The Democratization of Capital: The Fractionalization Revolution is Here and Getting Better

(This is not an endorsement of the products discussed below; use at your own risk)

In the 21st century we love apps, and rightfully so, because they control our lives; especially if you are of the “work hard and/or play hard” mindset. Without them, we have to expend valuable time and effort that could be better served working or playing to order food (Talabat, UberEats, DoorDash, etc.), hail a ride (Uber, Lyft), or find a comfy place to lay our head (AirBnB, Booking, Hotel Tonight). Now, there’s an app for that.

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There is also an app for the Democracy of Capital by fractionizing debt and equity. ThisFractionalization Revolution is going to drive consumer loyalty through the roof and, combined with the use of blockchain technology, it will only become faster, more efficient, and more prevalent. The use of StockPile (an app that allows you to purchase fractionized shares of 1,000+ blue chip stocks and Electronic Traded Funds (ETFs) for 99 cents a trade), WiseBanyan (a robo-advisor which does not charge account management fees for most services), and Bumped (allows you to earn fractional shares of stock when purchasing favorite brands) are all in their infancy: Bumped having 81 reviews, WiseBanyan having 151, and Stockpile having a whooping 27,916 reviews on iTunes at the time of this writing. These apps are becoming more prevalent with the millennial generation who not only want to buy the brands they like, but also want to benefit from being able to own part of those brands or, in the case of WiseBanyan, have the “set it and forget it” mindset when saving for long-term retirement goals or short-term vacation goals. To live like Warren Buffet (humbly and frugally), but be able to live and enjoy the life of Sir Richard Branson (Have you heard about his Virgin parties? The man knows how to throw a shindig.).

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It’s this type of democratization of traditional assets that is enticing because it is exactly what created the Berkshire Hathaway Class A and Class B stock over 20 years ago. While some never dream to own one share of Class A valued at $314,675.00, as of the time of this writing, it is the first time in history that you may be able to own a true piece of a Class A, and thus reap the success that Buffet has created. Of course you can always buy Class B, valued at the time of this writing of $209.91, but it does not have the same performance as its bigger, more powerful brother Class A, which can never be split. It is this mindset and economic dissonance of us versus them that has given rise to the apps and Financial Technology (FinTech) solutions mentioned above. It will also continue to give rise to various mechanisms, both consumer facing and non-consumer facing, which will allow businesses of all sizes to take advantage of this same fractionization revolution especially in developing markets.

The American economy looks quite stable right now, and should hopefully continue to be even with the 2020 election coming up and talks of recession abounding by over-lending. However, it is this over-lending that will likely make the use of blockchain-based FinTech solutions more prevalent in the US and abroad. For example, traditional bank lending rates are at 3% to 6% right now, but others such as equipment lending, invoice lending, and short term business lines of credit can bounce from 7% to 60% (https://www.fundera.com/business-loans/guides/business-loan-interest-rate). If companies and investors can receive more attractive rates, history has shown they both will search for those rates and the devices in which to obtain them.

This is where the fractionization of debt and equity comes into play. A company will have reduced costs and efforts because FinTech solutions using blockchain and artificial intelligence to facilitate not only what decision makes the most sense for them, but also how to proceed. Meanwhile, an investor, probably using a similar app or blockchain solution, will be able to take part in the company’s offering. In theory, this could create a situation where Starbucks (NASDAQ: SBUX) decides to stop using traditional bank financing because it makes better, long term financial decision to offer up a debt or equity round of financing through an app to expand into a new market or even a new store. Yes, a new store. With real estate being hot in blockchain, eventually the deed and mortgage to a property could all be held within chain; meaning this valuable data would simply be stored in a readily accessible immutable ledger that allows for investors to see the history of the property. Then Starbucks, or any other company whether it be a restaurant or brick and mortar, could offer the issuance to the community. Yes, the community. Are you a local restaurant owner and not sure whether to expand into another location, or you are sure but do not like the rates you’re receiving? Take the offering to the crowd. This is where loyal customers and a new generation of financial advisers become exceptionally popular and, if all goes well, exceptionally wealthy.

What better way to build brand loyalty at a local level than to own part of the store in which you frequent? I can only think of only one better: owning small fractionized shares around the globe using the same blockchain-based infrastructure. A $5,000 investment may not be large enough to open a coffee shop in Manhattan, but it would be in Colombo, Sri Lanka. This is where, if all goes well, fractionization will help put the capital markets back on track by allowing financial advisers or robo-advisers to take more seemingly aggressive risks to facilitate returns based on the client’s desires. It is this system that, if used properly, will eventually be as simple as opening an app, seeing an opportunity, and clicking a button to invest $5 or $50 in a local business or one located on another side of the globe and a rating which lets the investor know the risk involved. With these next level FinTech solutions using blockchain and advanced machine learning, it will only be a matter of time before everyone, whether they know it or not, will be part of these fractionalized financial models.

This article is provided as a general informational service to clients and friends of Jonathan C. Dunsmoor, Esq. and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes. For inquiries regarding this matter or others please contact us at Info@DunsmoorLaw.com or 716-371-1936.

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