In recent art world news, investing in fine art has been typically limited to the very affluent, but startup Masterworks is seeking to bring about some change to the art market through the use of blockchain technology in which everyone can invest in fine art.  Masterworks and its affiliated entities have developed an inaugural fine art platform that will allow the general public to invest in fine works of art.

The following is a brief summary of how the fine art platform works.  “Masterworks purchases artwork they deem to be undervalued, and then offers qualified investors the opportunity to purchase shares in a special purpose entity (limited liability company) that owns the specific work of art.  Share ownership is maintained by a transfer agent and recorded on the Ethereum blockchain.  The Ethereum blockchain is an open source, distributed computing protocol which enables users to record transactions securely and immutably.”

“Once the Securities Exchange Commission qualifies the exempt offering, the shares will be issued pursuant to a Regulation A+ (of Title IV of the JOBS Act) offering, which allows private companies to raise up to $50 million and enables the general public as well as accredited investors to participate.”  According to the company, this represents the first tokenized security offered under Regulation A of the JOBS Act.

The first painting set to be securitized is Andy Warhol’s “1 Colored Marilyn (Reversal Series),” which originates from a series of oil and silkscreen paintings completed by the late artist between 1979-1986.  Masterworks will offer 99,825 shares priced at $20 for each share.  The second painting to be securitized is Claude Monet’s “Coup de Vent” (1881).  Both paintings are stored in a facility in Delaware, but are likely to be relocated to a gallery in New York in the near future.

The startup paid $1.8 million for the Warhol and $6.3 million for the Monet.  The artwork will be offered on the platform at an aggregate amount that is 10% more than what Masterworks paid.  The added 10% is said to cover various costs, including administrative, storage and other costs.  After the offering, Masterworks may decide to sell the Warhol to a purchaser for value.  Under such circumstances, all of the shareholders would be paid their fractional amount of 100% of the proceeds, less a fee of 20% of the profits, which is directed to Masterworks.

Masterworks intends to purchase additional artwork for sale on its platform in the near future.  In view of the newly developed fine art platform, “[n]o longer will art owners need to sell a whole piece of artwork to a single buyer.”  Instead, the company will be able to sell fractionalized shares of artwork to a number of investors throughout the world.  The fine art platform will provide art owners the added benefit of “being able to retain possession of their art, even as they sell off parts of their collections (or even part of a single piece of artwork) to groups of individuals.”  In addition, institutional investors, such as art museums and the like, “will likely also take notice and invest in tokenized art securities to diversify their portfolios.”

This innovative development of the use of tokenized art securities in the art market is set to shift the paradigm for investing in fine art. Tokenized art securities provide a way for a vast new group of investors to actively participate in the art market that is now open to all.

In recent art world news, Sotheby’s reported a $57.3 million net income in the second quarter of this year in a recent earnings call earlier this week.  This figure represents a decrease of $19.6 million or about 26% in comparison to the same period last year when the auction house reported that it had $76.9 million in net income.

Sotheby’s attributed the decline in part to a change in its auction calendar as some sales in Hong Kong occurred in the first quarter instead of the second quarter.  The auction house also attributed the decline to a decrease in its auction commission margin.

While consolidated sales increased 22 percent to $3.5 billion, which represents some of the highest amounts in Sotheby’s history, there was a decline in its auction commission margin.  This was due to a competitive environment for high-value lots that resulted in “a higher level of auction commissions shared with consignors” under such circumstances.

Notwithstanding the above, sales in Asia remained strong as aggregate auction sales for the first half of the year totaled $488 million, representing a 15 percent increase in 2018.

Although the tone of the earnings call was downcast and the financial results were lower than expected, the auction house’s management and board are “excited as ever about the company’s prospects going forward.”

It is certainly nice to see the earnings call end on an optimistic note in view of the disappointing second quarter financial results.

 

 

Richard Polsky writes:

The ramifications from last May’s sale at Sotheby’s of a Jean-Michel Basquiat painting, for $110 million, continue to reverberate. It made the buyer, Yusaku Maezawa, an art world household name. It led to the current “One Basquiat” exhibition, of the now-iconic canvas, at the Brooklyn Museum. It also provoked a multitude of Basquiat owners into believing their paintings were worth far more than they actually were. And, finally, the sale unleashed a slew of fake Basquiats onto the market.

It reminds me of what occurred back in 1990, when the famous Tyrannosaurus rex skeleton, known as “Sue,” was discovered. Those who remember the story will recall how the most complete and best-preserved specimen of its type was found on the South Dakota ranch of Maurice Williams. After the dinosaur was unearthed, Williams unwittingly sold it for $5,000. But because he was a Native American, whose land was held in a government trust, he was able to take the buyer to court and have the deal rescinded. Once Williams got his mega-fossil back, he ultimately consigned it to Sotheby’s, who sold it to the Field Museum of Natural History in Chicago for $8.3 million.

After the sale went down, I spoke to Henry Galiano, a well-regarded paleontologist and fossil dealer. As he put it, “You wouldn’t believe all the calls I’m getting from ranchers claiming they have dinosaur bones on their property. Usually, they turn out to be cow bones. People think all you have to do is find a skeleton, hitch a chain to it and yank it out of the ground, and you have a million dollars! They’re all a bunch of ‘dinosaur dreamers.”

The equivalent is currently happening in the art market; a plethora of “Basquiat dreamers” have emerged. Since last May’s sale of one of the artist’s two greatest “Skull” pictures (the other is at The Broad), facsimiles of Basquiats continue to show up in our email. They’re sent by owners seeking guidance on whether they’re genuine. Sometimes, these digital images are outright laughable. More often than not, they bear a passing resemblance to a real Basquiat, but fail to capture the distinct personality of the painter. What all of these works have in common is they always include a depiction of a gold crown. It’s as if the creator seized upon the painter’s well-known icon and assumed by placing it somewhere within the composition, an alchemical process would occur and — voila! — you’d have a genuine Basquiat.

Just as a forger includes a crown, a seller often includes a story about how the work was acquired directly from Basquiat. Hoping to bring street cred to his pitch, he often refers to it as a cash-and-carry deal, so Basquiat could buy drugs — hence there was no paperwork. The potential buyer often nods his head, wanting to believe what he’s just heard, because he too knows Basquiat had a heroin problem. It makes him feel like an insider. After all, this is the art market, where one has to be an insider to get the good deals.

Regardless of all the scams out there, it’s important to point out that genuine Basquiats do emerge from time to time. Last year, through the organization POBA, we were asked to authenticate a large drawing which belonged to someone from Basquiat’s inner circle. Everything checked out and another important drawing took its place within Basquiat’s canon. It’s also worth mentioning that there are numerous authentic Basquiats which were never officially authenticated by the Basquiat estate. Many of these are documented in books and gallery exhibition catalogs. But a surprising number are not illustrated anywhere — yet are right as rain.

Inevitably, all of the hype surrounding the $110 Million Basquiat will dissipate. Assuming the art market continues on its upward trajectory, eventually another major Basquiat painting will break the record held by Mr. Maezawa. But until that happens, we will remain in a period where a steady flow of fake Basquiats keep popping up like varmints in a game of Whack-a-Mole. And just like the plastic moles, which aren’t real, most of these paintings won’t be real either.


Richard Polsky has accumulated forty years of expertise in the contemporary art world as a gallery owner, author of multiple books on the art market, lecturer, and provider of litigation support. Richard Polsky Art Authentication can be viewed at www.RichardPolskyart.com.

In recent art world news, following strong sales in 2017, the international auction houses are said to be “feeling bullish” once again.  Last Friday, Christie’s announced that it had sold about £5.1 billion or $7.3 billion of art and collectibles worldwide (up 26 percent from 2016) in 2017.  Phillips saw a similar improvement over 2016 sales with auction and private sales of $708.8 million (up 25 percent from 2016) in 2017.  As both auction houses are privately held, neither one disclosed a profit or loss.  Publicly traded Sotheby’s will disclose its financial results for 2017 at month’s end.

The $450.3 million fetched in November for Leonardo da Vinci’s “Salvator Mundi” helped propel Christie’s auction sales by 38 percent along with 65 lots that sold for more than £10 million.  Many of the auction house’s lots were supported by financial guarantees.  The strong sales signify that the art market is surging.

Auction houses among the likes of Christie’s, Sotheby’s and Phillips have high overheads with business models that haven’t changed much since the 18th-century.  A primary challenge is that they keep up with the upward trajectory growth of global wealth and earn money from it.  Each auction house has its own unique strategy in doing so.

In particular, Phillips’ key selling category is 20th-century and contemporary art that raised $421.8 million at auction last year (or 60 percent of the annual total).  Phillips complements its art auctions with sales of 20th– and 21st-century design, photography and prints, and generates further revenue by sales of watches and jewelry.  Phillips has held just two online-only auctions in collaboration with Artsy last year.

In contrast, Christie’s attracts new buyers through its own well-established program of online-only auctions.  Last year, Christie’s held 85 digital sales of luxury goods and lower-value collectibles fetching £55.9 million or about $80 million.  Although this accounted for only one percent of annual total sales, it represented 37 percent of the auction house’s new buyers.

Last December, Sotheby’s announced that it had sold $4.7 billion of art and collectibles at auction in 2017 (up 13.1 percent from 2016).  While this was below Christie’s auction sales of $6.6 billion, Sotheby’s has diversified into other areas, including financial services, art advice and managing artist estates, and image recognition technology.  Sotheby’s upcoming financial results for 2017 will disclose the amount of its revenue derived from such 21st-century business models.

But for the moment, the 18th-century model of live auctions continues to do nicely [for the auction houses], tracking global economic growth.”

It remains to be seen as to how technology is going to change things, but it would seem that it could streamline and add efficiency to the art buying process and attract a greater reach of new buyers, particularly the future generation of art buyers and collectors.

 

In recent art world news, Sotheby’s posted a $23.5 million net loss during the traditionally slow third quarter, up 57 percent from last year, announced by the auction house in its quarterly earnings call last Friday.  The “net loss of $0.45 per share beat expectations that foresaw a $0.67 per share drop, and the revenue total of $171 million was ahead of the anticipated figure of $110.9 million.”

The increase was attributed in part to the inclusion of Hong Kong fall sales in the financial period along with an atypical $7.4 million tax benefit.  Sotheby’s had built a reserve to defend against a potential tax liability and has since reversed the reserve with the one-time liability now past the statute of limitations to challenge.  In effect, this action gave the auction house a one-time cash infusion during this traditionally slow period in the summer months.

Sotheby’s executives were cautiously optimistic in addressing the quarter noting that “both sales in Asia and sales of contemporary art are up from a year ago—at this point last year, both sectors were trending down from the year prior.”  The auction house acknowledged that the while it benefited from the change in timing of the Hong Kong sales in the third quarter, the fourth quarter will be “negatively affected” with the exclusion of the Hong Kong sales.

The third quarter is typically the slowest period of the year as it accounted for less than five percent of the auction house’s total sales last year.  Sotheby’s total consolidated sales, which include auctions, private sales and inventory sales, are up 13 percent nine months into this year.

 

In recent art news, a vibrant painting of a skull, “Untitled” (1982), by the late artist Jean-Michel Basquiat sold for $110.5 million at Sotheby’s last Thursday evening and earned the distinction of becoming the sixth most expensive work ever sold at auction.  With last week’s sale, only ten other works have surpassed the $100 million mark.

The buyer of the Basquiat painting was Japanese billionaire Yusaku Maezawa who identified himself as the successful bidder through a recent post on his social media account.  In his post, Maezawa said “I am happy to announce that I just won this masterpiece” and added “[w]hen I first encountered this painting, I was struck with so much excitement and gratitude for my love of art.  I want to share that experience with as many people as possible.”

Incidentally, it was Maezawa who set the previous auction high for Basquiat in which he paid $57.3 million for the late artist’s 1982 painting of a horned devil at Christie’s last year.

This latest Basquiat acquisition by Maezawa is intended for a planned museum in his hometown of Chiba, Japan.  Maezawa said in a statement that “[b]ut before then I wish to loan this piece—which has been unseen by the public for more than 30 years—to institutions and exhibitions around the world.”

It remains to be seen as to whether one art collector makes a market as it will take another significant Basquiat work to test the sustainability of this $100 million level.

It was reported that Basquiat’s “Untitled” painting set a number of records last Thursday night at Sotheby’s postwar and contemporary auction of which include “for a work by any American artist, for a work by an African-American artist[,] and as the first work created since 1980 to make over $100 million.”

Last year, according to Artprice, Basquiat became the highest-grossing American artist at auction, generating over $170 million in sales from 80 works, and the artist’s auction high has increased an impressive tenfold in the last 15 years.

Sotheby’s auction last week fetched a total of $319 million against a low estimate of $211 million with 96 percent of the 50 lots sold in which 60 percent of the lots reached prices above their estimates.  Contributing to its success, Sotheby’s had a number of works in the “middle range around $5 million to $10 million” that were attractive to the market.

 

 

U.S. Trust, Bank of America Private Wealth Management, will host a panel discussion at the JAMES A. MICHENER ART MUSEUM in Doylestown, PA on “Effectively Managing A Fine Art Collection” on May 17, 2017 from 5:30 P.M. to 7:30 P.M.

The panel will be hosted by ERIC J. ABEL, Private Client Advisor at U.S. Trust and feature EVAN BEARD, National Art Services Executive, U.S. Trust; RAMSAY H. SLUGG, National Wealth Planning Strategist, U.S. Trust; and CINDY CHARLESTON-ROSENBERG, Founder and President, Art Appraisal Firm, LLC. The panelists will provide updates on trends in the art industry, the importance of appraisals and proper planning for collections, and how to address issues related to conservation and restoration of fine art.

The event is by invitation only. Interested parties should contact Eric Abel at 610-567-4735 or at eric.abel@ustrust.com.

The James A. Michener Art Museum is located at 138 South Pine Street, Doylestown, PA 18901. This event is a great opportunity to learn about art connoisseurship while enjoying the Michener Art Museum and its wonderful collection of Bucks County gems.

In an art market that has been defined by the uncertainty of world events and declining inventory, it was reported earlier today that Sotheby’s announced fourth quarter earnings of $65.5 million, which is an increase over that same period in the prior year.  The auction house had a loss of $11.2 million in the fourth quarter of 2015.  Sotheby’s adjusted net income for 2016 was $99.6 million, which is down from $143.1 million in 2015.

Sotheby’s has been working to counter this softening in the art market by diversifying its business.  In particular, Sotheby’s recently acquired art authentication firm, Orion Analytical, in addition to acquiring Amy Cappellazzo’s art advisory business last year.  The auction house further acquired Moses Art Indices, which monitor the auction business, and hired Christy MacLear, the chief executive officer of the Robert Rauschenberg Foundation, in an effort to expand its advisory services for both living artists and artists’ estates and foundations.

Further, although there is a widespread reluctance on the part of auction houses to give away profits through guarantees, Sotheby’s president and chief executive officer, Tad Smith, indicated earlier today that the auction house would use such guarantees when necessary.  With the expertise of Sotheby’s team, Mr. Smith affirmed that “we can confidently offer a guarantee to the seller and hedge it on the other side.  Used prudently, guarantees are good for consignors, collectors, the market overall, and investors.”

It will be interesting to see whether the other auction houses will follow suit in using such guarantees in future art auction sales this year.

Support of living artists can be rare.

Everyone knows the cliché “starving artist.”

However, things are about to change across the pond.  Last week, London’s mayor, Sadiq Khan, announced a new program designed to fund artist’s studio space through the financing of a special trust.  The trust known as the Creative Land Trust has been established through public and private dollars to keep artistic talent in the city of London and to avoid artist flight due to astronomical housing costs.

Somerset House Studio, a mixed used historic building along the Strand, is the first to reap the rewards.

This is an encouraging step in ensuring that there is continued investment in the arts. Large American cities like Philadelphia, New York, and San Francisco among others should take notice and strive to make similar investments.

Forbes recently published an informative online piece on a new IRS Revenue Procedure that makes the use of Charitable Remainder Trusts (CRTs) as a means for tax deferral more achievable for art and collectibles.  CRTs are generally used by those who are charitably minded and wish to sell a highly appreciated asset without having to pay a significant capital gains tax bill.

If the appreciated art is sold unconditionally by an art collector, the art collector, of course, would be responsible for income tax on the gain in the year of the sale.  However, if the appreciated art is sold by a CRT, which is typically exempt from state and federal income taxes, the gain is taxed over a period of time as distributions are made from the CRT.   In the meantime, the complete amount of sale proceeds unreduced by taxes can be reinvested by the CRT.  Moreover, in the year the art is sold by the CRT, the art collector is eligible to take a charitable deduction on his or her individual tax return in which such deduction is based on the remainder value of the CRT that is projected (based on specific IRS formulas) to be given to charity.

So exactly how does a collectibles CRT work?  Generally, art is transferred to the CRT by a collector and that art is sold by the trustee of the CRT who reinvests the proceeds in a portfolio of stocks and bonds.  As discussed above, the transfer of art to the CRT and the subsequent sale of the art will not result in a current capital gains tax bill for either the art collector or the CRT.

The CRT then makes a series of annual payments to a non-charitable beneficiary, usually the art collector who created the trust (or a family member) for his or her life or for a term of years.  The annual payments to the art collector or family member will be made from the CRT’s portfolio of assets, and the amount will vary depending on the structure of the CRT.”

This new change by the IRS is considered to have come at an “opportune time” with the Federal Reserve expected to increase interest rates later in the year as CRTs are most effective in higher interest environments.  In the meantime, art collectors may wish to consider this new IRS Revenue Procedure as we wait to see what happens with federal interest rates in the months ahead.