Investing in art has always been the perogative of the rich and wealthy. The poor had no access to the art of legends like Picasso, Warhol, Da Vinci etc. They only saw them in museums, exhibitions or in movies/tv. Now, a company called Masterworks allows you to invest in these priceless gems at a fraction of the cost. Just as you invest in equities where you are a fractional owner of a compay, here you can buy a fractional share in a costly painting. Masterworks is the first fine art investing platform. It allows ordinary investors gain access to world-renowned works of art from Warhol to Picasso to Monet. Founded in 2017, Masterworks lets investors buy shares in a painting similar to buying shares in a company. It’s a three-step process of buying a painting, taking it public, and selling shares. Once their offering circular is reviewed by the SEC and FINRA, you’re able to get started for as low as $20.
Dont put all your eggs in the same basket has been the basic mantra for investments. Diversifying your investments has been the fundamental lesson taught to investors. Till now investments were restricted to mutual funds, equities, real estate, cryptocurrencies, gold and other precious metals. Investing in art, wine etc was restricted to the wealthy. As a part of that diversification, now investors can also invest in priceless art which are valued at millions of dollars by investing only a fraction of the same.
What is Masterworks?
Launched as recently as 2017, Masterworks is an online platform that allows everyday consumers to invest in the multi-trillion-dollar fine arts arena. While we will explain the fundamentals in more detail further down, Masterworks operates on a crowdfunding-style business model, insofar that fine art pieces are purchased by the platform, and then sold to investors in the form of fractionized shares.
We are not talking about any old paintings here, but the likes of masterpieces from artists such as Monet and Warhol. The project’s founder and CEO – Scot Lynn, is a seasoned art collector with more than 15 years worth of experience in the space. Supporting Lynn is a team of 17 employees who also possess a wealth of experience in the fine art industry, with the company’s headquarters located in New York.
In a 2017 BBC article on the advantages of investing in the fine art space as a retail investor, it was noted that individuals will need to have a starting fund of anywhere between £5,000 and a whopping £500,000. As such, the fine art investment space has traditionally been reserved for the wealthy. However, Masterworks takes a completely different approach to the investment process, insofar that it allows multiple-ownership of a single piece.
The platform does this in the same way as any other crowdfunding-style website, such as those operating in the real estate sector. For example, the team at Masterworks will initially start the process by sourcing and identifying potential investment opportunities by locating fine art pieces that are available for purchase.
This could be a direct sale, or through an art auction. Nevertheless, once a fine art piece has been identified, Masterworks will then list it on its platform. Once they do, Masterworks investors will have the opportunity to inject capital into the listing, with each share broken down in increments of $20.
How does Masterworks actually work?
Masterworks is building what is to be believed is the first ever investment platform for fine art, allowing investors to purchase interests (or shares) in a painting similar to the way investors purchase shares in public companies. Here’s how they do it.
- The team selects paintings based on a review of sales data for similar works with historical appreciation rates between 9-15% and attempts to buy them below fair market value through auction guarantee strategies and established auction house relationships.
- After purchasing a painting, they file an offering circular with the Securities and Exchange Commission and respond to SEC comments to qualify the offering.
- Once the offering passes SEC and FINRA review, investors will be able to buy shares for $20 per share.
Pros of Investing
- Allows you to have a fractional ownership of world renowned and precious art works.
- It has low co-relation to the stock market. So any crisis in the stock market doesnt affect here.
- Not restricted to only the wealthy and powerful. A normal investor is also welcome
Cons of Investing
- Its a new business with no proven track record.
- Costs are high. 1.5% annual fees and 20% fees on the profits.
Security and the SEC
If you’re still somewhat confused about the legitimacy of having your investment represented by a tokenized security, the key word in this respect is ‘security’. In a nutshell, your investment – which is in the form of a digital token, is protected by the very same consumer rights and safeguards as found in any other financial security.
Whether it’s investing in stocks and shares, bonds, government treasuries, options, or futures – those behind the financial security in question must follow the rules set out by the SEC. This ensures that the underlying issuer of the security meets and complies with all relevant US laws and regulations surrounding investor rights and protections.
Without getting too technical, the team at Masterworks will register each and every fine art purchase with the SEC under Regulation D. Each offering is publically available to view via the SEC website. Here’s the posting for The Andy Warhol Catalogue Raisonné purchase that Masterworks made, which it paid just over $1.8 million for.
So now that you know the ins and outs of how your investment with Masterworks is backed by the blockchain protocol – and that each investment is protected by the SEC’s regulations on securities, we are now going to explore whether or not an investment in fine art is worthwhile.
The company claims to use analytics and big data to bring transparency to one of the world’s largest unregulated markets by publishing timely content. It also seeks to facilitate trading or sales through brokerage relationships, although they do not expect any such trading or brokerage relationships will be available within the next twelve-months. No assurance can be given that they will be able to establish a trading market for the shares.
The intention of Masterworks is to own each painting for a five to ten-year period. At any time, collector can make an offer to buy a painting that they’re invested in, triggering a vote to sell with all shareholders. If holders of a majority of shares vote to sell, your share of the net proceeds, if any, will be distributed to you (after the costs are deducted, as disclosed in the Offering Circular)
Masterworks is headquartered in New York and founded by Scott Lynn. He has been an active collector of contemporary art for more than fifteen years and has built an internationally-recognized collection of Abstract Expressionism that has included works by Clyfford Still, Barnett Newman, Mark Rothko, Willem de Kooning, and more. In addition to Masterworks, Mr. Lynn serves on the board of v2 ventures (Adparlor, Giant Media, Reachmobi, Amply, and Sellozo), Payability, and the Brooklyn Rail (a non-profit publication in the art industry). Co-Founders of the company are Alberto Simon and Hai Minh Tran.
Though, like any other investments, investing in art has its own challenges and risks. Please be careful and do all your proper research before investing. Better still, talk to your investment advisor or financial planner before making any investing moves.