Don’t Be Easel-y Duped: Utilize Contract Provisions to
Protect Your Financial Interests and Art Collection
Fractional ownership of art enables multiple individuals to purchase shares or investment interests in a piece of artwork, allowing the collective group of investors to share the costs and responsibilities of full ownership while benefiting from any sales proceeds. Before the establishment of art investment firms, most fractional art investments occurred among wealthy individuals and art dealers. In 2017, the art market changed when the first SEC-regulated art investment firms opened, permitting individuals to open investment accounts and buy shares in artworks. Purchasing shares from an investment firm has somewhat democratized the art market because the art acquired by investment firms typically consists of blue-chip pieces valued in the millions of dollars, which were previously accessible only to a small percentage of ultra-high-net-worth collectors. [1]
Fractional Art Investment Firms
If you’re familiar with stocks, you may wonder how an art investment firm securitizes art. One method art investment firms use is registering the art with the SEC like a company, which enables individual shares to be sold to investors. Another method involves creating a fund that operates like a mutual fund, allowing investors to purchase shares in the fund. Furthermore, the firm you invest with is responsible for researching the artwork’s value, provenance, and authenticity, thereby reducing some personal financial risks associated with purchasing art on the secondary market. [2]
Fractional Art Ownership Through an Art Dealer
If you prefer to use an art dealer to purchase an investment interest in an artwork instead of an art investment firm, it is essential to recognize that certain risks are associated with art dealer transactions, such as fraud and potential disputes with other co-owners. These risks arise from the more personal and unregulated nature of these dealings, which contrasts with the regulated approach of an art investment firm. Therefore, it is crucial to negotiate carefully and select contract clauses that will protect your financial interests when finalizing a sales agreement or consignment agreement with an art dealer. [3]
Two specific clauses to consider are an assignment clause that allows you to assign your interest and divest, and an accounting clause that provides a comprehensive breakdown of ownership percentages among all fractional owners. These clauses protect your financial investment and minimize potential disputes between co-owners and the art dealer. The accounting clause, in particular, is critical in combating fraud that could be committed by the art dealer, as demonstrated in the case of the art dealer Inigo Philbrick, who frequently committed fraud by selling more than 100 percent ownership of artwork to multiple investors.
How We Can Help
Understanding the risks and benefits of fractional ownership is crucial for maximizing the returns of your investment. Investing in the art market can be risky and rewarding, and our firm can assist clients with all aspects of an art transaction, including negotiation and drafting legal documents to safeguard your financial interests. If you want to learn more about our services, please complete the consultation form below.
[1] Understanding Fractional Art. https://insights.masterworks.com/alternative-investments/art-investing/understanding-fractional-art/. (Last Accessed: February 27, 2025).
[2] Id.
[3] Inigo Philbrick’s Fraud. https://news.artnet.com/art-world/judge-weighs-in-on-ownership-of-12-million-basquiat-ensnared-in-inigo-philbrick-fraud-. (Last Accessed: February 27, 2025).