Fractional Alternative Investing Glossary

August 2, 2022
Dylan Dittrich

If you’re new to fractional alternative investing, you probably have a lot of questions. Perhaps you’ve seen friends investing in collectibles on Rally or art on Masterworks, and you’d like to know how it works. Or, perhaps you want to start with the most basic question: what is fractional alternative investing?

We’ve prepared a robust glossary of fractional alternative investing terms, and regardless of your experience level, you’ll find it useful as you continue your investing journey. 

What is fractional investing? Key terms to know.

Fractional: Fractional refers to the ownership structure of an asset in which shares of ownership are issued to the public or otherwise divided amongst multiple people or entities. Rather than a single individual owning the asset, individuals or entities are able to purchase a share of ownership.

Asset: In fractional investing, the asset refers to the specific item or items being securitized for fractional ownership. The asset is owned by an LLC, in which investors purchase an ownership stake.

Share: Share refers to an ownership claim on an asset. For each asset, the platform elects to offer a certain number of shares of an asset for ownership. Each share represents fractional ownership of the asset, and the ownership claim per share can be determined by dividing 1 by the total number of shares.

Share Price: Share price refers to the prevailing price of a share of an asset. The share price at IPO is determined by the platform offering the asset. Afterwards, it is determined by the last traded price of the asset, i.e. the price at which the last transaction between shareholders took place.

Market Capitalization: Market capitalization refers to the total value of an asset based on all shares outstanding. It can be calculated as price per share multiplied by total shares outstanding.

Marketplace: In fractional, a marketplace refers to the entity/business that acquires assets, registers them with the appropriate parties, offers and markets them to shareholders, and hosts the secondary trading of those assets. Rally and Collectable are examples of marketplaces.

IPO: Initial Public Offering. In fractional, IPO refers to the initial launch of an investment offering to the public for funding. This is the first opportunity for investors to purchase shares in an asset at a valuation set by the marketplace.

Offering: An offering refers to the formal sale of securities interests in an asset to the public.

Live Offering: A live offering refers to an IPO that is currently open to the public. While an offering is "live", prospective shareholders are able to purchase shares at the IPO price until the asset has been fully funded, meaning all available shares have been purchased.

Share Cap: On certain offerings, fractional marketplaces may institute a share cap. This is a limit on the number of shares any individual user may purchase. Share caps are typically instituted on offerings for which there is expected to be large, widespread demand to allow a larger number of users access to the offering.

What is secondary trading? Key terms to know.

Secondary Trading: After an asset has been initially offered to the public and after a waiting period that varies by platform, the asset will begin trading on what's termed a secondary market. In secondary trading, market participants can purchase and sell assets, transacting with other market participants.

Bid: In secondary market trading, a bid represents an offer to purchase a share.

Ask: In secondary market trading, an ask represents an offer to sell a share.

Limit Order: A limit order is an order to purchase or sell shares at a specified price or better. A buyer submitting a limit order at $10 is willing to purchase shares at a price of $10 or below. A seller submitting a limit order at $10 is willing to sell shares at a price of $10 or higher.

Market Order: A market order is an order to purchase or sell shares at the most immediately actionable price. A market purchase order will be executed at the lowest available ask, while a market sale order will be executed at the highest available bid.

Post Only: Post only refers to a trading status in which shareholders are only able to post their respective bids and asks for an asset. Those bids and asked will not be matched and a transaction will not be executed until the asset is open for trading. Post Only status typically occurs between trading days (i.e. after 4:00 or 4:30PM, before 9:30AM, on weekends), or before an asset has begun live trading.

Live Trading: Live trading refers to a trading status in which bids and asks placed are instantaneously matched against each other when placed and certain conditions are met, affecting a transaction.

Clearing: Clearing is a secondary market trading term that refers to the matching of a bid with a corresponding ask, affecting the execution of a transaction. Shares are "cleared", for a simplistic example, when there is a bid for 10 shares at $10 and an ask for 8 shares at $10. In that scenario, 8 shares are cleared at $10.

Trading Volume: Trading volume refers to either the number of shares or aggregate dollar value of an asset traded over a specific time period, whether single day or 30 day. This metric, when shared, can serve to inform the market if price movements have been driven by only a small number of shares or if trading activity has been substantial. It can also serve as a measure of liquidity.

ROI: Return on Investment. Return on investment refers to the profit or loss made on an investment relative to the initial investment size. If an investor invests $100 in an asset, and the value of that investment rises to $105, the investor has generated an ROI of 5%.

Index: An index is a tool that measures a market or a subset thereof to enable investors to compare current market levels with past levels. Indices can be market-capitalization weighted, meaning that the largest assets by market cap have the largest weight, equal-weighted, in which every constituent is assigned the same weight, price-weighted, where assets with the highest share price have the largest weight, or they can be weighted by other considerations..

What is a buyout? Key terms to know.

Buyout: In fractional investing, interested parties may submit a buyout offer to the marketplaces for a certain asset. This offer represents a willingness to purchase the asset in question at a certain value. Upon receipt, the marketplace will typically share the details with the relevant shareholder base, solicit a vote on approval or rejection of the asset over the course of 48-72 hours, and conduct an advisory committee meeting to formally decide upon accepting or rejecting the offer, taking the vote results into account. Trading is frozen during the deliberation of a buyout offer and resumes upon rejection if applicable.

Gross Buyout Offer: The Gross Buyout Offer refers to the top-line amount that a prospective buyer has offered to a marketplace and its shareholders for an asset, before deducting taxes, fees, or marketplace ownership interest.

Net Buyout Proceeds: Net Buyout Proceeds refer to the amount that shareholders would stand to receive from a buyout, after tax considerations, fees, and marketplace ownership interest has been deducted or factored in.

Share-Weighted Vote: In the case of a buyout offer, marketplaces typically weigh shareholder sentiment based on a share-weighted vote to approve or reject. Share-weighted means that votes are given greater weight based on the number of shares each shareholder owns, as each share receives a vote. Some marketplaces also report the equal-weighted results of their survey, which assesses the number of shareholders, not shares, voted in favor or opposition.

What is retained equity? Key terms to know.

Retained Equity: When selling an asset with a fractional marketplace, a consignor may elect to receive cash for their asset, or alternatively, receive cash and shares in the asset offering. Shares received as compensation for selling the asset are referred to as retained equity. This reduces the share of the asset available to the public at IPO, and may give the consignor significant influence in buyout votes.

Shares Offered: In the event there is retained equity in an IPO, the number of shares offered will differ from the shares outstanding. Shares offered refers to the number of shares offered to the public, exclusive of those retained by the consignor.

Float Adjusted Market Capitalization: In the case of retained equity, not all shares of an asset may be offered to the public. The float-adjusted market capitalization refers to the total value of all shares available to the public (total shares outstanding minus shares retained).

What are the different fees associated with fractional alternative investing? Key terms to know.

Sourcing Fee: The Sourcing Fee is the fee paid to the manager of the offering (the marketplace) as compensation for managing and identifying the acquisition of the asset. Sourcing fees may be paid entirely in cash, or as a combination of cash and equity interests in the series.

Brokerage Fee: The Brokerage Fee is the fee paid to the broker of record and typically is in the amount of 1% of the gross offering proceeds.

Management Fee: The Management Fee is a fee paid to the asset manager (the marketplace) as compensation for ongoing management of the series. This fee is only assessed on free cash flows generated by the series.

Performance Fee (or Profits Interest): Some marketplaces may earn fees based on the performance of the asset. For example, Masterworks owns a 20% “profits interest” in each work. To use a simple example: if they bought a work for $1,000,000 and sold it for $1,500,000, they would earn 20% of the $500,000 profit, or $120,000. 

What are key comparable sale, auction, and asset terms for fractional alternative investors to know?

Comparable Sale (Comp): A comparable sale, or "comp", refers to the sale of an asset, whether at auction or otherwise, that may serve as a useful data point to inform the value of a like or similar asset. Comps are very commonly used in fractional investing, and ensuring that an investor is finding and utilizing appropriate comps is of the utmost importance. Utilizing sales of an asset that are not truly similar to the asset in question as comps can lead to poor investment decisions and a flawed understanding of valuation.

Discount: Most commonly used in the discussion of comparable sales, discount means that a fractionally-owned asset is trading or has been offered at a valuation that is less than a comparable sale. One might also say that an auction result was at a discount to a fractional valuation, which reflects poorly on the fractional asset.

Premium: Premium refers to a situation in which a fractionally-owned asset is trading or has been offered at a valuation that is less than a comparable sale. One might also say that an auction result was at a premium to a fractional valuation, which reflects favorably on the fractional asset.

Auction House: The venue of sale for many assets traded fractionally. Auction houses reach consignment agreements with asset sellers to sell the item on their behalf. Select examples of auction houses by category. Art: Sotheby's, Christie's, Phillips. Books: Sotheby's, Christie's, Heritage, Bonhams. Comic Books: Heritage, ComicConnect, Comic Link. Sports Cards & Memorabilia: Goldin, Heritage, SCP, Leland's, Memory Lane, Robert Edward Auctions, PWCC. Video Games: Heritage, Goldin. Historical Memorabilia: Christie's, Sotheby's, RR Auction, Heritage.

Buyer's Premium: At auction, auction houses may charge a fee to buyers of certain items. So, a prospective buyer must be prepared to pay in excess of the hammer price for an item. This fee typically ranges between 10-25% of the hammer price and is typically paid to the auction houses. In certain cases, a consignor may negotiate to receive a portion of the buyer's premium.

Consignor: Refers to the asset seller, both in an auction and on fractional platforms. The consignor is the individual or entity that lists an asset for sale with an auction house or sells an asset with a fractional marketplace.

Hammer Price: At auction, the hammer price refers to the winning bid price, before the addition of a buyer's premium if applicable.

Authentication: Many assets trading fractionally receive superior values if their authenticity has been confirmed after thorough examination by a credible subject matter expert. How this is done varies by asset class, and a few examples are presented here. Sports cards are sent to the relevant grading agencies (PSA, BGS, SGC) to authenticate and grade a card. Sports memorabilia and in some cases their accompanying signatures may be authenticated by companies like MeiGray, Resolution, MEARS, JSA, and others. Comic books are authenticated by CGC.

Population: Population refers to the quantity of an asset in existence. For sports cards,comic books, and video games, this may refer to the population, or total number, of assets in a specific grade, the total number graded by a specific grading agency, or the print run. For other assets, it may simply refer to the total number believed to exist.

How are fractional alternative investments regulated and structured? Key terms to know.

Regulation A: Regulation A is an SEC regulation modified in 2015 that provides rules exempting certain parties seeking to offer securities from undergoing the full SEC registration process, while still offering securities to non-accredited investors. Essentially, this regulation enables the existence of fractional investing, as well as non-accredited investments in private companies. Parties may offer securities under Tier I or Tier II of Regulation A. Fractional marketplaces offer their securities under Tier II, which requires that they file offering statements with the SEC, provide financial statements and reports on an ongoing basis, and limit the amount a non-accredited investor may invest in a Tier II offering. Tier II offerings do not require registration or qualification with state securities regulators (Tier I offerings do, but do not require ongoing provision of reports). Companies may offer up to $75 million in a 12 month period under Tier II.

Offering Circular: An offering circular, sometimes referred to as a prospectus, is a document filed with the SEC in connection with an offering of interests that provides prospective shareholders with information relating to an issue. Prior to investing in an offering, shareholders should review the offering circular to better understand risks, use of proceeds, fee structure, ownership structure, financial standing, and other key information.

Broker-Dealer: Each fractional marketplace utilizes a broker-dealer as broker of record (BOR) to facilitate the sale of membership interests. A broker dealer must be appropriately registered under the Securities Act of 1934 and additionally be registered in each state in which the membership interests will be offered. They do not solicit purchases of interests or make any recommendations regarding the interests. Fractional marketplaces are not broker-dealers. Broker-dealers are typically compensated with 1% of the gross offering proceeds.

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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.

All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.

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