Fractional Securities: The Building Block of the Savings and Investment Union

Originally deployed in a political context, the term democratisation has recently been adopted as a rhetorical device by the financial industry. This linguistic shift coincides with a renewed European interest in deeper capital market integration, often against the backdrop of the broader geopolitical ‘fight for democracy’. Within this context, the European Securities and Markets Authority (ESMA) has now highlighted the legal treatment of fractional securities as a pertinent issue. A coherent regulatory response would require ESMA to define ‘fractional shares’ and, subject to certain criteria, qualify them as MiFID-transferable securities.

A. The Fractionalisation Movement

One of the most transformative developments in finance since the ATM, the fractionalisation of investment assets has significantly broadened access to retail investment. What initially emerged in the context of funds and crypto assets has now expanded to cover securities, enabling millions of retail investors to construct diversified portfolios with relatively small capital outlays.

In Europe, neobrokers, that is, app-based, low-cost trading platforms like Robinhood and Trade Republic — many of them based in Germany — have led the way in offering fractional shares. Current market data suggest that approximately 90% of retail orders are placed in nominal amounts (EUR) rather than in discrete units, which will result in fractional execution. Fractionalisation has also proven essential for the functioning of automated investment plans, as it would be operationally burdensome for retail investors to acquire one whole share of, for example, Apple Inc., each month rather than investing EUR 100 worth of its stock.

B. Divergence in the Savings Union

Despite its transformative potential, fractional ownership remains largely underutilised in the context of the EU’s ‘Savings and Investments Union’. While fractional shareholding is unlikely to catalyse capital formation per se, its value lies in cultivating a cross-border retail investment culture across the Union.

Nonetheless, the regulatory treatment of fractional securities diverges considerably among Member States. Germany, for instance, offers a relatively clear path to legal recognition and insolvency remoteness of fractional ownership. By contrast, other jurisdictions such as France and Poland grapple with conceptual classification, often categorising fractional securities as packaged debt instruments requiring the issuance of PRIIP-KIDs.

Given this disparity, regulatory harmonisation is urgently needed. ESMA has acknowledged the issue and has recently advised the Commission to clarify the legal framework applicable to fractional shares within the ambit of MiFID II.

C. Delivery of Fractional Products under German Law

German brokers have emerged as key facilitators of fractional share ownership throughout the EU—a development largely attributable to the specificities of German civil law. Under the Bürgerliches Gesetzbuch (BGB), the concept of fractionalization—particularly of tangible objects such as securities embodied in global certificates—is well established. Indeed, the Girosammelwahrung (collective safe custody) with resulting fractional ownership of the collective of custodied assets constitutes the legal default for securities custody.

The legal construct of Bruchteilseigentum (fractional ownership) enables co-ownership and provides for insolvency remoteness, granting investors the right to separate their share of the underlying asset from the custodian’s estate. While operationally complex and often resulting in arrangements with pro-rata distribution, this ownership framework offers superior investor protection compared to purely contractual structures, which expose investors to counterparty risk.

To manage practical challenges, especially around corporate actions, contractual terms often limit investor rights to proportional distributions, while excluding participation in inherently personal corporate events such as general meetings. Furthermore, due to limited exchange tradeability, fractions are typically transacted via market makers or internalisers.

D. European Law: Clarifying MiFID Transferable Securities

Despite the progress made by brokers through cross-border service provision, legal uncertainty persists. National regulators frequently raise questions regarding investor disclosures (eg, insolvency risks, PRIIP-KID requirements) and the applicability of MiFID and MiFIR, particularly in relation to transaction reporting, best execution, and asset segregation obligations.

ESMA has confirmed this regulatory fragmentation, noting that in the absence of a harmonised definition, fractional shares are governed by national law and jurisprudence. This, in turn, threatens regulatory coherence and may erode investor confidence. ESMA rightly observes that consistent classification would remove legal barriers and facilitate the cross-border offering of fractional shares.

Although MiFID and MiFIR do not expressly contemplate fractional securities, the existing framework does not preclude their inclusion. The relevant criterion is whether an instrument qualifies as a transferable security, a term that need not imply full tradeability on multilateral platforms. Rather, it is sufficient if the instrument is capable of being transferred.

ESMA’s recent engagement with this issue should be welcomed. By issuing guidelines or Q&A clarifying the circumstances under which fractional shares may qualify as transferable securities, ESMA could introduce a bespoke category of ‘real fractional securities’. While such instruments would constitute soft law, they would offer immediate, low-impact regulatory direction.

In developing this category, ESMA should consider stipulating minimum conditions, including:

• Legal transfer of ownership, ensuring that investors are insulated from insolvency risks other than those of the issuer; and
• Pro-rata entitlement to the economic proceeds of the underlying security.

Nonetheless, effective investor protection will depend on reforms to national civil laws —particularly to accommodate insolvency remoteness and appropriate rights in corporate actions. A Directive would be the most effective legislative instrument to achieve these goals, potentially through amendments to the Shareholder Rights Directive to address issues of execution, segregation, and corporate events.

Clarifying MiFID would create momentum for Member States to align their domestic laws. ESMA could thereby capitalise on existing national initiatives. In France, the Haut Comité Juridique de la Place Financière de Paris is advocating for legal recognition of fractional shares, while regulators in Poland and elsewhere have already accepted the German legal model. With the Savings and Investments Union project expected to prioritise ‘Retail Investor Participation’ in Q3 2025, ESMA should now take the lead.

Lukas Philipp Köhler is the Head of Legal at Upvest.