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There are several different ways to invest in art. A collector might buy a painting with the expectation that it will increase in value and then sell it once that increase materializes. Beyond that, there are also high-end art funds, including Artemundi, Anthea and Luxembourg, which are pooled investment vehicles that cater to high-net-worth individuals who are essentially buying into a collection. Newer companies such as Rally, Masterworks and Yieldstreet are geared toward less wealthy investors who might buy shares of a single artwork for as little as $20 to $100. Another option that has grown increasingly popular is for two or more people to jointly purchase an expensive artwork, splitting the costs, with the agreement that they will sell the piece once the opportunity for profit has grown.
“Fractional ownership of artworks is not rare on the art market; it actually has been relatively common for quite some time,” Kate Lucas, special counsel at the Manhattan law firm Grossman LLP, told Observer. She regularly works with art collectors, dealers and investors and explained that these types of ownership arrangements “can also arise in situations where multiple family members inherit a partial share of a single artwork. Generally speaking, and unless there’s a contract that says otherwise, when a work is owned by multiple fractional owners, one of those owners can agree to sell or collateralize his or her own share, but not the other co-owners’ shares, without their consent.”
The obvious upside of fractionalized art ownership is that it allows investors to gain exposure to high-value artworks that would otherwise be financially out of reach, often with relatively small minimum investments. Fractional ownership also enables diversification across artists, periods or individual works without tying up large amounts of capital in a single piece. Potentially more important to some is that the model removes many logistical burdens of art collecting: storage, insurance, conservation and sales are typically handled by the investment platform, offering investors interested in art as an asset class rather than as a personal possession an inroad that doesn’t require deep market expertise or dealer relationships.
The downsides of fractional art ownership are largely structural. Investors typically cannot sell their shares at will and instead must wait for a platform-controlled exit or a secondary market that may be thin or nonexistent. Control is also limited, as fractional owners may have little or even no say over when an artwork is sold, how it is exhibited or how it is conserved, all of which can affect value. Valuation may be opaque and based on internal appraisals rather than active market pricing, making it difficult to assess true performance. Legal complexity adds risk, as ownership interests are contractual rather than physical, and disputes can complicate claims.
Fractional ownership arrangements usually run smoothly, but as always, an ounce of prevention is worth a pound of cure. William Pearlstein, a New York City lawyer who regularly works with clients in the art trade, noted that informal partnerships, generally consisting of two or three collectors or dealers, are “often undocumented or under-documented.” Under state law, these partnerships are known as “tenants in common” and are appealing because of their flexibility. “By contrast, art funds, like other private equity investments, are highly structured and well-documented.” The former arrangements, he said, “can get messy if the partners disagree about when to sell and for how much,” but the prevalence of fractional ownership suggests that such disagreements are relatively rare and that disputes are typically resolved privately with little fuss.
Not always, however. Between 2016 and 2019, according to the U.S. Attorney’s Office in the Southern District of New York, postwar and contemporary art dealer Inigo Philbrick and his partner Robert Newland defrauded multiple individuals and entities in the New York and international art market by knowingly misrepresenting “the ownership of certain artworks, for example, selling a total of more than 100 percent ownership in an artwork to multiple individuals and entities without their knowledge and by selling artworks and/or using artworks as collateral on loans without the knowledge of co-owners and without disclosing the ownership interests of third parties to buyers and lenders.” The value of the artworks involved totaled $86 million. Newland, a British citizen who was extradited to the U.S., received a 20-month prison sentence, while Philbrick was sentenced to seven years in prison.
Collectors should be certain that when shares in an artwork are offered for sale by a group of shareholders, every fractional owner has agreed to both the sale and the negotiated price. Auction houses offer items only when they are confident that a good title will pass to a buyer, but because art dealers sometimes form fractional ownership arrangements with investors, it may make sense for prospective buyers considering a gallery purchase to conduct a UCC-1 search to determine whether the owner or consignor of the artwork is a single individual or multiple parties.
Consignors of artworks or other property to galleries typically file these forms with the corporations division of a state’s Secretary of State’s office. The documents identify the owner or owners of consigned objects, allowing them to retrieve the works if a gallery declares bankruptcy and ensuring the pieces cannot be used as gallery assets to repay other creditors. Similarly, when an artwork is loaned by a collector to a gallery for an exhibition, a UCC-1 form clarifies that the piece is at the gallery temporarily and has not been offered for sale, protecting the owner from potential loss.
For consignors who are also fractional owners of artworks, the filing of a UCC-1 form serves an additional purpose. According to Megan Noh, a partner at the law firm Pryor Cashman, it alerts potential buyers of the property, as well as creditors of the other fractional owners, to their interest in the work. “It is saying to the world, ‘Hey, Joe Schmoe can’t pledge this artwork as collateral, because he is not the sole and complete owner of this property—I also own a share of this property.’ Or, similarly, ‘Hey, Christie’s, Joe Schmoe can’t consign this property to you without my permission, because I am a partial-owner along with Joe Schmoe.’”
For buyers, a UCC-1 filing also offers a measure of protection by indicating whether someone has asserted an ownership interest or a lien against the artwork that would prevent a good title from passing to a purchaser. However, a UCC-1 form cannot answer every question a prospective buyer might have. It may list multiple owners but not whether all have consented to a sale or whether one or more have already pledged or sold their shares to another party. It will not reveal if a fractional owner is experiencing financial distress or if a price is suspiciously low. As with any art purchase, buyers must remain diligent, asking questions of the gallery owner about the work’s condition and provenance and researching its quality, importance and price. At higher price points, lawyers are sometimes brought in to review purchase agreements and secure contractual protections such as representations, warranties and indemnification provisions.
As to exactly how often buying a stake in an artwork happens, the data-shy fine art world does its best to obfuscate the number of fractional ownership arrangements, though the total number of people buying fractionalized art is likely relatively small. A 2023 ArtTactic report found that 9 percent of art collectors had purchased fractional art shares, although 61 percent of those surveyed indicated they would likely do so within 12 months. Since then, fractional ownership platforms have expanded their reach as the model attracts new and younger investors who may not be able to afford an entire masterpiece but can splash out a few hundred dollars for a couple of shares.
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Daniel Grant
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