Etan Butler and Oscar Seidel founded the Dalmore Group back in 2005 because they identified a lucrative new space: “We saw an opportunity to provide certain execution services to daytraders and hedge funds, and also to raise capital for a number of hedge funds, which were a relatively new phenomenon at that time,” Butler, the Dalmore Group’s Chair, says.

With the passage of the Jobs Act in 2012, they were early again: this time on the opportunity to act as a broker-dealer for companies raising capital online. Again, they were ahead of the market. Sensing a theme?

That’s why it’s hard not to get excited about their newest focus: fractional investing. Regulation-A was updated in 2015, which expanded companies’ ability to sell securities. In the years that followed, entrepreneurs began to realize that there was an opportunity to sell partial shares of collectibles, real estate, and other growth assets that are often prohibitively expensive for much of the market. In 2018, Dalmore Group became the broker-dealer partner for Rally Rd. — the leader in the fractional investing platform space. “Since then, we've onboarded over 230 Reg-A clients and a fast-growing number of those issuers — today it's around 35 or 40 —  are fractional share platforms, also known as series issuers,” Butler says. “We've gotten many calls from companies that want to build the Rally for real estate, build the Rally for racehorses or athlete contracts or music royalties. So, it's been an interesting journey since.” 

We gave Butler a call to learn more about fractional investing and how expanding access to the growing space through partnerships with community banks and credit unions via Unifimoney can change ownership and diversified investing in the years to come.

When did you and Oscar become intrigued by fractional investing?

We spent the first 10 years or so focused primarily on institutional investment banking and corporate advisory services, and then, at the time of the Jobs Act in 2012, we were early to act from a broker-dealer perspective to start working with companies that were raising capital online. To start it was mostly with REG-D 506-C issuers in the commercial real estate space — serial online syndicators of real estate investment opportunities to accredited investors. And then when Reg A started to really pick up in popularity and usage, which was in late 2018, Dalmore got involved in Reg-A at that time. Since then, we've onboarded over 230 Reg-A clients and a fast-growing number of those issuers — today it's around 35 or 40 —  are fractional share platforms, also known as series issuers. So that was late 2018/early 2019 when we got involved in Reg-A and very soon after that was when the first series issuers were starting to emerge. The first of which, of course, was Rally Rd.

But since we became the broker-dealer partner for Rally Rd, we've gotten many calls from companies that want to build the Rally for real estate, build the Rally for racehorses or athlete contracts or music royalties. So, it's been an interesting journey since.

How can fractional investing change the realities of both ownership and diversified investing going forward? How do you view the balance between the intangibility of the object and the increased access to ownership in rarified sectors?

What fractional share platforms provide is the opportunity for investors to build out their own portfolio in bite-size share increments in subsets that are of interest to them — whether that's real estate, or collectibles, or art, or music royalties. The investor isn't buying into a consolidated-fund structure or into one issuing entity. Instead, they're able to buy shares and build their own portfolio. They may choose to only invest in this artist or that type of art, or this athlete. Then, one of the benefits of Reg-A is that unlike Regulation D and CF which have a one-year hold period before you can access secondary-market trading, Reg-A allows for an immediate path to potential liquidity. For investors building a portfolio of assets, it's helpful to not have to wait to have the opportunity to access secondary-market trading. 

Let’s take a famous artist as an example. They have a painting that let's say is worth $2 million, right? That painting might trade at an auction once every few years or even once a decade. Or you take a Michael Jordan mint rookie card that's worth a quarter million dollars. Every fan wants that, but no one really has the opportunity to access it. But by utilizing Reg-A and fractionalization, that Michael Jordan rookie card can be divided into $10 shares, and now thousands of fans can participate. You mentioned losing out on the ability to tangibly hold the asset, but oftentimes, when you buy a multimillion-dollar asset, it's held in a climate-controlled setting or in storage anyway. But even if you are missing out on having it on your wall, digitally you own shares, which means you actually have the chance to own a part of the previously unattainable asset. 

I also think that overall, it's healthy for the industry as a whole, because it brings additional liquidity into the space. Now, anyone over 18 can buy shares of art or collectibles or so many other valuable assets. It's no longer limited to the few people who could afford to plunk down $3 million on an asset. That means there's more capital flowing into these asset spaces, which ultimately provides a greater path to liquidity for the owner of the asset. It's great for any market to have more potential investors that can participate.

What does fractional investing becoming available at the community banks and credit unions that we work with at Unifimoney mean for the market? How does that increased access change things?

I'm a big believer that most assets are going to be fractionalized eventually: real estate and collectibles, but also so much more. And ultimately, I think that will be healthiest for the capital markets because it allows everyone the ability to participate. We've been seeing trends going in that direction and, personally, I envision a future where there's a path to liquidity via listing on an alternative trading system, whether that's tokenizing the asset or not. I think there will be a bridge between institutional capital and these private securities developing via DTC eligibility that will ultimately enable investors that have accounts at Charles Schwab or other brokerage houses to one day be able to acquire and purchase the shares of these private securities made available through fractionalization through Regulation-A. I think that's the direction that we're going.

It feels like we’re still early days with this idea. How do you expect the market to look five years down the road?

We're definitely early days with these fractional share platforms. Rally was amongst the first and they are a few years old and, already, we have 35 or 40 more fractional share clients. At this point, a dozen or so are live and active, and more and more are going live month after month pending SEC qualification. We're seeing a rapid increase in entrepreneurs who are fractionalizing anything and everything — the only limit is the imagination of the issuer as long as it's in a compliant format. We're seeing fractionalization with gems and precious stones. We're seeing it with music. We're seeing it with professional athletes, college athletes. We're seeing it with racehorses and collectibles and wine and whiskey, and even dinosaur bones and the Constitution. We're just at the beginning of fractionalization — soon enough, there is going to be a marketplace for every valuable asset that's out there. 

These are the early days. There are going to be mergers & acquisitions that happen — we're already seeing that amongst some of our clients today. There is going to be more institutional focus and involvement, and more and more community building amongst folks that want to participate in acquiring these assets. I think we're going to see a continued increase in secondary market trading to really try to create some marketplaces for the securities. I think we're gonna start seeing market making that occurs on these different marketplaces. I think we'll see co-listing amongst multiple ATSes or unique partnerships amongst them. So, it's super interesting what's going on in the space right now. It really is just the first few years and the first few dozen of these platforms that are emerging and leading the way. 

At Dalmore, what we focus on is what's next. We prepare for what's to come and try to steer things in a way that ultimately is most advantageous to the issuers and the investors. And that's the direction the fractional investment space is going.