* Startup Loyal3 promotes share-trading on Facebook
* Launch in third quarter or sooner
* Customers can buy in $10 increments
By Sarah McBride
SAN FRANCISCO, May 7 San Francisco startup
Loyal3, the creator of the Customer Stock Ownership Plan, is
betting it can encourage more Americans to buy stock -- right
from Facebook -- by allowing them to spend as little as $10 for
a portion of a share, with no fees.
By piggybacking on Facebook and its network of more than 900
million users, Loyal3 said it customers will be able to skip
brokerage fees -- which some say is stirring up anxiety among
the discount-brokerage industry that caters to small-time
In a variation on direct stock-purchase plans used by
companies like AT&T, where customers buy shares directly
from the company, Loyal3 offers only a $10 minimum investment
allowing people to buy stocks in lower dollar amounts and
increments, including fractional shares.
Loyal3 has set up a website as well as a Facebook
application through which would-be investors can select stock in
participating companies. Loyal3 said it was in advanced
negotiations with several but could not comment on the status
for regulatory reasons. It plans to launch as early as later
Going one step further, anyone buying stock on Facebook will
have the chance to click on a button and alert their friends to
what they have just picked up.
"We're able to remove the friction, the barriers to entry to
tens of millions of Americans," Loyal3 Chief Executive Barry
Despite a proliferation of discount brokerages, the
percentage of U.S. households that own stock has stubbornly
hovered around 20 percent for years, according to Federal
Reserve data, in part because people are reluctant to spend
Loyal3 hopes its CSOP will change that by allowing purchases
of small amounts of shares with no fees to consumers.
Schneider said more people actually want to invest,
particularly in companies with which they feel a bond, but most
would prefer to spend $25 or less. That is an expensive
proposition at most brokerages, even discount firms, which tend
to charge $5 to $10 per trade.
If Loyal3 takes off, Schneider said he envisioned
small-timers beginning to be able to invest in more expensive
market darlings. Apple Inc, for example, is a $500 to $600 stock
after it quadrupled in value over the past two years.
Success for Loyal3 may help Facebook's strategy of
developing a business beyond pure advertising -- on which it now
relies for the lion's share of its revenue -- by encouraging
companies to view it as a place for transaction- or
DEEPENED CUSTOMER LOYALTY
Loyal3 would not be the first company to enable trading on
Facebook. San Francisco-based Zecco already does that for its
clients. Currently, less than 5 percent of trading comes via
Facebook. "It's going to take some time to mature," said Zecco
Chief Executive Michael Raneri.
But by working to get companies on board and promoting the
program to customers, Loyal3 hopes it can drive faster adoption
of Facebook as a share-trading platform. It already claims a
dash of Facebook DNA in the form of former Facebook Chief
Privacy Officer Chris Kelly, who joined its board in 2010.
While the program appears to target new entrants to the
stock market, it has stirred anxiety among existing discount
brokerages. Among that group, competition is intense and margins
are very thin, said Alex Camargo of research firm Celent.
Loyal3 announced a partnership with Nasdaq last year
designed to allow Nasdaq companies to sell shares via Loyal3.
But a source familiar with the matter said the partnership broke
up when Nasdaq came under pressure from brokerages.
The program is taking shape at a time when individual
investors are winning more investment access. The Jobs Act,
signed into law last month, makes it easier for retail investors
to purchase shares in companies through a practice known as
crowdfunding, for example.
Loyal3's plan is to make it easy for people to buy a
company's stock or for companies to distribute shares to
extra-loyal customers. It envisions consumers holding onto the
shares rather than engaging in day-trading.
To that end, it has set up a back-end system that takes care
of the paperwork for the companies and can handle large numbers
of investors. The companies would bear the costs, which
Schneider described as nominal.
For businesses, the incentive lies in deepened consumer
loyalty. Several studies, including a 2008 paper by Australian
researchers and a 2000 paper by Bain & Co, have shown that
shareholders make better customers. Bain researchers found that
investors who doubled as customers spend 1.5 times as much money
and generate twice the referrals as the average customer.
Parts of the company's program have been reviewed by the
Securities and Exchange Commission, Schneider said. The SEC
declined to comment on any review.