Let's Create an Art Fund!

Our first simulation and a breakdown of two real-world art funds

Nov 17, 2022

SIMULATION #1: LET’S CREATE AN ART FUND!

This newsletter will be divided into two parts: 1) instructions for our first simulation and 2) a look at two real art funds, Masterworks and Particle. I am structuring it this way because I don’t want to bury the simulation at the bottom; the simulations and case studies are the heart of this project, and I hope you can participate! There has been a question about who is eligible to play. While I am an MFA student at PNCA, this project is open to both students and nonstudents, and the project as a whole is geared toward people who are not in the art world. However, US residents only please.

What’s an art fund?

An art fund is a group of people who come together to buy art as joint owners. The purpose of doing so is usually to flip it for a profit (the Masterworks model), but there are companies with other motives, like creating a traveling/metaverse museum curated by “the people” like Particle. (That’s what they say; I have my doubts.)

What will this simulation look like?

I have created this lovely 20.75” x 15” screenprint!

Art funds LOVE Andy Warhol and Yayoi Kusama because their work sells like gangbusters, so I have created this mashup entitled Andy Kusama’s Polka-Dot Pumpkin Surprise (there is not really a surprise). You will be given the opportunity to buy shares in this print (each share is $1 of real money) and then vote on whether we should try to sell the print at auction (eBay) and try to make a profit or divide the print up with each person receiving their proportional section in the mail. If you participate, you will also be featured as part of a collector’s corner feature on my Instagram (if you want) and receive a small thank-you gift.

Note: I have five similarish versions of this print. Two are crappy, one is an artist proof for my records, one is for the project and one will be overprinted with the individual sections marked off and the owner names in case I need something to hang for my MFA thesis show. The last two prints will each be numbered 1/1.

HOW TO PARTICIPATE IN THE SIMULATION

Step 1) Fill out this google form! THE DEADLINE FOR FILLING OUT THE GOOGLE FORM IS NOVEMBER 24, 2022 AND ME GETTING THE MONEY IS DECEMBER 1, 2022. The form will ask for your name, email address, mailing address, how many shares you’d like, and if you want to attempt to sell the print or have it cut up with the parts going to the shareholders. (That’s you.) Your email and mailing address will only be used for correspondence regarding this project, and you will receive a small screenprint (haven’t made it yet, so I don’t know what it looks like) for participating. Unfortunately, this simulation is only open to US residents.

Step 2) I will email you and we will talk about payment options. Your vote will not count until I get the money via Paypal, Venmo, or cash, and I will ask you to pay for any associated fees with your payment method. One share is one dollar. You are allowed to buy as many shares as you want, but don’t be silly with it. If you want one share, that’s great! If you want 25 shares, that’s silly! I don’t want to put a cap on things, but this is meant to be a fun, low-stakes project. Any money I make will go towards defraying postage costs. NO REFUNDS!

Step 3) We will also talk about the info I will need if you want to be featured in a Collector’s Corner post on my Instagram. What is that? Thank you for asking. One of the things I’ve noticed while doing research for this project is that auction houses and art fairs have videos on Youtube about “important” collectors. What better way to make collectors feel like a crucial part of the art ecosystem? I mean they are, but it feels like it's just a way to flatter these folks into buying more art. So, if you choose to participate in the Collectors Corner, I will create an Instagram post about you. You can provide a picture of yourself, something in your collection, or you can hype a cause you are into. I reserve the right to reject your proposal for any reason, but probably won’t as long as I don’t find it offensive.

Step 4) If folks vote to divvy up the print, I will calculate everyone’s share, cut it up, and send you your section. There are no guarantees on what this piece will look like; it very much depends on how many shares are sold. Your proportion will be equal to your share divided by all shares sold. One thing to note, while your share of the print is proportional, your vote is not. One person, one vote. It seemed more fun this way.

Step 5) If folks vote to sell the print, I will calculate all the fees (auction fees, payment fees, etc.) involved and then list it on eBay with a reserve price taking that all into account. If the piece sells, then I will send you your portion via Paypal. If not, you will just get your portion of the print. In order for this to work, you will need to help promote this on social media, so it will require a bit of effort on your part. Please have realistic expectations. You might make a dollar or less in profits. This is a simulation, not an actual investment opportunity. DEAR SECURITIES AND EXCHANGE COMMISSION, PLEASE NOTE THIS IS ONLY A SIMULATION FOR EDUCATIONAL PURPOSES. If the piece sells, I will also send you a breakdown of all the costs, etc. (There are ALWAYS fees with art funds.)

Step 6) You will get something in the mail. Either just your thank you gift, or the gift and your portion of the print.

If you have any questions, please put them in the comments on substack! I am sure other people will have the same one! Or you can also just respond to this email.

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LET’S TALK ABOUT ART FUNDS:

Art funds are not a new invention, but they seem to have taken off during the pandemic. This feels like the pure financialization of art: people come together to buy a work, sit on it for a bit, and then attempt to sell it at a profit. The shareholders will most likely never see the art in question, and to be honest, enjoying the art is beside the point. Here are two art funds that I find particularly interesting: Masterworks and Particle.

Masterworks: Here is how it works. Masterworks does the research, buys the artwork, and then registers it with the Securities and Exchange Commission as an asset, offering shares like an IPO. They hold the artwork for 3 - 5 years and then sell it. (Hopefully.) Shareholders will receive their proportion of the sale minus fees. If they cannot wait, they can attempt to sell their shares on the Masterworks secondary market, but only to other Masterworks shareholders, and there is no guarantee that anyone will want them. There is no guarantee anyone will want to buy the artwork either, but don’t tell Masterworks that.

I see a lot of potential problems with this. Masterworks is 100% not interested in appealing to art collectors; they are after the traditional investor. (There is a very good podcast about fractional art investing on the Arnet podcast The Art Angle. Katya Kazakina has done some great reporting on Masterworks and other art funds. I am linking below.) But art does not work the same as other investments which is why it does not go up and down with the stock market. How and when blue-chip works go up for sale is very tightly controlled. How many other pieces by the same artist are up for sale? Are there buyers interested in this particular piece? What else is available by other artists? Even blue-chip artists have their ups and downs. I wrote about Christopher Wool in the last newsletter. His market is on a bit of a downswing, and there is no guarantee that the owner of Apocalypse Now would make a profit if they tried to sell now. The Masterworks website makes it appear as if blue-chip art values just go up and up, and that is far from the truth. Also, because they are buying art from very established, famous artists, they are kind of buying at the top of the market. They want to buy high and sell high. (You’ve heard of buy low, sell high, right? This is not that.)

So this is a potentially risky bet for investors, but not Masterworks for two very important reasons. They are being given VERY good terms from the auction houses (per Kazakina), most likely because they buy a lot of stuff. If you or I were to buy something at auction, we would have to pay immediately, but Masterworks does not. They have time to register and sell off shares before they have to pay a dime. As long as they have buyers for the shares, they can acquire art at little risk to their own bottom line. And as long as they have buyers, they will charge fees, which are pretty high. As soon as a work sells, they immediately take 20% before paying any investors, and they charge an annual 1.5% fee, which is, according to David Rodeck at Forbes.com (linked below) “based on the total value of your account. They deduct this charge in equity each year, gradually reducing the number of shares you own. You do not have the option to pay the fee in cash.” There are also auction house fees etc. Masterworks may be incentivized to make this whole thing work, but they will be fine if it doesn’t.

Particle: While Masterworks is a pretty straightforward attempt to treat art like a generic financial asset, Particle is much weirder in its approach. Started by former Christie’s co-chairman Loïc Gouzer - we will be hearing more about him in a future newsletter - and four other co-founders, the goal of Particle is to bring masterpiece art ownership to the masses via NFTs. (I am not going to go into a detailed explanation of NFTs right now, but I probably will at some point. I find it all pretty annoying and am putting it off as long as I can.) As far as I can tell from their website, this is how it works. Particle buys a “masterpiece.” They digitize this work and divide it into a grid (100 x 100 in the case of their first purchase by Banksy.) You can buy an NFT of one of those squares in the grid, and that square is called a particle.

BUT WHAT EXACTLY IS AN NFT? In the absolutely simplest of terms: you have a digital piece of art and the NFT is another digital thing that points at that piece of art and says you own it.

Particle then sells off 90% of the NFTs to folks who want to own a part of that painting, and the physical artwork is given to the Particle foundation - a non-profit trust - which will care for and display the work in real-world and metaverse situations. According to their website, they have purchased two pieces of art so far, Love is in the Air by Banksy and Banksy’s a Ghost by Trevor Andrews. The goal stated on their website is “to acquire and tokenize the world’s greatest masterpieces and build one of the best collections out there.” But why would anyone want to do that? Well, Particle seems to believe that we are all hankering to own a fraction of a masterpiece and democratically control the creation and direction of a fancy art collection. Maybe?

Buuuuuuuuuuuut, these dudes don’t just come from the art world; they have backgrounds in finance, blockchain technology, venture capital, and Uber. Generally speaking, these kinds of folks start companies to make money. So where is the profit here? As long as the company sells the particles for more than they paid for the underlying artwork, they’ll be fine. What about the particle buyers when they lose interest in owning a fraction of a painting? A key aspect of this setup is that the particles are tradeable on crypto markets. It’s all taking place with Avalanche which is a cryptocurrency that hasn’t completely tanked yet. And if you can trade, you can make money, THEORETICALLY.

I’ll be honest, this seems dumb to me for so many reasons. First of all, this is solving a problem no one has. Or maybe one that only a few tech bros (I use that term gender nonspecifically) have because they need control over the world’s masterpieces to feel fulfilled. Secondly, the underlying asset, the artwork, cannot be sold according to the bylaws of the foundation, so no profit can be realized there. (I have not read the bylaws, it is entirely possible that there are exceptions.) Thirdly, there are probably some fees involved somewhere and somebody (Particle?) is capturing that. So basically, the main money to be made here for the particle owners is from trading the particles themselves, which is entirely dependent on the strength of the crypto markets. I am writing this right after the collapse of FTX, so we’ll see. I am skeptical this can succeed over time, but as long as the original particle sales net more money than the company paid for the underlying art, I guess it doesn’t have to. Particle can make money without worrying too much if the owners of the particles do because their mandate is democratizing masterpiece ownership. But is it really? I think you know what I think.

The PNW Conceptual Art Center (a conceptual art project)

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