrote an honest, personal piece I quite liked, called The Emperor Wears No Clothes.
Looking back, Christian reflects on this particular moment in time:
“I think the initial uptake in this market was a case of being in the right place at the right time. The pandemic gave people an interest in collectibles and income they’d otherwise be spending on dinner or vacations that they could now invest.
It also helped that it was novel, seemed to be part of the future, looked very much like traditional ways of making money (like owning shares in Apple!) and seemed cool.
Things like fractional ownership in collectibles or NFTs that may not have done anywhere close as well in a normal market, shot up in volume and value.”
– Christian Braun
Crashes, burns, and pivots
2022-2023 is the year when the fractional shit started to hit the fan.
Otis
In March 2022, Otis was acquired by Public.com, to expand their offerings beyond stocks and into alternative assets.
At first glance, this seemed like good news. The sale appeared to establish fractionalization as a serious business model! This would help the mainstreaming of alternatives.
But it quickly became clear that this was the canary in the coal mine for the rest of the industry. The sale price was not disclosed, and the acquisition appeared to be akin to a fire sale.
Since then, Public has sold off many of the assets on the Otis platform, and has had little success incorporating fractional alternatives into its own app.
Collectable
Collectable was a platform offering fractional ownership of sports collectibles — mainly cards & memorabilia.
They employed a controversial retained equity model, where consignors kept a percentage of shares and voting rights.
Retained equity is fine as long as the consignor has a small, non-controlling interest (say, 5-25% or so.) Where it becomes problematic is when the consignor owns a controlling/majority share.
Imagine owning a slice of a classic car, but the majority owner never wants to sell — they’re happy to keep it in storage forever. How would you ever get a return on your investment? What’s the point of fractional ownership if there’s no exit strategy?
This practice disadvantaged regular investors by effectively removing their say in key decisions (like when to sell the asset).
As Wyatt put it, “The initial share offering becomes a loan [the consignor] never has to repay.”
Note: If you want to invest in classic cars with a clear, 4 year exit strategy, check out our Ferrari Collection 🏎️
In May 2023, Collectable sent an email to investors announcing they were liquidating most of their assets (which is never what you want to hear as an investor).
Collectable’s poor financial position meant it could not keep all assets trading indefinitely. Suddenly, there were hundreds of items stuck on the platform that would never be sold.
The company tried to attract external investment, but when those efforts failed, the company had to liquidate assets. There was no recourse for shareholders and no way to get any kind of money back.
Eventually, they did find a buyer in a man named Phil Neuman. Today, Neuman has control of the vast majority of assets, which live in his personal museum. He has no plan (or incentive) to ever sell them.
Dibbs
Launched in 2021 and backed by Amazon, Dibbs was a fractional collectibles marketplace that allowed users to buy and sell fractional ownership of physical collectibles through tokenization.
The Dibbs Marketplace was launched in 2021 with the mission to evolve the industry by opening up new levels of accessibility and use cases for physical collectibles in an increasingly digital-first world.
However, in March 2023, the company announced they were shutting down the Dibbs marketplace, citing challenges in sustaining its business model amid evolving market conditions.
This post from CEO Evan Vandenberg outlines their pivot to Tokenization as a Service.
Mythic Markets
One of the early fractional companies, Mythic Markets was an investment platform founded in 2017 that allowed fans to buy and sell fractional shares in rare collectibles, including items from Magic: The Gathering and Marvel comics.
Mythic was actually one of the first to go under. In June 2021, Mythic Markets announced the closure of its marketplace and the auctioning of its assets through Heritage Auctions.
Koia
Koia was a London-based alt investment platform founded in 2021, which enabled users to invest in fractional ownership of luxury watches, fine wine, and Pokémon cards.
They grew a sizeable community on Discord, and planned to bring new asset classes to the general public.
But in 2022, they announced Koia was shutting down, and the founding team was pivoting to building Mava, an AI customer support platform for communities with large presences on Discord, Telegram or Slack.
Vint
Vint is an investment platform founded in 2021 offering fractional ownership in fine wine and whisky collections.
While Vint started out as a Reg A platform for non-accredited investors, within two years they had changed course. In December 2023, Vint announced they would cease offering new collections under the Reg A structure, and declared that all future offerings would be available exclusively to accredited investors.
Here
Here.co is a fractional real estate investment platform founded in 2022. Specializing in vacation rental properties, it allowed investors to purchase fractional shares of these properties with minimum investments as low as $100.
But in January, 2024, Here.co ceased operations, citing challenges posed by the prevailing interest rate environment and broader economic conditions.
LEX
Founded in 2017, LEX Markets was an investment platform that allowed investors to purchase shares in commercial real estate.
In 2023, LEX ceased operations, and their software and legal IP were sold to Monark Markets.
And on and on it goes.
Why have fractionalization markets suffered?
Okay, clearly something’s not right in the fractional universe.
So what went wrong?
High interest rates
Ah yes, interest rates. The familiar answer to everything. Boring but always necessary to mention.
As the Federal Reserve raised rates to combat inflation, consumers reduced their spending on non-essential items, and investors rotated out of riskier assets like collectibles and into safer, yield-producing investments.
Stocks and crypto also had a banner year in 2023, with S&P 500 increasing by 24%, and Bitcoin seeing triple-digit returns. This makes stuff like trading cards way less appealing by comparison.
Overpriced asset valuations
Asset markup is nothing new: The concept has been around for ages.
But huge markups and overpriced assets severely diminish investors’ potential upside. Unfortunately there are examples of wildly generous, borderline arbitrary valuations.
For example, an investor at fractional real estate platform Lofty.ai discovered a property listed on the platform was purchased just days before for a whopping 40% less.
Ultimately, investors are usually at the mercy of the platform when it comes to each asset’s valuation.
Joao Lages critiques traditional fractional investment platforms for risky, unrealistic valuations that favor the seller, leaving retail investors at a disadvantage:
“[These platforms] often give valuations that aren’t great for the investor. I mean, the valuations are the exits. That’s the strategy for the person selling it, you know? Basically, retail investors become the exit strategy.”
– Joao Lages, GM at Lympid
Christian Braun agrees:
“[In the fractional collectibles market], there was always unease about the price set. After all, it was not set by the market, but rather by the owner of the item.”
– Christian Braun
This highlights the potential for misaligned incentives and the need for more transparent and market-driven valuation methods.
This is exactly what aShareX is attempting to solve with their model — a unique system which allows fractional bidding up to a desired investment amount.
Instead of setting a fixed price for fractional shares, fractional bidders compete in a transparent and fair auction process. This leads to a more accurate, market-driven valuation of the asset.
Poor liquidity
Okay, this is the big one.
Liquidity is everything. It directly impacts the ease with which investors can sell their stakes.
This is true in all markets, but especially important for alternative assets, which by nature are inherently illiquid.
Imagine pouring your savings into a stock not knowing if, or when, you could ever sell it. Unthinkable, right? Well, that’s the inconvenient truth about most fractional platforms.
The logical solution for creating liquidity is to create a secondary market — a place for shareholders to sell their shares to other buyers after the initial offering.
And some platforms have done exactly this. Masterworks, Rally, and Roofstock all have secondary trading markets where asset holders can exit their positions.
But having a secondary market isn’t enough. It has to be an active secondary market.
If the secondary market is thin, inactive, or dead, you’re essentially stuck.
To ensure liquidity for fractional shares, you need to build an cultivate a robust, vibrant trading ecosystem with a huge, active user base. This is much easier said than done. However many users you think you need for this, double it. Multiply it by 10. Maybe 50. Maybe 100.
“Fractionalizing something doesn’t instantly give it liquidity! Liquidity comes from the hard work of bringing more and more people onto a platform so they actively trade between themselves”
– Joao Lages
Think of a secondary market like a “support network” — you need to match demand with supply. And so far, it’s hard to argue that fractional platforms have done a good job of that.
Now, there are other ways to create liquidity, including using blockchain-based tokenization, liquidity pools, or by introducing market makers. Some progress is happening in these areas. More on this below.
In the meantime, this problem is still largely unsolved. And until fractional liquidity improves, it will be the single biggest thing holding the industry back
Lack of control
Fractional platforms sit in a weird spot in the investing world: You aren’t handing over investment decisions to GPs or fund managers, but you don’t have full control over buy & sell decisions either.
It’s funny — this industry is fond of using the phrase “democratization of investing.” While it has been overused to the point where it’s become a cliche, it usually refers to the idea of opening up new asset classes to non-accredited investors. (Which is a great thing!)
But if you think about it, democracy is a system that bestows power to the people; either directly (hello, California!), or indirectly (through representatives).
While plenty of fractional platforms provide indirect democracy (Masterworks, AcreTrader, etc), the fact is there really aren’t many fractional companies who let investors directly vote & decide on the fate of each asset.
Alan Snyder sees this as a fundamental flaw in the approach of some fractional investment platforms; namely the assumption that investors are fully passive and don’t want control. He contends that investors want more agency in managing their assets, particularly regarding liquidity decisions.
“I think the flaw is in assuming that investors are customers, and don’t want control. We’re giving authority to investors, not to some intermediate money manager who dictates decisions.”
– Alan Snyder, Founder & CEO, aShareX
aShareX is attempting to solve this control problem by letting all investors vote once per year whether to sell the asset (beginning in year 2.) Votes are counted on a share-weighted basis, and all assets are sold at the end of year 8 no matter what. (Shareholders can also initiate an early vote if a compelling offer arises)
Ugly unit economics
When Regulation A+ launched onto the scene, it promised a world where anything could be securitized.
The harsh reality is that the potential of Reg A+ is often undermined by burdensome paperwork and administrative expenses, leading to challenging unit economics.
You’ve got 1-A filings, legal fees, accounting fees, EDGAR filing fees, Blue Sky compliance filing fees, KYC checks, quarterly & annual financial statements, annual audits, K1 forms, authentication, insurance, and storage fees, transfer agent fees, and possibly broker-dealer fees. It adds up very fast.
And that’s before user acquisition costs! Remember, a fractional marketplace is useless without actual traders on it (not to mention the critical mass you need to create a healthy secondary market).
It’s a tricky situation: You can’t just raise your fees to cover the expenses, because that could dramatically hamper the investors’ net returns. But if you don’t have enough customers to begin with, the entire business model will fall apart. This is exactly what has happened to other businesses in the space.
“I think there are some realities that have hit on the business side. A lot of our colleagues have really struggled with the cost of user acquisition, for example, and some of them have gone to the grave because of it.”
– Alan Snyder
Despite all the different ways fractional platforms can make money, oftentimes the math just doesn’t math. You can only slice the pie so many times until it becomes clear there’s just not enough to go around. Profitability becomes impossible, and the whole thing falls apart.
Platform risk/distrust
Platform risk is a topic Wyatt has been talking about for years. Fractional investors can no longer blindly trust any new platform that comes their way.
Collectable was deficient in its SEC filings, which resulted in a halt of secondary market activity. This prevented investors from buying or selling their shares on the platform.
But when this happened, it didn’t just erode trust in their platform; you could argue it eroded trust in all fractional platforms. In the wake of Collectable going under, confidence in the entire fractional ownership market was probably shaken.
Researching a platform’s history, management team, track record, and financial stability may not be something investors want to think about, but it’s increasingly something they have to think about.
There are measures platforms can take to safeguard investors’ funds. aShareX uses a bank as a cash custodian to build trust and address concerns about security.
“You want to have a bank involved as a cash custodian. You don’t want us to run off with your money. I’ve seen that happen, sadly.”
– Alan Snyder
Joao Lages highlights that even in case of bankruptcy, investors can retain a claim on the underlying asset through a contractual agreement known as a pawn right.
“Basically, with Lympid, if our company goes bankrupt, the user still has a pawn right over the asset he invested in.”
– Joao Lages
What does the future hold?
The old ways aren’t necessarily broken, per se. But they aren’t working that well, either.
Companies need to learn from the mistakes of the past in order to move this industry forward.
Investors need better liquidity
As I mentioned above, having a secondary market isn’t enough. You need to maintain sufficient liquidity for the market to function properly.
Another option is using market makers, who provide continuous bids and offers for assets, ensuring that there is always a buyer or seller available.
Our friends at JKBX (who offer Royalty Shares of popular songs) are planning on working with market makers to effectively guarantee a buyer for every seller — no matter the price.
It sounds like an easy and obvious solution, but it takes a lot of work, money, and expertise to put into place.
“We always thought one of the most important factors was creating liquidity for our investors. We architected JKBX from the start by contemplating leveraging market makers. We’ve been in discussions with the leading market makers, even before we launched, and intend to work closely with them on our secondary market.”
– Scott Cohen, CEO of JKBX
If JKBX pulls this off, they’ll be the first fractional investment platform that I know of that to ever do this.
Quality over quantity
One trend that is undoubtedly happening is the move towards offering only high-quality, high-ticket items.
Yes, it’s exciting to fractionalize everything under the sun. But just because you can fractionalize something doesn’t mean you should. Nowhere has this been better exemplified than through NFTs.
Most of the artwork NFTs were garbage investments — basically pure gambling — and probably should never have been fractionalized. (If the Bored Ape market comes roaring back, I promise I will eat my words.)
But quality aside, Reg A’s ugly unit economics almost dictate that having high value assets is even more important. The industry is difficult enough for platforms when offering high-ticket assets; there is basically no way to make the numbers work with low-value stuff.
“AShareX focuses on high-ticket items. We believe higher value assets work best for fractionalization vs lower value assets given their rarity/scarcity and higher potential for appreciation.”
– Alan Snyder
A good example of a very high-ticket item is Rally’s Stegosaurus Skeleton, which IPOs in December.
This is a unique, one-of-a-kind, museum-quality asset that investors can’t get access to in a dozen other places. But does it make sense as an investment?
When comps are thin this can be a tricky question to answer. You can run the risk of the asset turning into a bit of a lottery ticket:
“The issue is that no one yet knows what it’s truly worth, or what it will sell for.
The closest comp is the Apex Steggy, which was valued at $4 – 6m, but ended up selling for $44.6m.
It does seem like this will be a less complete version than the Apex (though we’re not sure because it’s still in the ground).”
– Wyatt Cavalier
In the meantime, it’s great to see this type of creativity. There are plenty of investable assets that have yet to be fractionalized — especially non-physical assets with low downside risk & good upside potential.
International markets
Reg A and Reg CF are uniquely American securities laws. But while there are no exact counterparts in other countries, many nations have developed similar frameworks.
Over in the EU, regulators are approaching fractional ownership as a form of alternative financing similar to crowdfunding.
The ECSP recently implemented generous new crowdfunding regulation which harmonizes crowdfunding practices across EU member states, and facilitates cross-border trade.
And don’t forget India, where the Securities and Exchange Board (SEBI) just made investing in REITs easier. India’s fractional ownership market is poised to grow from $500 million today to $5 billion by 2030.
Blockchain & tokenization: The final frontier?
Blockchain technology undoubtedly seems like a natural fit for fractional investing.
In addition to the transparency and accessibility benefits, blockchain enables easy tokenization of assets — breaking them into smaller units (tokens) that represent fractional ownership.
Tokenized shares can be bought and sold easily, almost singlehandedly solving the liquidity problem.
However, there’s a big problem. While the SEC acknowledges blockchain’s potential, it does not yet recognize the immutable record-keeping abilities of blockchain, and has not integrated blockchain into its regulatory framework.
In October 2022, the SEC amended electronic recordkeeping requirements for broker-dealers, allowing for audit-trail alternatives to the traditional write-once, read-many format (WORM). However, these amendments still do not explicitly endorse blockchain as a compliant method for record preservation.
Over in Europe, Joao Lages doesn’t have that problem.
Lympid is based in Lithuania, so not only is his company not under the jurisdiction of the SEC, but he operates under the Markets in Crypto-Assets Regulation framework (MiCA).
MiCA is a landmark EU regulatory framework aimed at creating a unified legal regime for token issuance, trading, investor protection, and crypto custody across all EU member states. It was adopted in May 2023 and will come into effect in December 2024.
Lympid tokenizes their assets, offering features like instant liquidity and 24/7 trading. They also integrate cryptocurrency payments and a vIBAN account for a seamless experience.
Joao asserts that tokenizing assets under the MiCA framework will significantly enhance investor protection compared to existing models. Even the “pawn rights” we talked about earlier will be a thing of the past come December, because Lympid will be tokenizing assets with central banks:
“We use blockchain because it lets investors enter and exit their positions 24/7.
The worst-case scenario custody problem will completely disappear from December forward, because that’s when MiCA enters into force.
Basically, we’ll be submitting a whitepaper (similar to a prospectus) to the regulator for tokenizing each asset with our central bank.
Consumers will have a lot more protection by holding those tokens, then they have ever had before. The tokens representing each asset will give adequate legal protections and recourse to the user.”
– Joao
Closing thoughts
Fractional investing has had its ups and downs.
Over the past decade it has faced significant challenges, including inflated valuations and poor liquidity.
While many platforms have failed or pivoted, innovative companies are learning the lessons of the past, and should continue to pave the way towards a brighter future.
I do think fractional ownership can still deliver on its original promise — democratizing access to high-value assets for investors everywhere.
But it all starts with being honest about what’s working, and what needs to change. 🥧
That’s all for today!
Reply with comments — we read everything.
Until next time, Stefan
Disclosures
- This issue was written and researched by Stefan von Imhof, with help from Alan Snyder, Ryan Johnston, Christian Braun, Joao Lages, and Wyatt Cavalier
- This issue was sponsored by aShareX
- Neither Alts nor Altea has any current holdings in any companies mentioned in this issue
- This issue contains no affiliate links.
