People have been buying and selling famous artworks for quite a while now. But until recently, it was still a pipedream for the masses to own blue-chip artwork. Masterworks is here to change that.
In this article, we’re going to review Masterworks.
What is Masterworks?
Masterworks is a platform for alternative investments that offers fractional shares of fine art.
The company makes it reasonably simple for investors to purchase shares, aka fractional ownership pieces of the art rather than full artwork ownership, of modern artwork by well-known artists like Jean-Michel Basquiat and Banksy because there is no minimum investment requirement. The fractionalization of the artwork makes the shares in that artwork affordable to almost anyone.
Masterworks has excellent research and assistance tools and a user-friendly interface. It is an appealing choice if you want to diversify your portfolio by making some investments in artwork without spending a fortune.
Who owns Masterworks?
Scott Lynn is the Founder and CEO of Masterworks. Aided by a team of some of the best people in the industry, he has built the company into quite an exciting one in a short time.
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What products does Masterworks offer?
The main product that Masterworks offers is fractional shares of artworks.
While we discuss fractional share investing later in the article, here’s an example that should help you understand it better.
Let’s say you want to invest in Apple. But it’s almost $160 per share. For the sake of this example, let’s say you only have $10 to invest. Since that’s way lower than $160, you wouldn’t be able to buy a share of Apple.
But if the brokerage decides to split the shares into, say 20 parts, each new share would cost $8. That’s way within your budget so you would happily buy the new share—the fractional share!
This makes you a fractional owner of the Apple share.
You may choose to keep your shares and wait until the platform sells the artwork in 3-10 years. If you choose to go for this option, you would get your pro rata proceeds—after the platform would deduct its fees from that amount.
Or you can sell your shares in the secondary market (which we’ll discuss later).
How does Masterworks work?
Masterworks purchases modern art via crowdsourcing. The company’s research department assesses up-and-coming modern artists and buys pieces it believes have a strong chance of appreciating in value.
After buying a piece of contemporary art, the company submits an SEC filing in order to offer investors fractional shares in the artwork through their platform.
Each artwork must be registered with the SEC in order for Masterworks to receive eligible investments from accredited and retail investors.
Masterworks holds the physical artwork until it’s sold.
They may choose to display it in the members-only gallery they have in New York City.
Masterworks offers shares to its members for a period of 90 days after the SEC authorizes a file for a specific piece of art. You can choose how many shares you want to purchase at the listed price and there’s no minimum investment requirement.
The company typically charges $20 for fractional shares.
Until they come upon a suitable opportunity to sell them on the contemporary art market to collectors, Masterworks retains works of art for three to ten years.
The company distributes all revenues from the sale of artwork to investors who own shares in it, prorated according to the number of shares held, after deducting its own part of the profits.
If you’re inclined to sell your fractional shares before the company sells an artwork, you can do so on the secondary market on the website.
That said, there is no guarantee that there will be purchasers for your shares if you choose to sell them. You can purchase and sell shares to and from other Masterworks users.
Prices on the secondary market are only influenced by demand from other Masterworks clients.
Note that only Americans with bank accounts with U.S.-based banks are permitted to trade on the Masterworks secondary market.
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What is Fractional Share Investing?
An equity stock that is less than one complete share is said to be a fractional share. Stock splits, which may not result in an even number of shares, frequently produce fractional shares.
Investing in such shares is called Fractional Share Investing. It is a type of alternative investment that has been trending for quite a while now with platforms like Robinhood actively promoting it.
Masterworks applies the concept with fine art investments and allows users to invest in artworks without having to shell out huge amounts of money.
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What is the “secondary market” on Masterworks?
The secondary market on the Masterworks platform is a marketplace for users to trade fractional shares with each other, thus adding more short-term liquidity.
If you sell your shares in the secondary market, you’re no longer eligible to reap the benefits of those shares once they mature.
And if you’re buying shares from someone, you’re the one who would be rewarded once the artwork is finally sold.
Is Masterworks legit?
Masterworks claims that it has an ROI of 15%+ across all its investment opportunities. It also claims nearly a 30% net annualized return with over 500k registered members.
Given that investing in fine art is quite risky, it is possible to see extraordinary returns when investing alongside the professionals at masterworks. That said, don’t expect a 30% yearly return. That stat has us asking, if it was truly that good, wouldn’t everyone do it?
Investment Platform: UI and Usability
Masterworks has a visually appealing website (no surprise there!) with an easy-to-use interface.
There are two points of interest on the website: the Price Database and the Secondary Market.
If you log in and go to the Price Database, you’d be able to search amongst more than 300,000 artists for your favorite artist. Let’s say you settle with Andy Warhol. The page that shows up would have everything you need to know before investing in his artwork. You would see the purchase price, sale price, and gross appreciation of each artwork.
From a UI/UX perspective, it’s pretty good to have everything right in front of you without clutter.
And then there’s the Secondary Market. As soon as you land on this page, you’ll be met with small graphs showing trending artworks. You can choose to hide this section completely or hit the Settings button to select the artworks you wish to know about.
This provides a clear view of the paintings you’re interested in.
Moving on, there’s the actual market with buy orders and sell orders. You can choose to trade in fractional shares out there pretty easily with just a few clicks.
Overall, the entire platform has an intuitive design that helps guide even the most novice investors to trade in their favorite artworks.
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Masterworks minimum investment
There’s no minimum investment on Masterworks—with a catch. You see, the fractional shares are sold at a minimum value. So if you’re on the platform to buy just one fractional share of your favorite Banksy artwork, you would still have to spend $20.
While there’s no minimum investment, you’re capped at 10% of the shares of one individual piece. As an individual investor, you can’t hold more than that amount in your account.
Masterworks levies two kinds of fees.
First, they take 1.5% of the account’s total value as a yearly management fee. They steadily reduce the number of shares you hold by deducting this fee from equity each year. Fortunately or unfortunately, there isn’t a cash payment option for the fee.
Second, they keep 20% of the proceeds if an artwork is sold on the open market for a profit after three to ten years. These payments are used by Masterworks to cover additional expenses associated with managing art, such as storage, appraisals, insurance, and SEC regulatory fees.
Transaction fees are not levied by Masterworks. So you can buy or sell shares as much as you want on the secondary market without having to worry about the fees.
What is the Masterworks Phone Interview?
Before you’re able to join Masterworks, you would have to get on a phone interview with a specialist from the company.
This might be a bit annoying if you’re looking for an all-online investment experience. But it is what it is.
It is worth noting here that it is not aplace to reject certain applications.
Instead, it is an opportunity for Masterworks to know you better, answer any questions you might have, and recommend the right investment to you.
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Masterworks Art Investment Education
Masterworks tries to educate investors about the artworks as well as the process of investing in art.
The platform has quite an impressive array of educational articles that can be found in the Learn section. These articles cover a lot of topics like recent auction sales, how-tos about art investment, and contemporary art amongst many others.
But that isn’t all.
In addition to that, every artist’s page has quite a lot of information about the artist along with how their artworks have performed in the past.
Couple the learnings from the two sections and you would know everything you need to know before investing in fine art.
Masterworks pros and cons
- There is no minimum investment
- You can buy and sell shares on the secondary market (thus improving liquidity)
- The platform allows investing in fractional shares
- You can diversify your portfolio with it
- The platform is well-designed
- Even non-accredited investors can participate
- The potential returns are high
- Focus on education helps investors make a learned choice
- The platform allows in-depth art investment research
- Fine art investments have huge risks associated with them
- Taxes on fine art are on the higher side
- High profit-sharing and annual fees
- The platform doesn’t have a mobile app
- Investments made on the platform have pretty long holding periods
- The phone interview might be irksome for some
- You have to design your own art investment portfolio
- Masterworks has a limited track record since it hasn’t had many exits
- The secondary market is only available to US citizens with US bank accounts
Masterworks review conclusion
Since the platform offers fractional shares of artworks, Masterworks attracts quite a lot of investors. But the high profit-sharing and annual fees it charges and the phone interview might deter some investors.
With this article, we’ve reviewed Masterworks. Happy investing!