Fond of art funds?
Art funds have become a tangible alternative asset in recent years but how risky is it to invest into paintings, sculptures, etc.?
Art funds are based on private investment funds put forward to generate returns by acquiring and eventually disposing of art pieces. The main difference between investing into a ‘natural resource’-based fund, involving gold for instance, compared to an art investment fund remains its diversity factor. Gold is a ubiquitous natural resource and even though carats may vary, its core value is known.
Art however cannot be as easily gauged in regards to its market value and thus a complexity factor is omnipresent within art investment funds. Can this ‘shadowy’ element of the art industry generate substantial opportunities for art investors? In other words, do the subjective value of fine art, the non-transparency of this creative market as well as the vacuum of regulatory authority boost investors’ fund portfolios?
Looking back at history, art funds have been around for about four decades. The initial outset by the British Rail Pension Fund in 1974 was created with a substantial portion of its capital invested into arts and eventually yielded yearly profits for a longer period of time. The primary issue for art funds to proliferate is the search for capital. This inherent problem has made art fund management firms attempt to deviate U.S. securities laws to a possible extent by adhering to specific restrictions.
These exemptions entail that equity interests in art funds in the U.S. are not available for sale purposes to the general public. Additional statutory and regulatory prerequisites emphasize the status of private offerings. To create a secure platform to initiate potential art-related funds, clients are required to fall under the class of “accredited investors”, with a net worth of $1 million or with an income of $200,000 over the two years prior to the possible investment, that showcase a prior relationship relating to funds but excluding art-related matters with the art fund. To keep a flexible concept in regards to the number and profile of investors, art funds try to fall under one of the ‘Investment Company Act of 1940’ exceptions. No registration will subsequently be required and the art fund avoids becoming a mutual fund, or as statutorily stated an “investment fund”.
To be eligible as an exception, the art fund cannot sell ownership and equity rights to more than 100 investors. 1940 Investment Company Act, 15 U.S.C. §80a-3(c)(1). Art funds benefit the art market by injecting money into the art market and therefore adding liquidity to the niche market. The regulation of art funds depends on whether funds raise their capital amongst U.S. investors or rather seek non-U.S. investors for offshore funds.
Notwithstanding the type of art fund to be established, issues of registration, equity interests, and compliance with ant-fraud regulations need to be gauged before launching yourself into a colorful or perhaps ‘shady’ venture.