In 2008, Randy Cohen, then writer of The Ethicist column for the New York Times Magazine, received this letter from Patrick Hebron of Brooklyn:
My friend, a young artist at the start of his career, offered to sell me a 1 percent share in him for $9,000. I would receive a portion of his lifetime earnings but would have no say in the sort of work he did. This seems like a good deal for us both, but it does feel a bit like slavery. Is this agreement ethical?
Cohen said Mr. Hebron was not unethical. The artist was still in charge. As Cohen closed, "Celebrate if he turns into Bill Gates or Warren Buffett; weep if he becomes a hobo or poet or classics scholar."1
People invest in people all the time, but usually only if they are family—or through a corporate structure. At one end of the spectrum, parents pay for their children's education. At the other, the Sun Microsystems founder Andy Bechtolsheim invests in Larry Page and Sergei Brin circa 1998, but makes the check out to "Google Inc."
Finance is conveniently impersonal. It creates a proxy. It turns people and ideas into securities, like stocks or bonds, as divisible as slices of a pie. If Fred were a company and Mr. Hebron bought shares, no one would be worried about indentured servitude. They would call him a venture capitalist.
As in the letter to The Ethicist, investing in an artist may feel sharky and capitalistic, but what if it could actually help the artist? What if inventive new structures could help artists own the upside of what they create? At a time of gift-economy crowd-funding like Kickstarter and new models like Upstart—in which anyone can trade a fraction of their future income for investment now—it is possible to reimagine artists' most fundamental property rights—ownership of their own work—and the ways that shared ownership can create meaningful support and patronage for artists at an early stage of their careers.
Artists do not currently own their work in a way that necessarily serves them. Their trade-off of risk and return is different from that of makers and inventors in many other fields, and not to artists' advantage. Actors other than the artist often profit. But even more than thinking about profit itself, it is possible to imagine a world in which patronage and art investment are reimagined to be true supports to creative work—rigorous, generous, collaborative and imaginative themselves.
Owning the Upside You Create
In 1973, the artist Robert Rauschenberg sat in the back of Sotheby's Park Bernet and watched his 1958 painting "Thaw" sell for $85,000. Rauchenberg has sold the work to taxi magnate Robert Scull in the late 1950s for a mere $900.2 Allegedly, Rauschenberg punched him.
In May of 2010, something similar happened to Jasper Johns, Rauchenberg's longtime romantic partner. His painting Flag sold for $28.6 million at the Christie's auction of the estate of the writer Michael Crichton. Johns made Flag in the 1960s and sold or gave it to Crichton in 1973, the same year Rauchenberg alledgedly punched Scull. Johns and Crichton were longtime friends. The writer even penned a 1977 catalog essay for Johns' retrospective exhibition at the Whitney Museum of American Art.3 The transfer of the painting in 1973 may have been non-economic, discounted and steeped in good will. But, as one point of reference, the Whitney Museum bought Johns' comparable 1958 painting Three Flags for $1 million in 1980, then the highest known price paid for a work by a living artist.4 That work had originally been purchased by the art patrons Mr. and Mrs. Burton Tremaine for $900 in 1959. Johns would not have received any of that return on the increased value of his work over those twenty years.
Jasper Johns is an unusual example to use here because his first show was wildly successful. That 1958 exhibition at Leo Castelli was one of the only times when the Museum of Modern Art bought multiple works from an artist's first show—as Alfred Barr, MoMA's legendary founding director, famously convinced the MoMA trustees to allow.5 Even with his early success, Johns' work gained enormously in financial value that he himself did not receive. The implied annual rate of return for the Tremaines would have been 37.4% each year from 1959 to 1980. Even if you assumed 11% to cover inflation and annual expenses such as storage and insurance, they would have made more than 25% each year.6
Consider the difference between how Crichton and Johns were paid. Crichton, a medical-doctor-turned-thriller-writer, sold film and television rights in addition to books. He conceptualized ER, wrote Jurassic Park, and sold over 200 million copies of his books. Book contracts would have entitled him to a small fraction of each book sold. His pay moved in lockstep with his publisher's.
Artists do not still own physical works of art they sell early in their careers. They develop work at an entrepreneurial stage, and then subsequent purchasers or investors reap the reward. This is partly because of the sheer nature of art. Art, by definition, transcends the market—it has use value not just exchange value. But even in market terms, artworks function like a currency or collectible, not like shares owned in an operating company. Investing in Monet the artwork is like investing in dollars or gold or Chinese vases. Investing in Monet the person during his productive life would have been like holding shares in Nike or Apple or another company that makes something. Like an operating company, the artist is the engine of growth and production, whereas the completed artwork can only appreciate or depreciate as a static object.
The Problems of Art Investment
From the perspective of collectors or the financial world, investing in fine art is mired in a single, insurmountable problem: A work of art is not divisible the way shares in a company or film are. A film makes money through ticket sales. An artwork is worth what the next purchaser is willing to pay. If you owned 10% of the back end of a Tom Cruise franchise, you would be pleased. If you owned 10% of a physical Cézanne painting, you would not be looking for a pair of scissors. An investor who wants a diversified portfolio—to own many different kinds of things in order to mitigate risk—would have to be rich enough to buy many different kinds of artworks. No one has figured out how to let people own, as you do with a mutual fund, small fractions of many different artworks. It is the scissors problem. You need to invest in something that is not the work but a representation of the work.
Imagine a world in which artists could own and sell shares in their work. Those equity stakes-like Kickstarter projects with shares-are property rights artists have never had. Knowing that artists have that right to income later when their work is sold or resold makes the shares valuable now. Trading them creates patronage for artists and investment opportunities that have never existed before. Fred could wait tables less and make his art more. Or, having some financial support would make it less scary for Fred's extremely talented, but risk-averse and duty-bound friend to keep making art instead of becoming a tax accountant. The larger marketplace for those shares could become the basis of art investment funds—ones that would solve the King-Solomon riddle of how to have 134 owners of a Cézanne painting without ever needing to cut it into 134 pieces.
The essential risks of art investing are unshakable: lack of severability, lack of liquidity, expensive carrying costs—the need, except in the rarest cases of truly ephemeral conceptual art, to maintain a physical object—and the general slipperiness of artistic value. But these equity stakes solve the severability problem. They are derivatives relative to the artworks themselves. And in being derivatives, they are more stable because they represent the work in a way that can be as divisible as a decimal place will allow. They therefore become infinitely more flexible, more sharable and less costly to maintain and to trade than any kind of investment in an artwork itself, an object that must be stored and worried over, insured and conserved. A single investor can be designated the physical owner and enjoy living with the highly insured Cézanne. Everyone else can own a fraction of it.
Assigning Property Rights: Coase Theorem
This way of looking at property rights comes in part from the work of Ronald Coase who, in 1991, won the Nobel Prize in economics for a deceptively simple idea: In economic markets where there are externalities—sources of positive or negative value that are not correctly priced in—assigning property rights allows the market to sort out the problem, provided that the cost of trading those rights, the transaction costs, are not too high. For example, pollution from a factory is a negative externality. The factory does not pay to pollute, but others bear the cost of dirty water or clean-up. Under Coase Theorem, the right to pollute becomes a form of property as it did when governments decided to issue "emissions permits" for certain levels of pollution. What Coase found was that it didn't matter how something like these pollution rights were originally allocated. So long as someone clearly owned those rights, the market would ensure that the rights got traded and sold so that eventually the person—or factory—who valued them the most ultimately ended up with them. Markets could regulate good outcomes so long as things of value were given containers that could trade. Those containers of value were property rights.
This is an impersonal and utopian view of markets: The market becomes a magical benevolent actor that helps us, in theory, collectively to allocate scarce resources in the best possible way. In this example, the market doesn't care who owns the property right, just that those rights are owned clearly enough to be traded.
In areas of innovation, property rights—such as patents and shares—are not just assigned, but assigned to the creators of the value: the founding owners and their early-stage investors. In that case, the market is not agnostic on who benefits. It favors the makers in the business world more than makers in the arts: They become the Mark Zuckerbergs and Thomas Edisons of the world, eventually awash in paper wealth when their hard-won company posts on a stock exchange or their inventions find a gadget-buying public.
Outside the arts, royalty provisions and early-stage investment structures can be wildly generative. For example, when Andy Bechtolsheim wrote a check to Google Inc. in 1998 to fund the work of Sergei Brin and Larry Page, it was so early in the life of the idea they actually had to incorporate the business to be able to cash the check. By 2010, Bechtolsheim's original $100,000 investment was valued at roughly $1.7 billion. Page and Brin also owned a fraction of the upside they created.
Bechtolsheim's ability to write that check also owes something to royalties. In his youth, he invented "an industrial controller based on the Intel 8008" for a company near where he grew up in Lake Constance, Germany. Those royalties "supported much of his education,"7 which in turn supported his going on to found Sun Microsystems.
Ownership shares—or royalties or any other tradable right to the upside artists create—can open up a whole world of structured financial products that serve artists by placing artists at the center, and that also solve age-old questions in the design of everything from art exchanges to art investment funds. They allow the securitization of art based on the original creator, pulling the art market far into line with royalties methods in other fields, from finance to music. An art investor goes from owning a collectible to owning the equivalent of shares in an operating company. An artist gains support, and still owns the upside him- or herself.
This is an argument that is meant to be generous toward artists, not to turn them into rapacious capitalists. It is predicated on ownership not as synonymous with greed but as prerequisite to generosity and a form of authentic boundary setting. In no other field from finance to music—excepting perhaps the early Motown artists—would any creative person be advised to make something without having rights to the value they create. That value gets shared with, not handed over to, early investors. The corporate structure of business becomes a protection of, not barrier to, effective artistic working practice. It turns artists from renters to owners of their own future.
In some rare cases, the artist's body of work already functions like shares, as in the case of something like Damien Hirst's Dot Paintings, where owning an individual work is like holding fractional ownership in the project.8 But in most cases, the single sale of a single object from an artist is a hazy representation of the value the artist creates, a problem artists' resale rights were originally proposed to solve.
Resale rights are legally mandated artist royalties—usually set at 5-10% of the increase in value after the initial sale. (Like a cost basis in the sale of the stock, the royalty applies to the increase in value from the last time it was sold.) Resale rights exist in over thirty countries, including in the European Union.9 They are typically criticized for three reasons: being bureaucratically complex, loosely enforced, and only helpful to artists later in their careers when they do not need the money.
The state of California had a resale rights scheme, enacted in 1973, in the wake of Rauchenberg's punch, but the law has, since 2013, been under judicial review, and under appeal in the 9th Circuit, for violating the Interstate Commerce clause. At issue, the law covers sales not only that take place in California but that are of the work of any Californian artist in other states. The original lawmakers were attempting to prevent forum shopping, which is to say, intentionally choosing another jurisdiction for a transaction to avoid the law—the figurative equivalent of art dealers driving into the Nevada desert every time they made a major sale.10
The criticisms of bureaucratic complexity and loose enforcement are fair, but the idea that the rights only have value at the point of sale is not true.
With regard to poor enforcement, according to Patricia Milich, the State of California's "resale royalty coordinator," between 1977 and 2011, the state collected $325,000 on behalf of 400 artists, on $6.5 million in sales of art—relatively low sums over such a long haul.11 As Judge Nguyen wrote in the California district court decision, "In December 1992, the Copyright Office issued a report concluding that it was "not persuaded that sufficient economic and copyright policy justification exists to establish droit du suite [resale royalties] in the United States."12 Internationally, a study as early as 1991 found that of the then twenty-nine jurisdictions with resale rights, twenty-four of the jurisdictions"appl[ied resale rights] little or not at all."13
With regard to bureaucratic complexity, Senator Herb Kohl of Wisconsin and Representative Jerrold Nadler of New York proposed federal resale rights legislation in 2011. The bill introduced a vastly complex, multi-tiered system in which a rights collection agency would have an 18% allowable expense ratio and artists would be required to donate half of their royalty to a second layer of administrative agency which would make art purchase grants to American museums.14 (The bill may be revised and reintroduced in the near future. Herbert Kohl retired from the Senate in January 2013.)
Compared to resale rights for visual artists, royalty schemes for recording artists appear easier to enforce. Rights management agencies for music, such as ASCAP or BMI, can bill radio stations probabilistically based on an expected number of times a song is played. A platform like Kickstarter could in theory manage artist royalties or shares, using technology to streamline bureaucracy, but the legislation as written would have disqualified Kickstarter for not having previously managed copyright clearances.
What the third argument—that royalties are only paid to already successful, famous and wealthy late-career artists—overlooks is the central idea of a property right. Royalties—meaning literal royalties, equity shares, or other ways of assigning ownership—are not static. Their value is not at the moment they are paid—off in the future at the point of later sale—but in the moment they are created—in the present, where the future transaction is already known as a possibility. That possibility has value unto itself. Royalties assign a property right to artists that has never existed before and that can be traded—for patronage now and investment purposes later. If a young, struggling artist knows that she will one day receive royalties, she can trade part of that right in the present, to gain support to make her work in the first place. Once a market for those royalties exists, they can be collected to mimic art funds. Those funds, like stock index funds, would be based on the artist as an operating company instead of the artwork as a collectable.
A coherent system of investment—like the venture capital community for tech start-ups or the royalty structures of the entertainment industry—has not in recent history existed in the arts, but creative ingenuity—an artistic consideration of the funding structure itself—is not new. In the 1970s, Seth Siegelaub, a wide-ranging art world actor credited with championing Conceptual Art, worked with the lawyer Bob Projansky to offer artists a contract they could use to enact resale rights themselves. This form, "The Artist's Reserved Rights Transfer and Sale Agreement," gave the artist 15% of "any increase in the value of each work each time it is transferred in the future" as well as "a record of who owns each work at any given time."15
Other creative financing attempts exist. In 1997, David Bowie worked with New York bond trader David Pullman to create "Bowie Bonds"—$55 million in 10-year bonds based on the earnings from Bowie's twenty-five albums.16 The money raised from the bonds gave Bowie the lump sum he needed to buy his back catalog. In the end, the bond was downgraded from A3 to Baa3, "just above junk-bond status... partly in response to falling record-industry sales."17At the conceptual end of the spectrum, artists have incorporated and sold shares in themselves, as an art project. The artist Kenyatta Cheese's offering of shares came complete with a corporate identity, website and annual reports. At the more practical end of the spectrum, the artist Daniel Wilson has proposed that artists be able to sell a 1% stake in their future income streams, in perpetuity with a buyout clause that Wilson thought would mitigate the indentured servitude concerns. Wilson structured this vehicle as $250,000 in exchange for a 30-year bond18. Others such as the art advisor and attorney Franklin Boyd include resale rights in contracts of the art sales advised by their firm Boyd Level. And Kibum Kim, co-founder of Newd Art Fair in Bushwick in 2014, said he plans to use a resale rights provision in the sales contracts at the fair.
How to Build the Better Mousetrap
Amidst this universe of possibilities—debt structures, side letters to standard contracts, performance art projects, federal legislation—the clearest solution is to create the effect of resale rights using ownership shares. For example, selling 20% of the equity in a company would be analogous to selling 1 out of 5% resale rights percentage points. A royalty is not technically equity but because the royalty is paid based on the increase in value of the work, it has an equity-like characteristic of a theoretically unlimited upside potential, or, in Randy Cohen's words, the possibility of "a Picassoesque payday."19 As the JOBS Act is interpreted, allowing everyday citizens not just wealthy accredited investors to purchase private shares, a firm—a cross between Kickstarter and WeFunder—could manage these shares.20 One the shares existed, the purchasers could remain individual patrons or assemble novel and useful investment fund structures.
The rationale behind any investment fund is the pooling of resources and the diversification of risk. If someone could only afford to buy one painting with their investment budget, that concentration of risk might be too much. (All my savings, in one Bob Ross masterpiece!) Instead, someone could pool resources with others and buy thirty works. (A few of these might do poorly but surely of thirty, some will do well!) This idea of diversification originates in an area of finance, Modern Portfolio Theory, pioneered by Harry Markowitz in the 1950s and awarded the Nobel prize in the 1990s. If you put your eggs in a lot of different baskets that are not perfectly correlated, you will likely get a higher risk-adjusted return. Markowitz, in his way, said it was possible to get a free lunch, or higher return for a given level of risk.
Fund managers have tried in the past to apply this rationale to investing in art. The most universally lauded attempt was the British Rail Pension Fund (BRPF)'s investment in artworks as an inflation hedge in the 1970s. When BRPF sold its Impressionist holdings in 1989, it made an impressive 21.3% annualized return. This success is less generalizable, however, for their having sold in near perfect timing at the peak of the Impressionism market. But by the time the fund had liquidated all of its art holdings in 2000, they had achieved a 4% annualized return, net of inflation (an 11.3% internal rate of return). As Noah Horowitz writes in Art of the Deal, "BRPF is typically enlisted as a successful precedent, especially by art fund enthusiasts.... [T]hough its returns to art outpaced inflation, they underperformend those of the major stock markets over the investment period."21 Other art investment fund efforts have ranged from Fernwood Art Investment Fund which lost investor money and spurred litigation in 2006,22 to the Fine Art Fund in London, generally credited as consistently if moderately successful. Art exchanges, such as Liquid Rarity Exchange (US) and SplitArt (Luxembourg) have similarly tried to allow investors to own and trade shares in art. Kathryn Tully of Forbes estimates that "fewer than 30 art funds are active today," in a worldwide art market of $67 billion each year.23
Most investment solutions are still based on the artwork itself, the basic premise of which leaves investors open to liquidity and severability risk, as well as high carrying costs of maintaining artworks without necessarily having the pleasure or "aesthetic dividends" of living with the work themselves. Instead, funds whose shares are based on the working life of an artist not only place artists at the center as creators of value, they solve the riddle of owning fractions of single, original objects. By enacting Coase Theorem, the property rights benefit artists and their early supporters, as any share or royalty would.
Trading resale rights or equity stakes could take on as many forms as any structured financial product does, whether rights over a fixed term or in perpetuity, bundled with a physical art sale or purely as a derivative. Those shares then become the art investment mechanism. They mimic the correlation-busting portfolio function ascribed to art, but also avoid the liquidity and severability problems of cutting up the Cézanne or having to sell it in a pinch. A majority owner in a work of art could keep the work physically, with contracts requiring insurance and condition, and minimum guarantees for sales prices.
Breathing life into the art investment world—catapulting the idea of an investment fund from conferences and cocktail party conversation and singular success story to working ecosystem—also eases the cash-strapped difficulty of getting into the arts in the first place. People leave the arts for many reasons that have nothing to do with their talent or ability to contribute-reasons like family pressure, lack of heroic self-esteem, lack of independent wealth, or talent in other fields. Tradable shares might mitigate the difficulties of being an artist and give all of us a more vibrant and meaningful cultural life.
On the art fund side, it may take many years for the current crop of artists to rise to such stature that their royalty streams have significant cash value. The market may start small and have philanthropic roots. Like art itself, the market might grow from generosity to value, at a human scale and with uncertainty. It is easy to talk about the gain in value of a van Gogh painting from 1980 to 2012 without talking as much about the 100 years someone owned it before. The first generation of fund holders may, proverbially speaking, build Chartres over centuries more than they reap quarterly returns.
And, the securitization of the person—artist or otherwise—is a brave new world. As technology learns to pixilate the person into shares—to make it possible to share ownership in our projects, our creations and even ourselves—the project can feel parceled into shares or the person unbundled into projects, the same way that iTunes makes what was once an album into a menu of songs. The science-fiction future is unknowable. And as we create it, with integrity and without losing the fact that the whole person is more important that the sum of the pixels, the burden of that possibility is in education, here the business education of the artist. The closer the investment is to the person, the more ethics and character matter. As with any financial regulation, those most equipped to imagine what will happen not one but five or twenty chess moves into the future of ownership shares—the fifth order effects of trading—those people like portfolio and risk managers in more pure financial fields will need to be asked to weigh in on the design of the system.
But it is worth letting artists own the value they contribute. Both artists and future generations of fund managers would benefit. And to the extent early-stage support keeps talented artists able to make work and their work enriches our lives, so would all of us.
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