Masterworks lets investors buy art shares from Picasso, Monet

Scott Lynn, Masterworks CEO joins the Yahoo Finance Live panel to discuss his company being the first platform for buying and selling shares representing an investment in iconic artworks.

Video transcript

- Well, if you've ever wanted to invest in art, now is your chance. Masterworks is the first platform where you can buy and sell shares that represent an investment in iconic pieces of art. So let's bring in Scott Lynn, he's the CEO of Masterworks. So, Scott, let's just start with how this works exactly. How can someone essentially buy a share of a piece of art?

SCOTT LYNN: Sure. So if you take take a step back and just look at the size of the art market overall and how it's performed over the past 25 years, contemporary art has appreciated at 14% a year, which basically is beating-- beating most other asset classes. The problem has been the only way to allocate to it is if you have millions of dollars to buy a painting. So Masterworks was the first company to go out, purchase a painting, securitize it with the SEC as a public offering, and then sell shares in that painting. So that's-- that's the very simple process that we use to take these-- these great works of art and make them into investment vehicles.

- And we chatted last September, I want to say, around kind of this concept and what you've seen in terms of the growth. I'm curious how big it's exploded now, given also that we've seen the NFT space and digital also take off. But this is very different from that, seeing as it's an actual physical painting and one that probably has a little bit of a longer track record, given how new NFTs are. What are you seeing in terms of the people who might be interested in Masterworks versus maybe the people who are more interested in the NFT and digital art space?

SCOTT LYNN: Yeah, I mean, we-- you know, I would describe our investors as much more traditional, much more data-driven. I mean, I think the NFT space is interesting. To us, it still feels very speculative. And I think we've seen that with a lot of NFT prices that have come up and sort of quickly-- quickly fallen.

But, you know, if you look at the art market overall, it's one of the oldest asset classes there is. I like to tell people that Sotheby's is 275 years old. Christie's is 250 years old. So this is literally an asset class that's been-- been around for centuries.

- So how long, you know, do you guys hold the artwork for before it perhaps gets sold and investors can really see that return on their investment? And do you guys have any kind of target return rates that you perhaps have for some of these pieces of art that you are purchasing and then selling shares of?

SCOTT LYNN: Yes, so we don't publish targeted returns. But we do let investors know how paintings have appreciated historically. So just like in other asset classes, like real estate, for example, we'll look at comparable paintings that have sold. And then we try to calculate what we call same sale appreciation rates historically. And we publish that to each investor with-- with each offering we do.

But, generally, these are longer term holds, right? So if someone's investing in a painting, we tell them to think about it as a seven to 10-year hold. Now that being said, we did launch secondary markets last year, so we now have investors trading shares in paintings just like they would otherwise trade shares in a company.

- I-- I mean, obviously, that improved liquidity is going to be helpful for people who might want to enter and exit some of these positions. But unless there is somewhat of an exiting event or maybe an auction or anything like that, I mean, how big do you see those swings in the pricing of these pieces, given, you know, there's not always a lot of events, I suppose, that would change it?

SCOTT LYNN: You know, surprisingly, there's-- there's quite a few events. So the thing that people don't realize about the art market is, this year, $60 billion in art will sell. Roughly half of that sells through public auction. So with-- with most of the artists that we're collecting, artists like Basquiat, artists like Banksy, artists like Warhol, there's-- there's dozens and, even in some cases, hundreds of sales every single year with those artists to help mark the value of our-- of our individual paintings.

- So, Scott, I'm curious to know. If you do own a piece of the artwork, could you perhaps then go and view it? Where is the artwork being stored? And then I just have another question about some of the taxes, you know.

When you buy a share, you know, that share isn't necessarily taxed when it goes onto the market. But artwork, you know, if you bring it into a state-- I know New York state levies, I believe, it's about a 4% tax rate on any artwork that is brought into the state-- how are you guys handling that? Is that included into some of the sales prices of some of the shares?

SCOTT LYNN: Yeah. So we-- so I guess to-- to both of those different questions, so we have a gallery now in Soho, where investors can come and actually view the paintings. So that's-- that's-- that's kind of-- it's been slower during COVID, but I think we're seeing investors come back to the gallery more to look at the individual works of art. And then we also loan them out to institutions so that they can be seen by the public.

And then the second question on taxes, we-- we use a creative structure where we actually purchase the paintings into the state of Delaware. We hold them in the state of Delaware so there's no sales or use tax. So we really avoid all of those taxes that the collectors would otherwise pay.

- And, Scott, just going back to one of those points you made on NFTs when we were chatting in the break, no plans to add NFTs kind of sounds-- I don't want to say a distaste there for NFTs-- but it sounds like there's something under the surface there. Why not add NFTs or digital art to the platform? And what's maybe the one warning you'd have for art investors?

SCOTT LYNN: Well, look, I mean, we're definitely the-- the anti-NFT people. And I think we-- we come at this really just from a very traditional finance perspective, which is we think the definition of a strategic asset class is something that beats inflation and is uncorrelated. And I think with NFTs at this point in time, we can't really-- you know, we can't really say either. It's unclear if they're appreciating, if they're depreciating.

We don't know how to think about them as part of a portfolio. I think one of the things that we just struggle with at Masterworks is-- you know, the argument behind an NFT is essentially you take a digital image and you put it on blockchain. But the reality is when that digital image is put on blockchain, there's no intellectual property transferring. So, you know, we're just a little bit confused about what people are buying. Like, at the end of the day, if I have just as much ownership right in that digital image as the person that owns that token, it doesn't feel like an investment to us.

- And before we let you go, Scott, I have to ask you very quickly about something that we see in your background. Is that or is that not an "Iron Man" mask that you have right there? Is that a collectible? We just really need to know what's happening over your shoulder there.

SCOTT LYNN: This-- this is-- this is my personal art collection, so not-- not anything to do with Masterworks. But it's actually a sculpture by a mid-century American artist called John Chamberlain, who did a lot of these abstract sculptures by-- by using found pieces. It's definitely not-- not an "Iron Man" mask.

- Well, I'm far off then. We thought it was Iron Man.

- That shows how much we know about the art world. Perhaps Chris and I have a little bit more homework to do here. But Scott Lynn, Masterworks CEO, we appreciate you coming back on here to chat with us.