Art Law Day

I am getting ready to register and book my hotel for AAA's Art Law Day, Nov 8th at Benjamin N. Cardozo School of Law, 55 5th Ave, New York, NY.

I posted on this a few weeks ago, but we have a tendency to put things like registration off. Just a reminder to register for this great program.

As usual, the program looks excellent. AAA states "This sell-out internationally attended event includes 250+ attendees such as estate attorneys and planners, tax accountants, insurance professionals, shippers, and other affiliated professionals. Art Law Day is considered the go-to conference for all of these affiliates, creating a high profile atmosphere."


Art Law Day 2019 is on Friday, November 8. It is held at Benjamin N. Cardozo Law School, 55 5th Avenue. Check-in begins at 8 am. The program begins at 9:00 am, and ends at 4:30 pm.

There will be an evening reception at The Salmagundi Club on Friday, October 26 from 5:00pm - 6:30pm. All Appraisers Association members and Art Law Day attendees are invited to attend.

For more information
Contact Teresa Caputo, Program Manager
212.889.5404x11, programs@appraisersassociation.org


  Members & Cardozo Alumni                                 General Admission
    $235 - Registration (ends 11/1)                                   $350 - Registration (ends 11/1)
    $255 - On-site                                                           $400 - On-site
Art Law Day is valid for 6 CLE Units

All pre-registration closes Friday, November 1, 2019. On-site registration will be available.

Click HERE to register.

The program
Friday, November 8
8:00am - 9:00am
  Check-In and Coffee

9:00am - 9:10am 
Kathleen Guzman
  Managing Director, Heritage Auctions, Emcee
Lark Mason, AAA
  President, Appraisers Association of America

9:15am - 9:45am Keynote Address
Kenny Schachter

9:45am - 11:00am
Colonial Looting
Tom Kline
  Partner & Attorney at Law,
  Cultural Heritage Partners
Shannon O’Loughlin
  Executive Director,
  Association of American Indian Affairs
Dr. Diala Touré
  Principal, Senior Art Appraiser,
  Appraisals of Value, LLC.
Dorit Straus, Moderator
  Insurance Industry Advisor

11:00am - 11:15am
  Coffee Break

11:15am - 12:30pm
New Issues and Platforms
in the Art Market Together
Nigel Glenday
  Chief Financial Officer,
Marc Halsema
  Global Family Office Advisory, Chief of Staff 
  General Counsel, Pennington Partners & Co., LLC
Freya Stewart
  CEO of Art Lending,
  The Fine Art Group
Diana Wierbicki, Moderator
  Partner and Global Head of Art Law

12:30pm - 1:45pm Lunch

1:45pm - 3:00pm
IP Caveats : When Is the IP
as Important as the Art?
Sarah Conley Odenkirk
  Art Converge
Abbey Green
  Global Copyright Manager,
Massimo Sterpi
  Gianni Origoni Grippo Cappelli & Partners
Virginia Rutledge, Moderator
  PIPE Arts Group

3:00pm - 3:15pm
  Coffee Break

3:15pm - 4:30pm
Financial Instruments at Auction
Andy Augenblick
  Emigrant Bank Fine Art Finance
John R. Cahill
  Executive Vice President, Chief Commercial Officer
Michael Findlay
  Director, Acquavella Galleries
Katherine Wilson-Milne
  Schindler Cohen & Hochman LLP
Steven R. Schindler
  Schindler Cohen & Hochman LLP

5:00pm - 6:30pm Reception
Location: The Salmagundi Club
Source: Appraisers Association of America 


Educating Professionals and Promoting an Appraisal Practice

Fellow appraiser Kelly Juhasz, ISA AM of Canada recently had a nice promotional piece published in the Canadian Underwriter. Kelly discusses the importance of insurance companies, agents and underwriters to work together with personal property appraisers, particularly when objects have been lost and stolen and there is a lack of documentation.

The post in Canadian Underwriter does several things, both enhances the importance of qualified appraisers and appraisals for insurance professionals. The other important aspect of publishing is as a promotional tool for Kelly's own appraisal practice, as the posting will be read by many in the insurance professions.

As you can see, the short article does not do a deep dive into qualifications or appraisal methodology, but hits on important aspects for insurance professionals to consider. It is an excellent promotional piece, and both new and seasoned appraisers should consider contributing to such publications in order to educate professionals on proper and qualified appraisers and appraisals, methodology and qualification as well as promoting their own appraisal practice.

Kelly Juhasz ISA AM writes in Canadian Underwriter
Brokers offering the extended service of appraisal can see their client satisfaction levels increase and gain an advantage over their competitors.

Working with a qualified appraiser can help you better understand your client’s property and level of risk. And in the case of a loss, a qualified appraiser can ascertain a justified value and help you make your clients whole.

I am a qualified appraiser for art, antiques and other objects of personal property. I am educated and trained in specialized valuation methodologies and knowledgeable in these specialty objects. My involvement is as an independent expert having no interest other than determining a proper value.

Over the past eight months, I’ve performed four appraisals for 15 pieces of art that had been stolen or destroyed. In each instance, none of the insureds had any documentation on the artworks. Only half of the insureds could remember important details about their artwork, such as the artist’s name. Fewer than half had photographs I could use to conduct the appraisal and, in return, help justify the values they claimed. It is important to note that my professional involvement in each of these claims was based on an invitation by the claims adjustor, not the client.

Had these clients, their brokers or insurance companies been in possession of an appraisal report to accompany their policies, their claims could have been processed more expeditiously, thus saving valuable time, resources and, in many cases, money. A report prepared by a qualified appraiser offering an unbiased, third-party opinion of value increases the validity of the methodology and credibility of the value conclusions.

As a skilled and qualified personal property appraiser, I have been able to work without documentation or descriptive details to create a probable description, an acceptable market range and a determination of parallel objects for each claim. This provided estimated replacement costs that claims adjustors could support.

To do this, I needed to work directly with the insureds to better understand their buying and collecting habits and the quality of their personal property objects. Regarding artwork, asking questions about the subject, scene and elements of paintings provides insight into their age and genre. Performing a market analysis of a sampling of parallel artworks – essentially, similarly-themed works created around the same time and selling for similar values – will reveal trends that suggest an increase or decrease in value at the time of loss. Such analysis helps to narrow down a broad range of possibilities.
By engaging directly with a qualified specialist, clients are more likely to feel that their insurance companies and brokers are providing them with the level of individual attention and expertise that their art requires. Plus, the high level of transparency and service will leave clients with positive feelings about their insurance professionals.

Kelly Juhasz is an art advisor and a qualified appraiser specializing in fine art and antiques. She is an accredited member of the International Society of Appraisers and president of the Canadian Chapter.

Source: Canadian Underwriter 


The RealReal Authentication Process

Fellow appraisers Christine Guernsey sent me this interesting article on The RealReal's authentication from Fashonista. The article notes that many of The RealReal's authenticators dont actual have authentication or specialty knowledge to authenticate, and the process on many objects are actual done by workers with the title of copywriters. TRR in response states the group investigating the authentication process and their reports are self serving, and TRR stands behind its authentication process.

Fashnista reports
Inexperienced copywriters are reportedly responsible for the bulk of the site's authentication, sometimes processing over 120 items in one day.

Over the years, The RealReal's authentication claims have been called into question a few times here and there — by customers in review forums who've claimed they received counterfeit goods; on Instagram by accounts like Diet Prada; by brands like Chanel, who filed an actual lawsuit; and by news outlets like this one. And a new report lends credence to those who have grown skeptical of the retailer's standards when it comes to authenticating luxury goods before listing them.

From day one, authentication has been The RealReal's "thing." It's right there in the name, for one, and when the site emerged in 2011, it positioned itself as the most reliable source (compared with, say, Ebay) for secondhand designer goods. And its purported leadership in this area helped it raise $300 million in a recent IPO. "We employ 100+ brand authenticators, gemologists, horologists and art curators. They inspect thousands of items each day, so you can be sure every item is 100% authentic," reads a page on therealreal.com.

This week, The Capitol Forum, a Washington, D.C.-based organization that conducts in-depth investigations into potential consumer protection issues, published its findings following one such investigation into The RealReal's authentication process. And they suggest that the above claim is misleading at best.

The report alleges that hourly workers with the title "copywriter," rather than professional authenticators, are performing the majority of authentication of consigned items before writing their descriptions and posting them on the website. Seven former TRR copywriters were interviewed for the report, all of whom said they didn't feel it was appropriate for them to be authenticating.

For one, the training they received was reportedly quite minimal. "They give you a quick 5-minute presentation on what things should look like and then have you go. [...] I should not have been authenticating an Hermes scarf, for example, but all they care about is the product getting on the site," said one former employee. Additionally, according to the former employees, the job had such a high turnover rate that experience levels remained low.

"The pay was so low and the work so grueling that everybody thought of it as just a temporary job," said one interviewee, "so no one really took it that seriously because they'd be gone in a couple of months."

Employees are also reportedly required to hit quotas that could exceed 120 items per day, per person. And, according to their accounts, that's 120 processed items; items found to be inauthentic didn't count, and while they could pass items they were unsure about off to be reviewed by professional authenticators, that process would take time away from meeting their mandatory quotas. Per one former copywriter, "Training was rushed and they put a lot of pressure on meeting our daily goals, so a lot of fake items slipped through the cracks because of all the goods we had to authenticate in one day, which could be 130 to 155 depending on what department you worked in. Our days were super long and draining, so a majority of employees were rushing to meet the quota so that they would not get fired. It was more about not getting fired than authenticating the goods." There were also allegedly perks for exceeding one's quota, like site credit.

Asked to respond, The RealReal confirmed to Capitol Forum that copywriters do authenticate products that it identifies as "low-risk" while more trained professionals take "high-risk items," also saying that "we're not training them on everything, they have guides they can refer to." The company also claimed that employees could take as much time as needed to authenticate goods but would reportedly not acknowledge the existence of quotas.

Obviously such an environment would leave room for inauthentic pieces to slip through the cracks — Capitol Forum even spoke to professional authenticators who confirmed as much. It is also not too surprising when you think about the volume of items on its site, and the speed with which it process consignments. But that is not a very good look for a company that promises authenticity to inspire trust in its customers and investors.

In response to the report, The RealReal provided the following comment to Fashionista: "This company’s actions and misrepresentations are clearly calculated to sell their subscriptions and improperly manipulate the market for the benefit of short-sellers on behalf of their subscribers. These people are not journalists and they are not credible. The RealReal stands 100% behind our state-of-the-art authentication process."
Source:  Fashonista


A Good Overview of the Salvator Mundi Work by Leonardo

A few weeks ago the Wall Street Journal published a good overview of the Salvator Mundi painting, its recent background and sale. It looks at some recent purchases as well as condition issues, which are great, to the point of asking " “If this had once been a Leonardo, is it now still a Leonardo?” The article also notes the whole story is a bit strange, and the oddities and questions two years after the massive $450 million, many questions remain unanswered and the situation remains strange.

Certianly an entertaining read for collectors and appraisers.

The WSJ reports
When news broke in November 2017 about the sale, for an unprecedented $450 million, of a painting in questionable condition, with an uncertain attribution to Leonardo da Vinci, it was the latest, most dramatic sign of an art world gone topsy-turvy. Who would pay such a sum for a 26-by-18-inch piece of painted panel? Almost two years later, the strangeness surrounding the sale of the “ Salvator Mundi ” has only increased. The painting has not been seen since its sale, its whereabouts known only vaguely.

Ben Lewis, an art historian and critic, brings his combined skills to bear in “The Last Leonardo,” a page-turning tale about the most expensive painting of all time. It’s a story populated by characters straight out of a thriller: the soft-spoken but ambitious art dealer, the Russian oligarch in the middle of a messy divorce, the shadowy Swiss storage king who sidelines as a dealer, the Saudi prince eager to polish his reputation with a cleansing spritz of high art. Mr. Lewis interweaves the many threads of an intricate tale into the story of the dramatic restoration, sale and resale of the “Salvator Mundi.”

Within Leonardo’s lifetime (1452-1519), his studio produced at least 20 versions of the same subject, which depicts Jesus almost as a Byzantine icon, static and centered, staring out at the viewer. Leonardo typically did not make this kind of stock religious figure but had his assistants make them, one among many indications pointing away from his full authorship. Of the originals, most have been lost or are known only through copies. The multiple versions make each one difficult to trace, but the first certain identification of the painting sold in 2017 dates from 1907, when it was noted in the collection of Francis Cook, an English merchant and art collector. The work was described as having “suffered both by over-cleaning and repainting.” A series of art historians saw it in Cook’s collection but passed it over. In 1958 it was sold for £45 to Warren Kuntz, an American collector from New Orleans. In 2005, a pair of intrepid art dealers, Robert Simon and Alex Parish, bought it for $1,175.

Mr. Simon then brought the painting to the noted conservator and New York University professor Dianne Modestini. The painting had extensive areas of missing paint and layers of overpainting by previous restorers. In Ms. Modestini’s words, the condition of the face and eyes were “shocking.” She performed exquisite work restoring the painting, but as the author puts it, “If this had once been a Leonardo, is it now still a Leonardo?”

A crucial moment in the quest to authenticate the painting came in 2011 with the unusual decision, by the National Gallery in London, to include “Salvator Mundi” in an exhibition on Leonardo. The imprimatur of inclusion in an esteemed show often boosts the value of a work being prepared for sale, so such a move is generally frowned upon and avoided. But after convening a group of experts, the National Gallery decided to proceed, attributing the work unequivocally to Leonardo.

Despite the institutional endorsement and a second restoration treatment, the painting was not easy to sell. The Qatari royal family; the Hermitage in St. Petersburg; the Getty Museum; the Museum of Fine Arts, Boston; the Gemäldegalerie in Berlin and the Vatican all passed.

That’s when Yves Bouvier, a self-proclaimed art adviser and the director of several high-end warehouses for art, stepped in. He presented the painting to Dmitry Rybolovlev, a Russian oligarch on the hunt for expensive art and real estate to shield his assets during a divorce. Mr. Rybolovlev agreed to purchase the “Salvator Mundi” for almost $130 million, with Mr. Bouvier stashing it away in one of his warehouses. For years, however, Mr. Bouvier had been reselling art to Mr. Rybolovlev at a substantial markup (in this case, almost $50 million more). By chance, Mr. Rybolovlev learned of Mr. Bouvier’s deception, and several lawsuits are now in progress. In the meantime, Mr. Rybolovlev put the painting back on the market, with Christie’s holding the sale in November 2017.

More than 27,000 people went to see it when the auction house put the painting on display, their responses documented for an odd promotional video: Through a hidden camera, viewers were recorded gazing at the painting. Slack-jawed and moist-eyed, they were held in rapture. Hype or not, the tears were real. Few would have realized how much of Ms. Modestini’s handiwork they were seeing. How could they? The full conservation report is yet to be made public.

Bidding began at $75 million and rocketed to $180 million in about two minutes before reaching a final price of $450 million. The buyer, initially shrouded in mystery, was eventually revealed to be Crown Prince Mohammed bin Salman of Saudi Arabia. For Prince Mohammed, the purchase may have seemed like a way to establish himself as a cultured player on the world stage, but the optics quickly shifted. “In the Gulf States, art is a projection of power,” Mr. Lewis writes, “but it also functions in a new way, as camouflage, to disguise what is really going on.” Almost immediately after the sale, it was announced that the painting would be loaned to the Louvre Abu Dhabi, but it never arrived. “The ‘Salvator Mundi’ has not yet journeyed to Arabia,” we are told. “It has not left Europe since it was sent there after the Christie’s auction.”

After its dramatic rise from obscurity, the painting is once again hidden from view. “It is impossible to imagine a more vivid symbol,” Mr. Lewis writes, “of the dysfunctionality within the ecosystem of art than the fact that the most recently discovered work of art by the most famous artist of all time—never mind its outrageous cost—dare not show its face.” The Louvre has requested it for the museum’s major Leonardo exhibition, opening in October, but is still awaiting an answer.

The story Mr. Lewis tells is about what happens when art becomes an asset class. In one vast Geneva warehouse alone, more than a million of the world’s most precious works, purchased by investors as part of a diversified portfolio, now sit—accruing value for their owners, avoiding taxes, seen by no one. Now there’s something to cry about.
Source: The Wall Street Journal 


Ivan the Terrible Returned to the Ukraine

Ukrainian Mikhail N. Panin's "Secret Departure of Ivan the Terrible before the Oprichnina" was returned in a ceremony at that Ukrainian Embassy. The painting, consigned to the Potomack Company in Alexandria, VA (full disclosure, I work with the Potomack Company)discovered the painting was stolen and notified authorities. The consignor purchased a house in 1987 and the painting conveyed.

CBS news reports on the stolen painting and its return to the people of the Ukraine.
Mikhail N. Panin's "Secret Departure of Ivan the Terrible before the Oprichnina"
A massive 19th century oil painting of Ivan the Terrible, the first czar of Russia, was returned to its rightful owners on Monday, after its disappearance from a Ukrainian museum more than 75 years ago during World War II.

The Ukrainian ambassador to the U.S., Valeriy Chaly, accepted the painting on behalf of the people of Ukraine during a repatriation ceremony at a fine arts auction house outside of Washington, D.C. He called its return a "demonstration of unity and solidarity with the Ukrainian people."

"The damage from the theft of this painting really cannot be quantified," said Jessie Liu, U.S. attorney for the District of Columbia. "There are generations of people who weren't able to see this painting ... We hope that the repatriation of the painting is the first step in remedying that harm."

In 1941, Nazis looted Mikhail N. Panin's "Secret Departure of Ivan the Terrible before the Oprichnina" from the Dnepropetrovsk Art Museum during Germany's occupation of Ukraine. The 64-square-foot painting portrays the Russian czar fleeing the Kremlin on horseback.

Gabby and David Tracy purchased a home in Ridgefield, Connecticut, in which the large painting conveyed with the property in 1987. Unaware of the painting's history, the Tracys enjoyed the painting until 2017, when they decided to downsize and auction the artwork.

As the painting was being prepared for auction, an employee of the auction house, Potomack Company, discovered the artwork's true origins, which were later confirmed in an email sent by the director of the Dnepropetrovsk Art Museum.

"Attention! Painting 'Ivan the Terrible' was in the collection of the Dnepropetrovsk Art Museum until 1941 and was stolen during the Second World War," the email read. "Please stop selling this painting at auction!!! According to the international rules of restitution of stolen works of art, the picture should return to Ukraine."

It's hard to imagine this could have come as a greater surprise to Gabby Tracy, a Holocaust survivor, whose own father died in a concentration camp. She lived in a Jewish ghetto in Budapest until the Soviet liberation. Tracy eventually fled to the U.S. as a refugee with her sister and brother in 1947.

"We're very happy to give it back to the Ukrainian people, and I hope one day we go there and see it hanging in the [Ukrainian] museum," she said via Skype during the repatriation ceremony.

The stolen property was never auctioned. It was seized by the U.S. government under forfeiture law with full cooperation from the Tracys. A subsequent FBI investigation uncovered additional proof of the painting's origins, including black and white images of the art hanging in the Ukrainian museum around 1929.

"Art crime is one of the FBI's lesser known priorities, but it is an important one given the cultural implications," said FBI special agent Timothy Dunham. He added, "I think [Mrs. Tracy] found it very rewarding to be a part of something like this — returning stolen property."
Source: CBS News 


Thrift Shop Find

You dont see these types of finds that often, but everyonce in awhile they show up. The NY Post is reporting on a thrift shop find from Hertfordshire Englad where a Chinese vase was purchased for a little over $1. 

According to the NY Post the vase has the potential to bring nearly $100,000 when it is auctioned at Sworders on Nov 9th.

The NY Post reports
Taking a trip to your local thrift shop probably isn’t going to yield any remarkable discoveries. You’ll probably find a few broken printers, an incomplete set of silverware or two and lots of clothing that smells vaguely like mothballs.

So, when a bargain hunter in Hertfordshire, England, listed a small vase purchased at a local thrift shop on eBay, they couldn’t possibly have expected their £1 ($1.23) investment to turn into £80,000 ($98,600).

The vase, which stands a mere eight inches tall, was picked up for next to nothing, but it got a lot of attention once it appeared on eBay. Art collectors flocked to the listing, prompting the unnamed owner to withdraw it from bidding and have it appraised. Now, it’ll appear in a fine art auction where it is expected to make its seller very, very happy.

The vase is in incredible condition considering its age and it was originally made for an 18th-century Chinese emperor who reigned between 1735 and 1796. Now, centuries later, it somehow found its way to the shelves of a charity shop.

High-end auction house Sworders will now handle the selling of the piece and it’s expected to fetch a minimum of £50,000 ($61,600) and perhaps as much as £80,000 ($98,700) when it goes up for sale on November 8th.

The 8in (19cm) high pear-shaped wall pocket with ruyi handles and a yellow ‘sgraffito’ ground is inscribed with a poem praising incense alongside a yuti mark and two iron-red seal marks reading Qianlong chen han (‘the Qianlong Emperor’s own mark’) and Weijing weiyi (be precise, be undivided).

It’s a major win for the lucky owner and it will surely make a lovely addition to someone’s fancy art collection. You probably won’t have the same luck, but maybe it’s worth a trip to a nearby thrift shop just to be sure.
Source: The NY Post 


Fractional Investing

Fellow appraiser Xiliary Twil sent an interesting article from Wealth Managment on fractional investments in fine art. The article gives some interesting background on the securitization of fine art, how it is selected and then packaged and resold in fractional ownership pieces.

Wealth Management reports
Fractional investing lowers the barriers to entry and democratizes access to investing in fine art.

I recently purchased an interest in a painting by famed American artist Andy Warhol. But don’t expect to see it hanging in my living room anytime soon.

The painting—an oil and silkscreen on canvas, signed and dated in 1979 by Warhol, called 1 Colored Marilyn (Reversal Series), which sold for $1.815 million at its last auction sale in 2017—will remain displayed in a Broome Street gallery in New York City. My interest in the painting is limited to 125 shares at $20 per share. If you want to get technical about it, my $2,500 investment represents 0.125% ownership of the piece.

By making this investment, I have leapt into the future of finance, one in which investors of average means can invest in fine art, a blue-chip corner of the investing world that was previously open only to the super wealthy. With securitization, thousands of investors have an opportunity to diversify their portfolios with an asset class previously closed to them. When the asset sells, shareholders receive a portion of the appreciation.   

Diversification and democratization is what this new asset class offers. The fine art market is largely isolated from the ups and downs of the S&P 500 Index and is less volatile than capital markets. In fine art, collectors recognize a tax-efficient asset with the upside of capital appreciation as part of a diversified portfolio.

Innovative fintech startups such as Masterworks, the partnership that purchased the Warhol, want a broader demographic to get a piece of the fine art action—without the risks and headaches of actually taking possession of the artwork. Owning a multimillion-dollar work of art requires insurance, alarm systems and secure storage. As a fractional art owner, I get many of the benefits—I can still visit the Warhol whenever I want—without most of the expenses.     

Fractional art fintechs apply big data to mine datasets of historical art sales to identify works of art that may be undervalued by the market. Then the asset is divided into securities so that average investors can (within limits) buy shares in a fund that purchases the art, safeguards it, displays it in galleries, loans it to museums and, ultimately, sells it for a profit to a collector or another investor. It’s like Moneyball for the art world, using big data and machine learning to identify artwork undervalued by the art establishment. 

In operation, fintechs select an artwork its algorithms suggest is undervalued by the art world and has the best chances for appreciation. After buying the artwork, the fintech securitizes the art with the SEC’s blessing. This process falls under the new Regulation Crowdfunding rules under Section 4(a)(6) of The Securities Act.

When I indicated an interest in investing, I was asked to schedule a screening interview. Senior Vice President Michael Del Pozzo explained that while anyone, not just accredited investors, may invest in the Masterworks offering, it wants to be certain the investment is suitable. Del Pozzo made sure I understood the risks of the investment. He also explained that on occasion he’s had to decline the money of individuals he felt did not meet the company’s suitability standards.

To some people, treating art as nothing more than a commodity is off-putting. Critics say people should buy paintings if they like looking at them, but not to make money. The Village Voice disparaged this new asset class as “the best way to suck all the joy and humanity out of art.” 

By this view, artworks are primarily aesthetic investments. “I feel a rather strong dislike for the narrow focus on art as an investment,” says Michael Juul Rugaard, partner with Norfico, a Copenhagen-based fintech research firm and an expert on the tokenization technology that enables investments in fractional art. “Art is about so much more than money; reducing it to a question of a good or bad investment is a bit sad.”

But that horse has abandoned the barn a long time ago. The art world has always been about more than aesthetics. The romantic aspects of collecting art have always been associated with an interest in collecting art that the market validates by assigning monetary value to objects.

Aligned Interests

Masterworks is structured to align the interests of the company with the investors. Masterworks does not realize returns until the Warhol is sold. At that point, it collects 20% from each investor’s profits. It also charges a 1.5% annual management fee to cover operating expenses, insurance, distribution costs and regulatory expenses. If Masterworks is presented with a serious offer, it’s required to poll the investors. Majority vote governs whether to sell. 

To be sure, investing in art or coins or stamps is replete with risk, and Masterwork’s SEC offering circular filed in May 2019 doesn’t pull punches. Unlike investing in commodities such as gold, individual artworks are unique, and buyers cannot immediately be found. At best, investors must expect a long lock-in period. With tokenization, it may be possible that shares in these investments may eventually find a secondary market, but no such market exists today. The investment is the definition of illiquid.

That said, digital technology provides an answer to the traditional lack of liquidity. Maecenas is another fintech startup that applies blockchain technology to tokenize and digitally allocate single pieces or portfolios to several co-investors who can trade with other parties through an art exchange. While the owner retains 51% of the artwork’s value, the remaining 49% can be traded, transforming the dynamics of the market and bringing much greater granularity to art investing.

The big problem for investing in fine art, besides the large sums required to participate, is a lack of transparency on trends, values and even the provenance of artworks. Using tokenization, Maecenas is building a market-driven platform that will give investors more detailed insight into transactions and prices. The goal is a secure, open platform that serves as a distributed trust register for tracking the provenance and whereabouts of fine art.

Masterworks only generates taxable income during the tax year in which the artwork is sold and then only if the artwork is sold at a profit. Shareholders will receive a Form K-1. Masterworks issuers are limited liability corporations that elect to be taxed as a partnership. Title to the Warhol is vested in a Cayman Islands subsidiary that is taxed as a corporation. Masterworks believes this structure results in zero entity level taxation. Of course, tax consequences to investors vary with individual circumstances. 

Overestimated Reward, Underestimated Risk 

Research presented at the European Finance Association conference demonstrates two truths: Appreciation of fine art has been significantly overestimated, while the risk, underestimated. The research concludes that the true annual return of art as an asset class from 1972 to 2010 was closer to 6.5%.

The underlying cause of the overestimation is selection bias. The indexes are based on a very limited set of transactions. Returns may even be lower if survivor bias in the data is factored in. Indexes are based on sales of artworks at auction, but pieces that have fallen in value are rarely put on the block. 

The analysis applies to art purchased via a fund, but there is reason to believe its lessons carry across the art world. When the study compared the investment returns and risk of all the styles of art to a portfolio of pure stocks, it concluded that art investments do not substantially improve the risk/return profile of a portfolio diversified among traditional asset classes, such as stocks and bonds.

Providers of art funds suggest that appreciation of fine art outperforms traditional assets, like stocks and bonds. A figure of 10% appreciation per year for fine art is bandied about. But there is reason for skepticism. There is nothing in the art world remotely as transparent as the S&P 500. Assuming a five-year hold, my back-of-the-envelope calculations tell me that the offering will deliver meaningful profits to investors if it beats the S&P 500 by at least a factor of two over the same period. That’s a tall order. 

Is this experiment in fractional art ownership a good investment? Time will tell. As noted, the time horizon for this investment may be up to five years. When a majority of investors accept an offer and the Warhol is sold, I will report on the transaction and how my investment performed. Until then, you are welcome to view my Warhol, or at least the 0.125% of it I own, the next time you are on Broome Street in lower Manhattan. Maybe you’ll see me there.
Source: Wealth Management