253G2 1 form253g2.htm

 

Filed Pursuant to Rule 253(g)(2)

File No. 024-10876

 

Offering Circular Dated May 10, 2019

 

MASTERWORKS 001, LLC

 

Offering Circular

 

 

99,825 Class A ordinary shares

Representing Class A Limited Liability Company Interests

$1,996,500 Maximum Offering Amount 

 

Masterworks 001, LLC is a Delaware limited liability company formed to hold a single work of art, an oil and silkscreen inks on canvas created in 1979 by Andy Warhol entitled, 1 Colored Marilyn (Reversal Series) (the “Painting”). We believe that, for many investors, our Class A ordinary shares represent an effective means to gain economic exposure to the Painting and, by extension, to the high-end art market. This offering is the first offering of its kind and the first offering conducted by an affiliate of Masterworks.io, LLC. Masterworks has not offered any prior investment programs in which disclosed in the offering materials was a date and time period at which the investment program might be liquidated.

 

Masterworks 001, LLC, a Delaware limited liability company, is offering up to 99,825 of its Class A ordinary shares representing Class A limited liability company interests, for an aggregate purchase price of up to $1,996,500, in a “Tier 2” offering under Regulation A (the “Offering”). The offering price will be $20.00 per Class A ordinary share. There is no minimum number of Class A ordinary shares that needs to be sold as a condition of closing of this offering. Subscriptions, once received, are irrevocable by investors but can be rejected by us. This Offering is being conducted on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be sold, through our underwriter, SDDco Brokerage Advisors LLC (“SDDco-BA”), a registered broker-dealer with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). SDDco-BA is not purchasing or selling any Class A ordinary shares pursuant to this Offering. SDDco-BA will be entitled to receive fees and commissions for sales of the Class A ordinary shares offered hereby from Masterworks Administrative Services, LLC not to exceed 5.4% of the gross proceeds of the Offering if the maximum offering is sold. See “Plan of Distribution” in this Offering Circular.

 

The closing of the Offering will occur on the earlier of (i) the date that the subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by the Company in its discretion. The maximum offering period is 270 days from commencement of the offering and will expire on February 4, 2020, but we reserve the right to terminate this Offering for any reason at any time. The offering will commence on the date the offering is qualified by the SEC.

 

Our affiliate Masterworks.io, LLC owns an online investment platform located at https://www.masterworks.io/ (the “Masterworks Platform”) that allows investors to acquire ownership of an interest in special purpose companies that invest in distinct artworks. Through the Masterworks Platform, investors can, once they establish an account, browse and screen potential artwork investments, view details of an investment and sign contractual documents online. The Offering will be conducted through the Masterworks Platform. For additional information regarding the Masterworks Platform, please see page 64.

 

No public market currently exists for the Class A ordinary shares. We intend to seek to make the Class A ordinary shares available for trading on a trading platform or facilitate sales through brokerage relationships, subject to compliance with applicable laws, although we do not expect any such trading platform or brokerage relationships will be available within the twelve-months following the closing of the Offering. No assurance can be given that we will be able to establish a trading market for the Class A ordinary shares or that any such trading market will be available to all investors.

 

No sales of Class A ordinary shares will be made prior to the qualification of the offering statement of which this offering circular is a part by the SEC in the United States. All Class A ordinary shares will be initially offered in all jurisdictions at the same price that is set forth in this offering circular.

 

Class A ordinary shares
Offered by Us
  Number of Class A ordinary shares     Price to Public     Underwriting
Discounts and
Commissions (1)
    Proceeds, Before
Expenses, to Us (2)
 
Per Class A ordinary share:      1     $ 20.00     $ 0.00     $ 20.00  
Total (3)     99,825     $ 1,996,500     $ 0.00     $ 1,996,500  

 

  (1)

We have engaged SDDco Brokerage Advisors LLC (“SDDco-BA”) as an underwriter in connection with this Offering. SDDco-BA may engage other broker-dealers to assist us in finding potential investors. SDDco-BA will receive certain fees and commissions and expense reimbursements from Masterworks Administrative Services, LLC in respect of its activities, but no commissions, fees or expense reimbursements of SDDco-BA shall be paid by the Company or from the proceeds of this Offering. Aggregate underwriting compensation payable to SDDco-BA in connection with the Offering will not exceed 5.4% of the gross proceeds of the Offering if the maximum offering is sold. SDDco-BA is acting solely on a “best efforts” basis and will not acquire any Class A ordinary shares. The Company intends to distribute the Offering through the Masterworks Platform. See the section entitled Plan of Distribution” beginning on page 30 of this offering circular for additional information.

     
  (2)

This amount does not include estimated offering expenses of approximately $150,000, all of which will be paid by Masterworks Administrative Services, LLC, rather than from the net proceeds of the Offering.

     
  (3) Assumes that the maximum aggregate offering amount of $1,996,500 is received by us.

 

The Class A ordinary shares are offered on a best efforts basis primarily through the online Masterworks Platform. The Company is not offering, and does not anticipate selling, Class A ordinary shares in any state where SDDco Brokerage Advisors LLC is not registered as a broker-dealer. The subscription funds advanced by prospective investors as part of the subscription process will be held in a non-interest-bearing segregated account of the Company with Cross River Bank, Inc. and will not be commingled with any other funds, unless and until there is a closing of the Offering.

 

We retain complete discretion to determine that subscribers are “qualified purchasers” in reliance on the information and representations provided to us regarding their financial situation. Generally, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

An investment in the Class A ordinary shares is subject to certain risks and should be made only by persons or entities able to bear the risk of and to withstand the total loss of their investment. Prospective investors should carefully consider and review the information under the heading “Risk Factors” beginning on page 15.

 

The SEC does not pass upon the merits of or give its approval to any securities offered or the terms of the Offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials. These securities are offered pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”); however, the SEC has not made an independent determination that the securities offered are exempt from registration.

 

We expect that our operations will not cause us to meet the definition of an “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”), because (1) at all times our sole assets will consist only of cash and a single work of art referred to herein as the “Painting”, neither of which is deemed to be a “security” for purposes of the 1940 Act, and (2) at all times we will not be engaged primarily in owning, holding, investing or trading in “securities” (as such term is used for purposes of the 1940 Act).

 

Our principal office is located at 497 Broome Street, New York, New York 10013 and our phone number is (203) 518-5172. Our corporate website address is the website address of Masterworks.io, located at www.masterworks.io. Information contained on, or accessible through, the website is not a part of, and is not incorporated by reference into, this offering circular.

 

This offering circular is following the offering circular format described in Part II of Form 1-A.

 

SDDCO BROKERAGE ADVISORS LLC 

The date of this offering circular is May 10, 2019.

 

 
 

 

TABLE OF CONTENTS

 

  Page
THIRD PARTY DATA 2
TRADEMARKS AND COPYRIGHTS 2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 2
STATE LAW EXEMPTION AND PURCHASE RESTRICTIONS 2
QUESTIONS AND ANSWERS ABOUT THIS OFFERING 3
SUMMARY 7
THE OFFERING 13
DETERMINATION OF OFFERING PRICE 15
DIVIDEND POLICY 15
RISK FACTORS 15
DILUTION 29
PLAN OF DISTRIBUTION 30
USE OF PROCEEDS TO ISSUER 40
DESCRIPTION OF BUSINESS 40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 57
MANAGEMENT 59
MANAGEMENT COMPENSATION 66
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS 67
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS 68
DESCRIPTION OF SHARES 70
SHARES ELIGIBLE FOR FUTURE SALES 78
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS 79
ADDITIONAL REQUIREMENTS AND RESTRICTIONS 87
LEGAL MATTERS 88
EXPERTS 88
APPOINTMENT OF AUDITOR 88
WHERE YOU CAN FIND MORE INFORMATION 88

 

We have not and SDDco-BA has not authorized anyone to provide any information other than that contained or incorporated by reference in this offering circular prepared by us or to which we have referred you. Neither we nor SDDco-BA take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This offering circular is an offer to sell only the Class A ordinary shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this offering circular is current only as of its date, regardless of the time of delivery of this offering circular or any sale of Class A ordinary shares.

 

For investors outside the United States: We have not done anything that would permit this Offering or possession or distribution of this offering circular in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this offering circular.

 

 1 
 

 

THIRD PARTY DATA

 

Certain data included in this offering circular is derived from information provided by third-parties that we believe to be reliable. Information about Andy Warhol and the Painting, as defined below, is derived from Biography.com, which is owned by A&E Television Networks, LLC, Philips Auctioneers LLC, auction notes for the 20th Century & Contemporary Art Evening Sale held on November 16, 2017 and other publicly available sources. The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate. Certain data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified such third-party information, nor have we ascertained the underlying economic assumptions relied upon therein. The statistical data relating to the art market is difficult to obtain, may be incomplete, out-of-date, or inconsistent and you should not place undue reliance on any statistical or general information related to the art market included in this offering circular. The art market data used in this offering circular involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such data. While we are not aware of any material misstatements regarding any market, industry or similar data presented herein, such data was derived from third party sources and reliance on such data involves risks and uncertainties.

 

TRADEMARKS AND COPYRIGHTS

 

We own or have applied for rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect our business. We do not own the copyright to the Painting, as such term is defined below. All copyrights associated with the Painting are held by the Andy Warhol Foundation for the Visual Arts and any representation to the contrary is inaccurate. This offering circular may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this offering circular is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this offering circular are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property of their respective owners.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This offering circular contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “plan,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, or state other forward-looking information. Our ability to predict future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual outcomes could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could cause our forward-looking statements to differ from actual outcomes include, but are not limited to, those described under the heading “Risk Factors.” Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this offering circular. Furthermore, except as required by law, we are under no duty to, and do not intend to, update any of our forward-looking statements after the date of this offering circular, whether as a result of new information, future events or otherwise.

 

STATE LAW EXEMPTION AND PURCHASE RESTRICTIONS

 

Our Class A ordinary shares are being offered and sold only to “qualified purchasers” (as defined in Regulation A under the Securities Act). As a Tier 2 offering pursuant to Regulation A under the Securities Act, this Offering is exempt from state law “Blue Sky” review, subject to meeting certain state filing requirements and complying with certain anti-fraud provisions, to the extent that our Class A ordinary shares offered hereby are offered and sold only to “qualified purchasers” or at a time when our Class A ordinary shares are listed on a national securities exchange. “Qualified purchasers” include: (i) “accredited investors” under Rule 501(a) of Regulation D and (ii) all other investors so long as their investment in our Class A ordinary shares does not represent more than 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). Accordingly, we reserve the right to reject any investor’s subscription in whole or in part for any reason, including if we determine in our sole and absolute discretion that such investor is not a “qualified purchaser” for purposes of Regulation A.

  

To determine whether a potential investor is an “accredited investor” for purposes of satisfying one of the tests in the “qualified purchaser” definition, the investor must be a natural person who has:

 

  1. an individual’s net worth, or joint net worth with the person’s spouse, that exceeds $1,000,000 at the time of the purchase, excluding the value of the primary residence of such person; or
     
  2. earned income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.

 

If the investor is not a natural person, different standards apply. See Rule 501 of Regulation D for more details.

 

 2 
 

 

For purposes of determining whether a potential investor is a “qualified purchaser,” annual income and net worth should be calculated as provided in the “accredited investor” definition under Rule 501 of Regulation D. In particular, net worth in all cases should be calculated excluding the value of an investor’s home, home furnishings and automobiles.

 

QUESTIONS AND ANSWERS ABOUT THIS OFFERING

 

The following questions and answers about this Offering highlight material information regarding us and this offering that is not otherwise addressed in the “Offering Summary” section of this offering circular. You should read this entire offering circular, including the section entitled “Risk Factors,” before deciding to purchase the Class A ordinary shares.

 

Q: What is Masterworks 001, LLC?
   
A: Masterworks 001, LLC is a Delaware limited liability company, formed to hold a single work of art, an oil and silkscreen inks on canvas created in 1979 by Andy Warhol entitled, 1 Colored Marilyn (Reversal Series) (the “Painting”). We believe that the artwork of Andy Warhol, including the Painting, is among the greatest examples of Pop art. As such, we believe that, for many investors, our Class A ordinary shares represent an effective means to gain economic exposure to the Painting and, by extension, to the high-end art market. This Offering is the first offering of its kind and the first offering conducted by an affiliate of Masterworks.io, LLC. Masterworks has not offered any prior investment programs in which disclosed in the offering materials was a date and time period at which the investment program might be liquidated.
   
Q: What is Masterworks?
   
A:

Masterworks.io, LLC has created the first fine art investment platform that will allow anyone to invest in individual works of art. “Masterworks” refers to a group of companies that will provide administrative and other services to our Company. Masterworks intends to facilitate similar offerings and Masterworks owns the Masterworks Platform located at https://www.masterworks.io/, which is an online investment platform for investments in entities holding a specific work of art or collection of artwork. The Masterworks Platform gives investors the ability to:

 

  Browse art investment offerings;
  Transact entirely online, including digital legal documentation, initiate funds transfer, and ownership recordation; and
  Manage and track investments easily through an online portfolio.

 

Q: What is our relationship with Masterworks?
   
A: We have multiple relationships with Masterworks. Notably, Masterworks: 

 

  Funded our organization and this Offering;
  Owns the Painting that will be sold to us at closing;
  Will manage and administer our operations;
  Will determine which securities trading platform or platforms will trade the Class A ordinary shares, if any, and may seek regulatory licenses to operate its own proprietary trading platform to trade the Class A ordinary shares; and
 

Owns 24,956 Class B ordinary shares representing a 20% profits interest in our Company and will own Class A ordinary shares if and to the extent the Offering is not fully subscribed upon closing of the Offering.

  

Q. What will Masterworks own or receive in connection with these relationships?
   
A.

Masterworks owns 24,956 Class B ordinary shares, representing a 20% “profits interest” in our fully diluted equity. The Class B ordinary shares retained by Masterworks will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding Class A and Class B ordinary shares. Masterworks will also be entitled to receive a true-up on the sale of the Painting to the Company equal to $181,500, or 10% above its cost to acquire the Painting in November 2017. Lastly, Masterworks will receive fees and expense reimbursements for the administration of our operations in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding per annum (excluding Class B ordinary shares) following the closing of the Offering. Masterworks will also receive any Class A ordinary shares offered by this offering circular that are not sold in the Offering, if any, as partial consideration for the Painting. Masterworks may also receive reasonable and customary trading fees and commissions from the trading of the Class A ordinary shares or other administrative fees associated with providing access to a trading platform or arranging brokerage transactions, subject to applicable laws, rules and regulations.

  

 3 
 

 

Q. What costs and expenses will be paid by Masterworks and what costs and expenses will be paid or reimbursed by us?
   
A.

Masterworks will pay all costs associated with the development and operation of the Masterworks Platform, all costs associated with the acquisition of the Painting (including financing from the time of purchase to the Closing of the Offering) and all costs of our organization and this Offering, including legal fees, audit fees, printer costs, compliance costs, marketing expenses and other costs. Masterworks will also be responsible for all ordinary and necessary costs for ongoing administrative expenses, for which it will receive Class A ordinary shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum. In addition, we remain responsible for and shall reimburse Masterworks only for:

 

  Payments associated with litigation, judicial proceedings or arbitration;
  Costs associated with any material or extraordinary transactions, such a merger, third-party tender offer or other similar transaction; and
  Costs associated with a sale of the Painting.

 

Q. Can we issue more shares or engage in other business activities without consent of shareholders?
   

A.

Unless we obtain the consent of shareholders, we cannot issue additional shares or membership interests of any class following the completion of the Offering, except Class A ordinary shares issuable to Masterworks for administrative services and shares issuable upon conversion of the Class B ordinary shares, as such term is defined below and we cannot acquire additional material assets, incur debt for borrowed money or engage in business activities that are unrelated to the ownership, maintenance, promotion and sale of the Painting.

   
Q. How is an investment in the Class A ordinary shares different from investing in other art investment opportunities offered on the Masterworks Platform?
   
A. If this Offering is successful, Masterworks intends to facilitate other offerings through a similar offering process and structure. Each such offering will represent an investment opportunity in a company holding or planning to hold a unique artwork and will therefore have different investment characteristics from every other offering. We believe that the long-term value of each company will heavily depend on the relative popularity and market value of the particular genre, artist and specific work owned by such company. As of the date of this filing, Masterworks is facilitating a planned Regulation A offering by Masterworks 002, LLC, a Delaware limited liability company, that has filed a Regulation A offering with the SEC, which has not yet been qualified.
   
Q. Who might benefit from an investment in the Class A ordinary shares?
   
A. An investment in the Class A ordinary shares may be appropriate for you if you seek to diversify your personal portfolio with an investment in a company that holds a single piece of art focused on long-term capital appreciation and if you are able to hold your investment for an extended time period. On the other hand, we caution persons who require current yield, near-term liquidity or guaranteed income, or who seek a short-term investment, that an investment in the Class A ordinary shares will not be suitable.
   
Q. What risks are involved in buying the Class A ordinary shares?
   
A.

Investing in the Class A ordinary shares is speculative and involves a high degree of risk. You should purchase these securities only if you can afford to hold your investment for an extended period of time. We currently plan to hold the Painting for an extended period and we cannot assure you that a trading market will develop. See “Risk Factors” for a description of the risks relating to this Offering and an investment in the Class A ordinary shares.

   

Q.

Will you ever sell the Painting at a loss?

   
A.

We believe the Painting will appreciate in value over time, however, the art market is not immune to global economic conditions and other unforeseen occurrences and it is possible that the value of fine art, including the Painting, will decline.  Historically, these declines have often proven to be temporary in nature. Accordingly, we intend to hold the Painting for a relatively long period of time and sell the Painting opportunistically when market conditions are favorable, which we believe is necessary to achieve optimal returns.  Our shareholders cannot force us to sell the Painting at a loss prior to the seven-year anniversary of the offering and only then if a trading market does exist or has insufficient volume. We have no current intention or economic incentive to sell the Painting at a loss. If we are offered the opportunity to sell the Painting at a loss, we would decline such offer unless we determined that seeking a shareholder vote with respect to such offer was necessary to satisfy our fiduciary obligations to shareholders. Lastly, circumstances may arise that would compel us to sell the Painting at auction at an inopportune time and potentially at a loss, such as if we face litigation or regulatory challenges.

   
Q. Who can buy Class A ordinary shares?
   
A. Generally, the Offering is open to everyone, though there are limits on how much you can invest.

 

  ● “Accredited investors” as defined under Rule 501(a) of Regulation D; and
   
  ● All other investors can invest up to 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).
   
  Net worth in all cases should be calculated excluding the value of an investor’s home, home furnishings and automobiles. We reserve the right to reject any investor’s subscription in whole or in part for any reason.

 

 4 
 

 

Q. How do I buy Class A ordinary shares?
   
A. You may purchase Class A ordinary shares in this Offering by creating a new account, or logging into your existing account, at the Masterworks Platform. In order to subscribe, you will need to follow the instructions on the Masterworks Platform which are summarized in the section of this offering circular entitled “Plan of Distribution – Procedures for Subscribing.”
   
Q. Is there any minimum investment required?
   
A.

Yes. You must initially purchase at least 50 Class A ordinary shares in this Offering, or $1,000; however, we can waive the minimum purchase requirement on a case-by-case basis in our sole discretion. We may waive the minimum investment amount based on the demand for and supply of the Class A ordinary shares. For example, the Company may waive the minimum investment amount if there is not sufficient demand among fewer investors for the Class A ordinary shares.

 

Q. Is there any maximum investment restriction?
   
A.

Yes. You may only purchase up to 5,000 Class A ordinary shares in this Offering, or $100,000 based on the current per Class A ordinary share price; however, we can waive the maximum purchase restriction on a case-by-case basis in our sole discretion. We may waive the maximum investment amount based on the demand for and supply of the Class A ordinary shares. For example, the Company may waive the maximum investment amount if there is sufficient demand among fewer investors for the Class A ordinary shares. In addition, our operating agreement restricts beneficial ownership by any individual shareholder, together with such shareholder’s affiliates, to a maximum of 19.99% of the total voting shares issued and outstanding. This 19.99% limitation does not apply to any of the Masterworks entities.

 

Q. Is there any minimum initial offering amount required to be sold?
   
A. No. There is no minimum initial offering amount required to be sold.
   
Q. What will we do with the proceeds from this Offering?
   
A.

We expect to receive gross proceeds from this Offering of up to $1,996,500. We will use all of the proceeds from this Offering, together with any remaining unsold Class A ordinary shares from this Offering (which will be issued in the form of Class A ordinary shares), if any, for us to acquire the Painting from Masterworks. In all cases, if a closing of this Offering occurs, we will acquire the Painting and the same aggregate number of shares will be outstanding whether or not this Offering is fully subscribed.

   
Q. Can we or Masterworks sell the Painting at any time or in any manner?
   
A.

No. We can sell the Painting without shareholder approval in certain limited circumstances that are described in our operating agreement and any such sale must occur at a public auction. Any other sale transaction will require the approval of the holders of our Class A ordinary shares.

   
Q. What happens upon a sale of the Painting?
   

A.

Following a sale of the Painting, we will pay or reimburse Masterworks for any expenses for which we are responsible, including applicable third-party sales commissions, income taxes and other transactional expenses. Following the payment of all of such taxes and expenses, our Company will be liquidated, and the remaining net proceeds, if there are any, will be distributed to the then holders of record of our shares in accordance with the priorities set forth in our operating agreement. As further discussed below, our intention is to own the Painting for a five- to ten-year period, although we may elect to hold the Painting for a longer period or sell the Painting at any time due to certain circumstances.

  

 5 
 

 

Q. How long will this Offering last?
   
A.

The closing of the Offering will occur on the earlier of (i) the date that subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by us in our discretion. The maximum offering period is 270 days from commencement and will expire on February 4, 2020, but we reserve the right to terminate this Offering for any reason at any time.

   
Q. Will we file additional information with the SEC?
   
A. Yes, we will file certain information with the SEC, including:

  

  An annual report;
  A semi-annual report;
  Supplements to the offering circular, if we have material information to disclose to you; and
  Other reports that we may file or furnish to the SEC from time to time.

 

  All such information will be available on the SEC’s website at www.sec.gov and on the Masterworks Platform located at https://www.masterworks.io/.
   
Q. Who can help answer my questions about the Offering?
   
A. If you have more questions about the Offering, or if you would like additional copies of this offering circular, you should contact us by email at support@masterworks.io or by mail at:

 

Masterworks 001, LLC

c/o Masterworks Administrative Services, LLC

497 Broome Street

New York, New York 10013

Attn: Investor Relations

 

 6 
 

 

SUMMARY

 

This summary highlights selected information contained elsewhere in this offering circular. This summary does not contain all of the information you should consider before investing in the Class A ordinary shares. You should read this entire offering circular carefully, especially the risks of investing in the Class A ordinary shares discussed under “Risk Factors,” before making an investment decision. In this offering circular, unless the context indicates otherwise, the terms “we,” “our,” “ours,” “us,” “Masterworks 001” or the “Company,” refer to Masterworks 001, LLC, a Delaware limited liability company, and its wholly owned subsidiary, Masterworks 001 Cayman, LLC, a Cayman Islands limited liability company, which has not yet been formed but is planned to be formed prior to the completion of this Offering. For purposes of this offering circular, the term “Masterworks” refers to Masterworks.io, LLC, and/or any of its wholly owned subsidiaries, which include Masterworks Administrative Services, LLC, referred to herein as the “Administrator,” Masterworks Gallery, LLC and also includes Masterworks Brokerage, LLC, but does not include Masterworks 001, LLC and its subsidiary. All Masterworks entities are Delaware limited liability companies. For purposes of this offering circular, the term “Painting” refers to that certain painting by Andy Warhol, titled 1 Colored Marilyn (Reversal Series), 1979, Oil and silkscreen inks on canvas. Unless otherwise clear from the context, references throughout this offering circular to “our operating agreement” refers to the Masterworks 001, LLC’s amended and restated operating agreement which became effective prior to the qualification of this offering circular by the SEC and the form of which is filed herewith as Exhibit 2.3. The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

Overview

 

We were formed as a Delaware limited liability company on March 28, 2018 to acquire the Painting. The Administrator will manage all maintenance and administrative services relating to the Painting and the Company. We will not conduct any business activities except for activities relating to the ownership, maintenance, promotion and the eventual sale of the Painting. Our strategy will be to display and promote the Painting in a manner designed to enhance its provenance and increase its exposure and its value. This Offering is the first offering of its kind and the first offering conducted by an affiliate of Masterworks.io, LLC. Masterworks has not offered any prior investment programs in which disclosed in the offering materials was a date and time period at which the investment program might be liquidated.

 

The Painting was purchased at a public auction held by Philips Auctioneers LLC, on November 16, 2017, for $1,815,000 by an agent acting on behalf of Masterworks. We are offering up to 99,825 Class A ordinary shares for aggregate consideration of up to $1,996,500. The closing of the Offering will occur on the earlier of (i) the date that the subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by the Company in its discretion.

 

We will use all of the proceeds from this Offering, together with any remaining unsold Class A ordinary shares from this Offering, if any, to acquire the Painting from Masterworks. We do not expect to generate any revenues or cash flow unless and until we sell the Painting and no profits will be realized by investors unless they are able to sell their Class A ordinary shares on a trading platform or through brokerage transactions approved by us or the Painting is sold. We will be totally reliant on Masterworks to maintain the Painting and administer our business.

 

The Artist

 

The following description of Andy Warhol is derived from Biography.com, which is owned by A&E Television Networks, LLC. The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

Born on August 6, 1928, in Pittsburgh, Pennsylvania, Andy Warhol was a successful magazine and ad illustrator who became a leading artist of the 1960s Pop art movement. Warhol ventured into a wide variety of art forms, including performance art, filmmaking, video installations and writing, and he controversially blurred the lines between fine art and mainstream aesthetics. Warhol died on February 22, 1987, in New York City.

 

In the late 1950s, Warhol began devoting more attention to painting, and in 1961, he debuted his first paintings of a genre that came to be known as “pop art” — paintings that focused on mass-produced commercial goods. In 1962, he exhibited the now-iconic paintings of Campbell’s soup cans. These small canvas works of everyday consumer products created a major stir in the art world, bringing both Warhol and pop art into the national spotlight for the first time. Warhol’s other famous pop paintings depicted Coca-Cola bottles, vacuum cleaners and hamburgers. He also painted celebrity portraits in vivid and garish colors; his most famous subjects include Marilyn Monroe, Elizabeth Taylor, Mick Jagger and Mao Zedong. As these portraits gained fame and notoriety, Warhol began to receive hundreds of commissions for portraits from socialites and celebrities. His portrait “Silver Car Crash (Double Disaster)” sold for $105.4 million in 2013, making it one of the most valuable paintings in world history.

 

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In 1964, Warhol opened his own art studio, a large silver-painted warehouse known simply as “The Factory.” The Factory quickly became, one of New York City’s premier cultural hotspots, a scene of lavish parties attended by the city’s wealthiest socialites and celebrities. Warhol’s life and work simultaneously satirized and celebrated materiality and celebrity. On the one hand, his paintings of distorted brand images and celebrity faces could be read as a critique of what he viewed as a culture obsessed with money and celebrity. On the other hand, Warhol’s focus on consumer goods and pop-culture icons, as well as his own taste for money and fame, suggest a life in celebration of the very aspects of American culture that his work criticized. Warhol spoke to this apparent contradiction between his life and work in his book The Philosophy of Andy Warhol, writing that “making money is art and working is art, and good business is the best art.”

 

The Painting

 

As evidenced by the artist’s signature and date on the verso of the canvas, 1 Colored Marilyn (Reversal Series), is one of the earliest works from a series of oil and silkscreen paintings completed by Andy Warhol between 1979 - 1986. In the works, Warhol revisited one of his most iconic and enduring subjects, the Hollywood star Marilyn Monroe. The Painting, which carried a pre-sale estimate of $1,500,000 - $2,000,000 in Phillips’ November 2017 New York auction, measures 46.4 cm by 34.9 cm (18 ¼ inches by 13 ¾ inches) and was created in 1979. Following its execution, the work was acquired by an American collector from Warhol’s primary dealer, Bruno Bischofberger, in 1984. The Painting remained in the Los Angeles collection of Douglas S. Cramer since its sale, until its acquisition by Masterworks in 2017.

 

The Art Market

 

The global art market is influenced by the overall strength and stability of the global economy, geopolitical conditions, capital markets and world events, all of which may affect the willingness of potential buyers and sellers to purchase and sell art.

 

According to the 2019 Art Basel Report, the global auction market was $29.1 billion in 2018 and global art sales were estimated at $67.4 billion, an increase of 6% from 2017. The report also states that Post War and Contemporary art, which represents works created from 1945 through the present day, is the largest category in terms of total dollar value of transactions, representing 50% and 46% of all global auction sales in 2018 and 2017, respectively. The Post War and Contemporary segment was followed in size by Modern art and Impressionist and Post-Impressionist art, which accounted for over 29% and 15% of the value in the auction market in 2018, respectively. The market for high end art is highly concentrated, both in terms of buyers and top-selling artists. In 2018, 36.1% of the auction market for Post War and Contemporary art was captured by the top twenty artists, while the top ten alone captured roughly 24.6%. Warhol was third in the segment, just behind Zao Wou-Ki and Jean-Michel Basquiat, with 3.4% of the sales in this category for 2018.

 

The fine art market is comprised of public auctions and private dealer or gallery sales. The private sales market is characterized by its opacity and is dominated by a small network of industry insiders where the majority of sales occur through consignments. By contrast, the public auction market is relatively transparent and sales occur on specific pre-announced dates. According to the Art Basel Report, the relative size of the private sales market as compared to the auction market tends to shift based on overall sentiment, where optimism in the market tends to favor auction sales. For example, in 2018, auction sales accounted for 43% of total sales by dollar volume, as compared to approximately 47% in 2017. According to Artnet, the auction market has grown considerably since 2000, with total pre-sale total estimates increasing by approximately 400% from May of 2000 to May of 2018. Of this growth, only approximately 25% is attributed to an increased number of works offered, while the remainder is attributed to price inflation.

 

One particularly important category within the broader Post War and Contemporary segment is Pop Art. The Pop Art movement emerged independently in Britain and the United States during the mid- to late-1950s and gained widespread recognition in the 1960s. Andy Warhol immediately established himself as one of the leading figures of Pop Art and continues to be one of the best-selling American artists of all time. Central to the movement was the practice of appropriation, where familiar images of consumer culture and mass media, especially, those from advertisements, cinema and everyday objects, were removed by artists from their original context and isolated or combined with unrelated material. By virtue of the technique, banal or kitschy elements of popular culture could be emphasized and examined by Pop Art, often through the use of irony. Many Pop Artists also came to rely on mechanical means of reproduction or rendering techniques as part of their process, thereby further emphasizing the consumer culture central to the work. 

 

We believe that Warhol was prolific by any measure. The Andy Warhol Catalogue Raisonné, the definitive record of the artist’s paintings, sculptures and drawings, is an ongoing effort by the Andy Warhol Foundation. Thus far, volumes I - V have been released covering the period from 1961 through 1978, with volume VI currently in preparation to cover 1978 – 1980. According to Artnet, Andy Warhol auction sales were $427 million in 2013, $653 million in 2014, $526 million in 2015 and, according to TEFAF and ArtPrice, $168 million in 2016, $175 million in 2017, and $244 million in 2018. According to Artnet, aggregate pre-sale auction estimates for Warhol works offered at May auctions by the leading auction houses over the eighteen-year period from 2000 through 2017 were $2.1 billion, second only to Pablo Picasso whose total was $2.5 billion, and significantly above Claude Monet, who came in third with $1.3 billion in aggregate auction estimates. According to auction data published by Artnet, Warhol was ranked the highest grossing artist in 2014 worldwide across categories, the second highest grossing artist in 2015 and the eighth highest grossing artist in 2016.  For 2018, ArtPrice ranks Warhol as the 5th most popular artist ranked by turnover, with a record of $37 million for an individual work sold last year. His all-time auction record was established in November 2013 with the sale of Silver Car Crash (Double Disaster for $105.4 million.

 

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According to a report published by Artnet in 2017, Andy Warhol is the second highest selling artist, with $4.9 billion of total auction sales over the 17-year period prior to publication of the report, behind only Pablo Picasso whose works sold for more than $6.2 billion over the same period. Ownership of Andy Warhol’s work is highly concentrated with several collectors or institutions holding a significant portion of his body of work. The Andy Warhol Museum claims to hold approximately 900 Warhol paintings and the Mugrabi family owns the largest private collection of Andy Warhol paintings, which according to an October 2017 Artnet article includes more than 1,000 works by Andy Warhol.

 

Administrative Services

 

There are various services required to administer our business and maintain the Painting. Pursuant to an administrative services agreement between us and Masterworks to be entered into prior to the completion of the Offering, the Administrator will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. In exchange for these services and as reimbursement for ordinary and necessary administrative costs, we will issue Class A ordinary shares to the Administrator at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum. The 1.5% share issuance in respect of fees and routine reimbursements to Masterworks will be made on a quarterly basis in arrears and there is no overall limit to the number of shares that may be issued to pay this fee. Any extraordinary or non-routine costs, payments and expenses, if any, will be paid for by the Administrator, but such extraordinary or non-routine costs and payments will be reimbursed upon the sale of the Painting or a sale of our Company, as applicable. Any termination of the Administrative Services Agreement will require the prior written consent of Masterworks Gallery, LLC.

 

Trading of and Market for the Class A Ordinary Shares

 

We intend to seek to make the Class A ordinary shares available for trading on one or more trading platforms that are approved by us or to facilitate brokerage transactions. Any such trading or sales activities must be conducted through an alternative trading system, or ATS, registered with the SEC or be exempt from such registration. We do not intend to list the Class A ordinary shares on a national securities exchange. Masterworks may, at some point in the future, apply to become a registered broker dealer and a member of FINRA and operate an online trading platform or execute brokerage transactions and receive transaction-based compensation from trading the Class A ordinary shares. Masterworks has not yet decided to pursue this strategy and the implementation of any such proprietary trading platform is not expected to occur within the first year following this Offering, if ever. Masterworks is seeking to make the Class A ordinary shares available for trading on one or more trading platforms owned and operated by unaffiliated third parties, though no such arrangement currently exists and it is not expected that such an arrangement will be established within the twelve month period following the consummation of the Offering. When and if Masterworks is able to operate a proprietary trading platform or develops a relationship with a third-party to facilitate brokerage transactions or establish secondary market trading of the Class A ordinary shares, it will inform holders of its Class A ordinary shares. There is currently no trading market for the Class A ordinary shares and no assurance can be provided that we can be successful in making the Class A ordinary shares available for trading on any trading platform, that a trading market for the Class A ordinary shares will develop or that any such market or brokerage arrangement will provide you with adequate liquidity to sell your Class A ordinary shares. Any secondary trading or sale of the Class A ordinary shares among investors may be restricted to comply with applicable state and foreign securities laws.

 

Selling the Painting

 

Our intention is to own the Painting for a five- to ten-year period, although we may elect to hold the Painting for a longer period or sell the Painting at any time due to certain circumstances. We will have the ability, in our sole and absolute discretion, to sell the Painting at a public auction and liquidate our Company if:

 

 

We become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market for the Class A ordinary shares fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, or
 

The Administrator notifies us of its intent to withdraw as the administrator of the Company.

 

The Painting is effectively perpetually available for sale following the Offering. If any person makes a Bona Fide Offer (as defined in our operating agreement) to purchase the Painting at any point in time, the Administrator will submit such offer to a vote of the then holders of our Class A ordinary shares, excluding any shares beneficially owned by Masterworks (“voting shares”) and if holders of a majority voting shares vote in favor of accepting such Bona Fide Offer, we will accept the Bona Fide Offer and sell the Painting.

 

If, on the seven-year anniversary of the closing of this Offering, the Administrator determines that an active trading market does not exist or such market does not have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, the Company will solicit the vote of holders of voting shares to sell the Painting (a “Liquidity Sale”). If the holders of a majority of voting shares vote to sell the Painting, the Administrator will use commercially reasonable efforts to sell the Painting at auction or in a privately negotiated transaction as soon as reasonably practicable, but not later than two years following such vote. If the Administrator proposes to execute such Liquidity Sale pursuant to a privately negotiated transaction and the proposed purchaser is known by the Administrator to be the beneficial owner of at least 10% of the voting shares or is an affiliate of the Administrator (a “Related Party”), the Company shall be required to obtain an additional approval of the terms of such Liquidity Sale with a Related Party purchaser from the holders of a majority of the voting shares as a condition to closing any such Liquidity Sale with a Related Party purchaser.

 

Further, except as noted above in connection with a Liquidity Sale, if at any time we or Masterworks decide to sell the Painting in a private sale transaction (i.e., non-auction sale), we must submit such proposed sale to a vote of the then holders of our voting shares, and if holders of a majority of the voting shares vote in favor of a sale, the Administrator will then effectuate the private sale.

 

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Following a sale of the Painting, we will pay or reimburse Masterworks for any expenses for which we are responsible in connection with the sale of the Painting, including applicable sales commissions, taxes and other transactional costs and expenses. After payment of such costs, expenses and taxes, the Company will be liquidated, and the remaining net proceeds, if there are any, will be distributed to the then record holders of our shares in accordance with the priorities set forth in our operating agreement. There can be no assurance that there will be any remaining net proceeds to be distributed at such time.

  

Organizational Structure

 

The following chart reflects the planned organizational structure of Masterworks following the Offering and the material relationships between us and Masterworks that will exist following the Offering:

 

 

 

 

 

*All entities are Delaware limited liability companies, except Masterworks Cayman 001, LLC, which is a Cayman Islands limited liability company. All entities, except Masterworks 001, LLC and its subsidiary, are referred to collectively as “Masterworks.” Our officers will also serve as officers of Masterworks. Masterworks entities will engage in other business activities, including performing services to other companies that have a similar business model as our Company.

 

(1)

“Masterworks.io” refers to our affiliate Masterworks.io, LLC, which owns the Masterworks Platform which will facilitate online investment in connection with this Offering and will be used to facilitate similar offerings for other companies. As of the date of this filing, Masterworks is facilitating a planned Regulation A offering by Masterworks 002, LLC, a Delaware limited liability company, that has filed a Regulation A offering with the SEC, which has not yet been qualified.

   
(2)

“Administrator” refers to Masterworks Administrative Services, LLC, which will operate the Masterworks Platform and will perform administrative services for us pursuant to the administrative services agreement. The Administrator will also retain rights to display the Painting. The Administrator will be entitled to receive fees and expense reimbursements for the administration of our operations in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding per annum (excluding Class B ordinary shares) following the closing of the Offering.

   
(3)

“Masterworks Gallery” refers to Masterworks Gallery, LLC, which owns 100% of our membership interests prior to giving effect to the Offering. Masterworks Gallery will sell the Painting to us for aggregate consideration equal to $1,996,500, representing 110% of its cost, which will be funded from the proceeds of the Offering, plus in the event any shares offered in this Offering remain unsold, such shares will be issued to Masterworks as additional consideration. Masterworks Gallery also owns 24,956 Class B ordinary shares representing a 20% profits interest in our Company.

   
(4)

“Masterworks Brokerage” refers to Masterworks Brokerage, LLC, an affiliate of Masterworks which may, at some point in the future, seek to apply to obtain SEC registration to operate a trading platform to trade the Class A ordinary shares and or to receive transaction fees from third party trading platforms that may be approved by us to trade the Class A ordinary shares in the future. No assurance can be given that Masterworks Brokerage will seek to obtain such registration or actually obtain such registration or engage in such activities.

   
(5)

Represent economic ownership percentages and assumes 100% of the Class A ordinary shares are sold in the Offering. To the extent any Class A ordinary shares are not sold in the Offering, such number of unsold shares will be issued to Masterworks Gallery in the form of Class A ordinary shares, as partial consideration for the Painting and the respective ownership percentages of Masterworks Gallery and investors will adjust accordingly. Class B ordinary shares will have no voting rights. Class A ordinary shares will have the limited voting rights further described below, and any shares beneficially owned by Masterworks will have no voting rights. Our day to day operations will be administered by our Administrator pursuant to our operating agreement and the administrative services agreement. Ultimately, Scott W. Lynn, the founder of Masterworks and the individual responsible for funding Masterworks has effective control over Masterworks.

   
(6) 

As of the date of this filing, the Company has entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company in the form of: Class A ordinary shares and Class B ordinary shares, and 24,956 Class B ordinary shares are held by Masterworks. The Class B ordinary shares will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding shares.

 

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Risk Factors

 

An investment in the Class A ordinary shares includes a number of risks and uncertainties which are described in the “Risk Factors” section of this offering circular, including the following:

 

  Risks Related to Our Business Model

 

  Our business model is new and untested.
  We do not expect to generate any revenues.
  We are as undiversified as a company can possibly be.
  We may sell the Painting at a loss or may be unable to sell the Painting at all.
  The timing of a sale of the Painting is unpredictable.

 

  Risks Associated with an Investment in a Company owning Fine Art

 

  The Painting may decline in value or may not increase enough in value to cover our administrative costs.
  The value of the Painting is highly subjective.
  Investment in art is subject to various risks, including fraud, poor or deteriorating condition, authenticity claims, and other risks.
  We may have overpaid for the Painting.
  We may not be able to sell the Painting.
 

We may be subjected to high transaction costs in selling the Painting.

 

  Risks Relating to Our Relationship with Masterworks

 

  We are totally reliant on Masterworks to maintain the Painting and administer us.
  Masterworks will have significant control over us.
  Masterworks interests may not be aligned with your interests for several reasons, including

 

  Masterworks will conduct other art-industry related activities,
 

Masterworks may earn fees from auction houses for providing guaranteed bids at auction,

  Masterworks intends to earn fees from trading in the Class A ordinary shares, and
 

Masterworks will be entitled to receive a true-up on the sale of the Painting to us equal to $181,500, or 10% of the cost of the Painting, and further, after the Offering, Masterworks will receive fees and expense reimbursements for the administration of our operations in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding per annum (excluding Class B ordinary shares) which will dilute all holders of our shares.

 

 

Our operating agreement contains provisions that reduce and waive fiduciary duties of the Board of Managers and the members.

  Masterworks is subject to cybersecurity risks that could adversely affect us.

 

  Risks Related to Ownership of the Class A ordinary shares and the Offering

 

  There is no active public market for the Class A ordinary shares and no assurance can be given that a trading market will develop.
  You may not be able to sell the Class A ordinary shares.
 

If a trading market develops, the trading price of the Class A ordinary shares may be extremely volatile.

  There is a risk the Offering will not close.
 

Investors in the Class A ordinary shares will continue to experience dilution after the Offering, due to our arrangement of paying the Administrator in Class A ordinary shares.

 

Investors using foreign currencies or credit cards to pay for their Class A ordinary shares if such payment methods are accepted by us will incur fees and interest charged by third parties in connection such payment methods and credit card investors will be subject to increased risk.

 

By purchasing shares in this Offering, investors are bound by the arbitration provisions contained in our subscription agreement which limits their ability to bring or seek remedies on a class basis.

 

Company Information

 

Our principal office is located at 497 Broome Street, New York, New York 10013 and our phone number is (203) 518-5172. Our corporate website address is the website address of Masterworks.io located at www.masterworks.io. Information contained on, or accessible through, the website is not a part of, and is not incorporated by reference into, this offering circular.

 

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We are a manager-managed limited liability company managed by the Board of Managers. We were formed for the specific purpose of acquiring, maintaining, promoting and ultimately selling the Painting. Purchasers of our Class A ordinary shares in this Offering and any previous or subsequent purchasers will be deemed to become party to our operating agreement, a form of which is filed as Exhibit 2.3 hereto. The Company has entered into an amended and restated operating agreement, which created two classes of membership interests of the Company in the form of: Class A ordinary shares and Class B ordinary shares, and 24,956 Class B ordinary shares are held by Masterworks. References throughout this offering circular to “shares” refer generically to the Class A ordinary shares and Class B ordinary shares and references to the Masterworks 001, LLC “operating agreement” and the “operating agreement” of Masterworks 001, LLC, refer to the Masterworks 001, LLC amended and restated operating agreement that became effective prior to the time of qualification of this offering circular by the SEC and the form of which was filed as Exhibit 2.3 to the offering statement of which this offering circular forms an integral part and unless otherwise stated herein.

 

Subject to applicable law, the Board of Managers will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Board of Managers shall not have the authority to amend our operating agreement (except in limited instances described therein), or the administrative services agreement (except in limited instances described therein), issue additional shares (other than pursuant to the administrative services agreement and upon conversion of Class B ordinary shares), incur debt for borrowed money, engage in other business activities or effect a sale of the Painting, subject to certain exceptions, without first obtaining the prior approval or consent of the shareholders.

 

The Board of Managers consists of three members and shall initially consist of, Nigel S. Glenday, Joshua B. Goldstein and the Independent Manager. Our operating agreement provides that each member of the Board of Managers will serve for an indefinite term, but that each may be removed by a majority of the Board of Managers for any reason, or may choose to withdraw under certain circumstances. In addition, our operating agreement provides that holders of two-thirds (2/3) of the voting shares may affirmatively vote to remove a member of the Board of Managers for “cause.”

 

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THE OFFERING

 

Class A ordinary shares Offered Up to 99,825 Class A ordinary shares, on a “best efforts” basis for up to $1,996,500 of gross proceeds. Purchasers of the Class A ordinary shares will become members of the Company. Aggregate proceeds from this Offering will not exceed $1,996,500 and not more than 99,825 Class A ordinary shares will be sold in this Offering.
   
Offering Price per Class A ordinary share by the Company $20.00 per Class A ordinary share.
   
Number of Shares Outstanding Before the Offering As of the date of this filing, there are no Class A ordinary shares issued and outstanding and there are 24,956 Class B ordinary shares currently issued and outstanding, which are held by Masterworks.
   
Amended and Restated Operating Agreement Prior to the time of qualification of this offering circular by the SEC, Masterworks 001, LLC entered into an amended and restated operating agreement, which created two classes of membership interests of the Company in the form of: Class A ordinary shares and Class B ordinary shares, and simultaneously, the 16,015 membership interests of Masterworks 001, LLC converted automatically into 24,956 Class B ordinary shares of Masterworks 001, LLC. References throughout this offering circular to the “Masterworks 001, LLC operating agreement,” the “operating agreement of Masterworks 001, LLC,” or “our operating agreement” refer to the Masterworks 001, LLC amended and restated operating agreement that became effective prior to the time of qualification of this offering circular by the SEC and the form of which is filed as Exhibit 2.3 to the offering statement of which this offering circular forms an integral part.
   
Number of Shares Outstanding After the Offering

99,825 Class A ordinary shares.

 

24,956 Class B ordinary shares (100% held by Masterworks). Class B ordinary shares are convertible into Class A ordinary shares based on a formula that will result in the issuance of a number of Class A ordinary shares to Masterworks equal to the quotient of (a) 20% of the aggregate increase in value of our issued and outstanding Class A and Class B ordinary shares, divided by (b) the value of the Class A ordinary shares at the time of conversion. For a detailed description of the Class B ordinary share conversion formula and an example of how it operates, see “Description of Shares.” 

   
Minimum and Maximum Investment Amount There is a $1,000 minimum investment requirement and $100,000 maximum purchase requirement per investor; however, we can waive the minimum and maximum purchase requirements on a case-by-case basis in our sole discretion. Subscriptions, once received, are irrevocable by the investors but can be rejected by us. In addition, our operating agreement, restricts beneficial ownership by any individual shareholder to a maximum of 19.99% of the total voting shares issued and outstanding. This 19.99% limitation does not apply to any of the Masterworks entities.
   
Subscribing Online Our affiliate Masterworks.io owns the Masterworks Platform and Masterworks Administrative Services, LLC operates the Masterworks Platform located at https://www.masterworks.io/ that enables investors to become equity holders in companies that own artworks. Through the Masterworks Platform, investors can browse and screen potential artwork investments, view details of an investment and sign contractual documents online. After the qualification by the SEC of the offering statement of which this offering circular is a part, the Offering will be conducted through the Masterworks Platform, whereby investors will receive and review relevant offering documents, including the offering circular, operating agreement and subscription agreement, and execute and deliver subscription agreements electronically. For more information on how to subscribe, see the section in this offering circular entitled “Plan of Distribution – Procedures for Subscribing.”
   
Underwriter SDDco Brokerage Advisors LLC (“SDDco-BA” or “Broker”), a New York limited liability company and a broker-dealer that is registered with the SEC and in each state where the offering will be made is an underwriter of this Offering on a “best efforts” basis. SDDco-BA is a member of FINRA and SIPC.
   
Payment for Class A ordinary shares After the qualification by the SEC of the offering statement of which this offering circular is a part, investors can make payment of the purchase price in the form of ACH debit transfer or wire transfer into a segregated non-interest bearing account held by us with Cross River Bank, Inc. until the closing date of this Offering. We may also permit payment to be made in foreign currency or by credit card if and to the extent we can establish and maintain relationships with licensed exchange services providers and or payment processing entities to facilitate such transactions and provided, further, we are able to do so in accordance with SEC and FINRA guidelines. Investors contemplating using their credit card to invest are urged to carefully review “Risk Factors – Risks of investing using a credit card.” On the closing date, the funds in the account will be released to us and the associated Class A ordinary shares will be issued to the investors in this Offering. If there is no closing of this Offering, the funds deposited in the segregated account will be returned to subscribers by mail via a check in U.S. dollars, without interest. If we accept credit cards, any such credit card subscription shall not exceed the lesser of $10,000 or the amount permitted by applicable law, per subscriber. Further, we will use a third-party service to convert any payment in foreign currency into U.S. dollars at the time a subscription agreement is executed, and then deposit such funds in the account. The third-party service used to convert foreign currency into U.S. dollars may charge a conversion fee or simply offer a reduced exchange rate. Prior to accepting payment in a foreign currency, the Masterworks Platform will display or link to the name of the third-party exchange, the then current exchange rate and any third-party conversion fees applicable to such transaction. If any funds are returned by us if we choose to reject a subscription or elect not to proceed with the Offering, such funds will be returned by mail via a check in U.S. dollars.

 

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Investment Amount

Restrictions

Generally, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, you are encouraged to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, you are encouraged to refer to www.investor.gov.
   
Worldwide

Class A ordinary shares will be offered worldwide, provided that we may elect not to sell shares in particular jurisdictions for regulatory or other reasons. No sales of Class A ordinary shares will be made anywhere in the world prior to the qualification of the offering circular by the SEC in the United States and FINRA’s issuance of a No Objections Letter. All Class A ordinary shares will be initially offered everywhere in the world at the same U.S. dollar price that is set forth in this offering circular; after the initial offering of the Class A ordinary shares, the offering price and other selling terms may be subject to change.

   
Voting Rights

The Class A ordinary shares have no voting rights other than the right to vote, voting as a single class, to approve certain acts as described in the Masterworks 001, LLC operating agreement, including the ultimate sale of the Painting in connection with our receipt of a Bona Fide Offer or in connection with a Liquidity Sale (as such terms are defined in the Masterworks 001, LLC operating agreement) or another private sale transaction (i.e., non-auction sale) and the right to vote on certain amendments to the operating agreement and the administrative services agreement.

   
Risk Factors Investing in the Class A ordinary shares involves risks. See the section entitled “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in the Class A ordinary shares.
   
Use of Proceeds

We expect to receive proceeds of up to $1,996,500 from this Offering. The Administrator will pay all expenses of the Offering, fees and expenses associated with qualification of the Offering under Regulation A and all brokerage fees and expense reimbursements payable to SDDco-BA. Therefore, the gross proceeds from this Offering will equal the net proceeds from this Offering. We will use all of the proceeds from this Offering, together with any remaining unsold Class A ordinary shares from this Offering, if any, to acquire the Painting from Masterworks.

   
Closing

The closing of the Offering will occur on the earlier of (i) the date that the subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by the Company in its discretion.

   
Termination of the Offering

The maximum offering period is 270 days from commencement of the Offering and will expire on February 4, 2020, though we reserve the right to terminate the Offering at any time for any reason.

   
Transfer Restrictions The Class A ordinary shares may only be transferred by operation of law or with the consent of the Company:

 

  To an immediate family member or an affiliate of the owner of the Class A ordinary shares,
  To a trust or other entity for estate or tax planning purposes,
  As a charitable gift, or
  On a trading platform approved by Masterworks or in a transaction otherwise approved by Masterworks.

 

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Transfer Agent and Registrar We intend to engage Transfer Online, Inc. to be our transfer agent and registrar.
   
Dividends

None, unless and until there is a sale of the Painting, at which point we plan to pay a liquidating distribution. There can be no assurance as to the timing of a liquidating distribution or that we will pay a liquidating distribution at all.

 

DETERMINATION OF OFFERING PRICE

 

The price per each Class A ordinary share was determined by dividing (1) the sum of (a) purchase price that Masterworks paid for the Painting, $1,815,000, plus (b) 10% of such amount which equals the true-up payable to Masterworks, which is $181,500, in connection with its sale of the Painting to us, by (2) 99,825, which is the maximum number of Class A ordinary shares that will be sold in this Offering (or issued to Masterworks if any remain unsold). Masterworks Gallery owns 24,956 Class B ordinary shares representing a 20% profits interest in our Company and following the Offering will own Class A ordinary shares if and to the extent the Offering is not fully subscribed, since the number of unsold Class A ordinary shares, if any, will be paid to Masterworks as part of the purchase price for the Painting. Prior to this Offering, no public market exists for the Class A ordinary shares, and there can be no assurance that a public market will ever exist for the Class A ordinary shares. The Company believes that based on the price paid for the Painting at public auction, historical appreciation rates of similar paintings by the same artist and other factors, the per share offering price constitutes a reasonable estimate of the fair value of the Class A ordinary shares as of the date of this Offering Circular.

 

DIVIDEND POLICY

 

We have not declared or paid dividends on the Class A ordinary shares since our formation and do not anticipate paying dividends in the foreseeable future on any shares, unless and until the Painting is sold, at which point we plan to pay a liquidating distribution. There can be no assurance as to the timing of a liquidating distribution or that we will pay a liquidating distribution at all. There are no contractual restrictions on our ability to declare or pay dividends and if any are to be paid in the future, such decision will be at the discretion of our Board of Managers and will depend on our then current financial condition and other factors deemed relevant by the Board of Managers.

 

RISK FACTORS

 

The purchase of the Class A ordinary shares offered hereby involves a high degree of risk. Each prospective investor should consult his, her or its own counsel, accountant and other advisors as to legal, tax, business, financial, and related aspects of an investment in the securities offered hereby. Prospective investors should carefully consider the following specific risk factors, in addition to the other information set forth in this offering circular, before purchasing the securities offered hereby.

 

Risks Related to our Business Model

 

The Company is a new company and our business model is untested.

 

The Company is a new company that was formed on March 28, 2018 and had no operating history. We cannot make any assurance that our business model can be successful. Since inception, the scope of our operations has been limited to our formation. Our business model includes novel and unique features that are untested. Our operations will be dedicated to acquiring and maintaining the Painting and facilitating the ultimate sale of the Painting. We do not expect to generate any revenues or cash flow until the Painting is sold and no profits will be realized by our investors unless the Painting is sold for more than we acquired it for and there are sufficient funds after all applicable costs, expenses and taxes in order to effectuate a distribution to holders of our Class A ordinary shares upon our liquidation. We are not aware of another company that has successfully offered investors securities that represent indirect ownership of an interest in a single work of art. Similarly, there are few, if any, companies that have offered investors securities that represents indirect ownership in a single asset with the sole goal of realizing appreciation on the value of that asset. Accordingly, it is impossible to determine in advance how the Class A ordinary shares will trade relative to the underlying value of the Painting or if they will be able to trade at all. It is difficult to predict whether this business model will succeed or if there will ever be any value in the Class A ordinary shares.

 

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We do not expect to generate any revenues.

 

Our business activities will be dedicated to maintaining the Painting and facilitating the ultimate sale of the Painting, which may not occur for many years. Our intention is to own the painting for a five- to ten-year period, although we may elect to hold the Painting for a longer period or sell the Painting at any time due to certain circumstances. We do not expect to generate any revenues or cash flow unless the Painting is sold and no profits can be realized by our investors unless the Painting is sold for more than we acquired it for and there are sufficient funds to effectuate a distribution after paying the applicable costs, taxes and expenses, or the investors sell their Class A ordinary shares on a trading platform approved by us or through brokerage relationships for more money than they acquired them for. Because we do not expect to generate any positive cash flow, we will be completely reliant on Masterworks to fund our operations. Investors should be prepared to hold their Class A ordinary shares for an indefinite period, as there can be no assurance that the Class A ordinary shares can ever be tradable or that the Painting can be sold for more than what we paid for it, or at all.

 

We are extremely undiversified as a company since our strategy is investing in a single piece of art.

 

Our Company was formed to acquire, maintain and potentially sell the Painting. We will not invest in any other artwork or assets. Such lack of diversification substantially increases market risks and the risk of loss associated with an investment in our Class A ordinary shares. A consequence of limiting our scope of operations to ownership of a single Painting is that the aggregate returns realized by investors are expected to correlate to the underlying value of the Painting.

 

We may sell the Painting at a loss or at a price that results in a liquidating distribution that is below the trading price of the Class A ordinary shares, or no liquidating distribution at all.

 

The Company will have the ability, in its sole and absolute discretion, to sell the Painting at a public auction and liquidate us if:

 

 

We become subject to the reporting requirements of the Exchange Act,

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have volume sufficient to permit reasonable trading of the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.

 

Any such sale could be affected at an inopportune time, at a loss and or at a price that would result in a distribution of cash that is less than the trading price of our Class A ordinary shares or no liquidating distribution at all, and our investors could lose part or all of their investment in us. Investors should be prepared to hold their Class A ordinary shares for an indefinite period of time, as there can be no assurance that the Class A ordinary shares can ever be tradable or that the Painting can be sold for more than what we paid for it, or at all.

 

The timing and potential price of a sale of the Painting are impossible to predict, so investors need to be prepared to own the Class A ordinary shares for an uncertain or even indefinite period of time.

 

We intend to sell the Painting within a five- to ten-year time horizon, although we may elect to hold the Painting for a longer period due to market conditions or other circumstances. In addition, the occurrence of certain events, such as our inability or unwillingness to make the Class A ordinary shares available for trading on a trading platform approved by us, may compel us to sell the Painting at an earlier time. Accordingly, a risk of investing in the Class A ordinary shares is the unpredictability of the timing of a sale of the painting and the unpredictability of funds being available of a cash distribution and investors should be prepared for both the possibility they will not to receive a cash distribution for many years, if ever, and the contrary possibility that they may receive a liquidating cash distribution at any time following the completion of the Offering. Investors should be prepared to hold their Class A ordinary shares for an indefinite period of time, as there can be no assurance that the Class A ordinary shares can ever be tradable or that the Painting can be sold for more than what we paid for it, or at all.

 

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Our structure may make it more difficult for us to sell the Painting at the highest possible price.

 

We have intentionally limited the manner in which we can sell the Painting without shareholder approval. Unless we obtain the prior approval of the then holders of our voting shares, our operating agreement, prohibits us from selling the Painting in a private (i.e. non-auction) sale. If the sale is initiated by the Company, we will execute the sale at a public auction conducted by Christie’s, Sotheby’s, Philips or another leading auction house. If we are approached by a potential purchaser, we will only execute the sale if such transaction is approved by the then holders of our voting shares. A significant percentage of transactions in fine art occur through privately negotiated transactions among art professionals and clients and many collectors and investors do not participate in public auctions. Similarly, collectors and investors may not be inclined to go through the trouble and cost to make an offer if there is a significant risk the shareholders will not approve such offer. Given the uniqueness of our model and the evolving character of the art market it is impossible to determine what effect, if any, these issues will have on our ability to eventually sell the Painting at the highest possible price. Further, there can be no assurance that the Painting can be sold at a profit or at all. The timing of the sale, and the potential value of the Painting will depend upon many factors beyond our control and investors in our Company should be prepared to lose all or part of their investment in our Company.

 

Our business model involves certain costs, some of which are to be paid for in Class A ordinary shares which will have a dilutive effect on the holders of our Class A ordinary shares.

 

There are various services required to administer our business and maintain the Painting. Pursuant to an administrative services agreement between us and the Administrator to be entered into prior to the completion of the Offering, the Administrator will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. The Administrator will pay all ordinary and necessary costs and expenses associated with the administration of our business and maintenance of the Painting. In exchange for these services and incurring these costs, we will issue Class A ordinary shares to the Administrator at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum as consideration for such activities. Any extraordinary or non-routine services, if any, will be managed and paid for by the Administrator, but actual third-party costs associated with these extraordinary or non-routine services will be reimbursed upon the sale of the Painting or a sale of our Company, as applicable.

 

Because we do not expect to generate any positive cash flow, we will be completely reliant on the Administrator to fund our operations. The portion of the foregoing fees that are going to be paid in Class A ordinary shares will have a dilutive effect on the holders of our Class A ordinary shares and will effectively reduce the tangible book value per Class A ordinary share over time.

 

In the event we are able to sell the Painting, your potential investment returns will be lower than the actual appreciation in value of the Painting due to applicable costs, expenses and taxes to be paid.

 

In the event the Painting is sold, your distribution of cash proceeds will be reduced by costs, expenses and taxes. Sale prices reflected in action records, include the hammer price (i.e. the price at which the auctioneer declared the winning bid), plus the buyer’s premium and are reported net of applicable taxes, fees and royalties. Taxes, fees and royalties are typically paid by the purchaser. The amount of the published sale price a seller of a work receives is typically reduced by all or a portion of the buyer’s premium and there may also be a sales commission. These economic terms are negotiated between the seller and the auction house and vary widely depending on a number of factors, including the value and importance of the specific work, whether the work is sold as an individual piece or part of a larger transaction, anticipated demand levels and other factors. For a work similar to the Painting, it would be reasonable to expect that the net pre-tax cash proceeds to a seller in an auction sale would be in the range of 8% to 15% less than the published sale price, Accordingly, if for example, the Painting were to eventually sell at auction for a sale price of $3.0 million (hammer price, plus buyer’s premium), the net proceeds available to the Company as the Seller would be expected to be in the range of $2,760,000 to $2,550,000, however, the net result could fall outside of this range. The distribution to you upon dissolution of us following a sale will also be taxable to you depending on your tax basis in the Class A ordinary shares, the geographic area in which you reside and your local tax laws. Accordingly, your investment returns upon a sale of the Painting, if such a sale can occur and if such sale can generate sufficient funds for a distribution after accounting for applicable expenses and taxes, may be significantly lower than the actual rate of appreciation of the Painting.

 

Risks Associated with an Investment in Fine Art

 

There is no assurance of appreciation of the Painting or sufficient cash distributions resulting from the ultimate sale of the Painting.

 

There is no assurance that the Painting will appreciate, maintain its present value, or be sold at a profit. The marketability and value of the Painting will depend upon many factors beyond our control. There can be no assurance that there will be a ready market for the Painting, since investment in Painting is generally illiquid, nor is there any assurance that sufficient cash will be generated from the sale of the Painting to compensate members for their investment. Even if the Painting does appreciate in value, the rate of appreciation may be insufficient to cover our administrative costs and expenses.

 

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The value of the Painting is highly subjective and appraised values and auction estimates may differ widely from actual realizable value.

 

The value of the Painting is inherently subjective given its unique character. Although the auction estimate for the Painting at the November 16, 2017 auction held by Phillips Auctioneers LLC, or “Phillips,” was between $1,500,000 and $2,000,000, investors are cautioned not to put undue emphasis on the auction estimate, which is subject to a number of important qualifications and assumptions. The actual realizable value of a fine artwork may differ widely from auction estimates or its appraised value for a variety of reasons, many of which are unpredictable and impossible to discern. In addition, the net realizable value to a seller is often significantly lower than the published sale price because the net proceeds are typically reduced by all or a portion of the buyer’s premium and there may also be a sales commission.

 

For non-cash generating assets, such as fine art, valuation is heavily reliant on an analysis of sales history of similar artwork. Experts often differ on which historical sales are comparable and the degree of comparability. The attempt to discern value from historical sales data is extremely challenging for a variety of reasons, including, without limitation:

 

  Qualitative Factors. Differences in perceived quality or condition between the subject work and the so-called “comparable” sale. Perceived differences in the physical quality and condition of the respective works require subjective judgements as to the valuation impact attributable to such differences.
     
 

Lack of Reliable Data. Data from non-auction sales, comprising a majority of all sales, is largely unavailable and historical sales data may be inaccurate. Also, data may be stale or unavailable because comparable works may remain off market for extended periods of time, often for generations. Even for public auctions, sale prices may be incorrectly reported due to credits for guarantees entered into with buyers (though under current rules, these would be deducted from the reported sale price), or other credits provided to potential buyers.

     
  Subjective Factors. Subjective motivations of a buyer or seller may significantly affect the sale price. These motivations may relate to an emotional attachment to the work, ego, financial, estate or tax planning objectives, the desire to enhance or complete a specific collection objective, perceptions of supply and scarcity and other factors.
     
 

Timing Differences. Historical transactions must be viewed in light of market conditions at the time compared to current conditions. Overall market conditions are difficult to track in recent periods and extremely difficult to discern for historical periods. Harder still, is the ability to track the relative popularity of specific works, artists and genres over historical periods.

   
  Market Depth. Sale prices only reflect the price a single buyer was willing to pay for a work, so it’s very difficult to determine the depth of demand at various price levels at or below the sale price.
     
  Entanglements. It is not uncommon in the art market for buyer, sellers and intermediaries to enter into private contractual arrangements that may affect the selling price in a specific transaction. It is often impossible to know of the existence or terms of any such contractual arrangements.

 

Accordingly, due to the inherent subjectivity involved in estimating the realizable value of the Painting, any appraisal or estimate of realizable value may prove, with the benefit of hindsight, to be different than the amount ultimately realized upon sale and such differences can be, and often are, material.

 

An investment in the Painting is subject to various risks, any of which could materially impair the value of the Painting and the market value of our Class A ordinary shares.

 

Investing in Painting is subject to the following risks:

 

  Authenticity. Claims with respect to the authenticity of a work may result from incorrect attribution, uncertain attribution, lack of certification proving the authenticity of the artwork, forgery of a work of art, or falsification of signature.

 

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  Provenance. Claims related to provenance are relatively common and allege that an artwork has an uncertain or false origin.
     
  Condition. The physical condition of an artwork over time is dependent on technical aspects of artistic workmanship, including the materials used, the manner and skill of application, handling and storage and other factors. Condition often declines over time and could be impaired by the storage conditions of the Painting, viewing and accidental damage by guests physically around the Painting, or other factors.
     
  Physical Risks. Painting is subject to potential damage, destruction, devastation, vandalism or loss as a result of natural disasters (flood, fire, hurricane), crime, theft, illegal exportation abroad, etc.
     
 

Legal Risks. Painting ownership is prone to a variety of legal challenges, including challenges to title, nationalization, purchase of work of art from unauthorized person, risk of cheating, money laundering, violation of legal regulations and restitution issues.

     
  Market Risks. The art market is prone to change due to a variety of factors, including changes in transaction costs, substantial changes in fees, tax law changes, export licenses etc., changes in legal regulations, changes in attitudes toward art as an investment, changes in tastes, trends (fashion) and changes in supply, such as the liquidation of a major collection. These risks can be specific to certain geographies, as economic and policy shifts in countries such as China and Russia have had a large influence on art prices over the past several years.
     
  Economic Risks. Art values and demand are affected by global and regional economic conditions and stock, bond and commodity markets and subject to declines in value in connection with broader declines in other asset classes.
     
  Fraud Risk. The art market is unregulated and prone to abusive practices, including price manipulation, disguised agencies and lack of transparency.

 

Although Masterworks Gallery purchased the Painting from a reputable auction house and conducted due diligence in connection with its purchase of the Painting, no amount of due diligence can completely insulate a buyer against these risks and if any of these risks materialize, the value of the Painting may decline, and the trading price of the Class A ordinary shares would be adversely affected.

 

If the painting is eventually displayed in a gallery space or other location, it could be damaged, and insurance may not cover all of the damages, or even if insurance does cover the damages, it may cause the painting to be unsaleable.

 

It is planned that the Painting will be permanently stored and or displayed in the United States, though it might be displayed periodically in an international location. We plan to initially store the Painting at an unaffiliated commercial art storage facility in Delaware. The Painting is currently stored at a warehouse located at 111 Alan Drive, Newark DE 19711 in custody of Delaware Freeport LLC. Shareholders will be notified when the Painting is displayed. We plan to obtain and maintain insurance coverage for the Painting. However, the painting may be damaged while being displayed and our insurance may not be able to cover all of the damages resulting therefrom, and even if insurance does cover such damages, the damages may result in the Painting being unsaleable. Accordingly, damage or destruction of the Painting will have a material adverse impact on the value of the Painting and, consequently, the value of the Class A ordinary shares.

 

We may have overpaid for the Painting.

 

We plan to purchase the Painting at the same purchase price paid by Masterworks, which is the same as the price paid by Masterworks’ agent at a public auction in November 2017. Accordingly, if Masterworks overpaid for the Painting, we will have overpaid for the Painting. When Masterworks determines how much to pay for any painting, including the Painting, it may not know about additional commissions or incentives the seller, or the seller’s representative (including a dealer or auction house) of the Painting is receiving in the transaction or other facts that prove to be material to its estimate of valuation.

 

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We may not be able to find a buyer for the Painting at a reasonable price.

 

Art is a highly illiquid asset and a significant percentage of objects go unsold when sent to auction. Even in the event that we attempt to sell the Painting, we cannot guarantee that there will be a buyer at any reasonable price. Additionally, if the Painting does go to an auction sale and is not sold, such failure could damage the reputation of the Painting in the marketplace and make it even more difficult to sell in the future.

 

The global economy, the financial markets and political conditions of various countries can adversely affect the supply of and demand for works of art.

 

The global art market is influenced over time by the overall strength and stability of the global economy and the financial markets of various countries, although this correlation may not be immediately evident. In addition, global political conditions and world events may affect our business through their effect on the economies of various countries, as well as on the willingness of potential buyers to purchase the Painting in the wake of economic uncertainty. Accordingly, weakness in those economies and financial markets can adversely affect the supply of and demand for works of art and the value of the Class A ordinary shares. Furthermore, global political conditions may also influence the enactment of legislation that could adversely impact our business.

 

Temporary popularity of some paintings or categories of art may result in short-term value increases that prove unsustainable as collector tastes shift.

 

Temporary consumer popularity or “fads” among collectors may lead to short-term or temporary price increases, followed by decreases in value. The demand for specific categories of art and artists is influenced by changing trends in the art market as to which collecting categories and artists are most sought after and by the collecting preferences of individual collectors. These conditions and trends are difficult to predict and may adversely impact our ability to sell the Painting for a profit. These risks of changes in popularity may be greater for a living or emerging artist, as compared to other categories which may have a proven valuation track record over a longer period of time. These trends could result in reduced profitability or a loss upon the sale of the Painting.

 

We could be exposed to losses in the event of title or authenticity claims.

 

The buying and selling of artwork can involve potential claims regarding title, provenance and or authenticity of the artwork. Authenticity risk related to works of art may result from incorrect attribution, uncertain attribution, lack of certificate proving the authenticity of the artwork, purchase of a non-authentic artwork, or forgery. In the event of a title or authenticity claim against us by a buyer of the Painting from us, we may or may not have recourse against the seller to us of the Painting, but a claim could nevertheless expose us to losses. In addition, we do not maintain liquid assets to defend or settle any such legal claims and would be reliant on the Administrator to outlay the cost of such defense or settlement.

 

Ownership of Andy Warhol’s work is highly concentrated, and any large-scale divestiture of a major Warhol collection could negatively affect prices.

 

The Andy Warhol Museum and the Mugrabi family own the largest collections of Andy Warhol paintings and other sizable collections exist throughout the world. Many art industry participants believe that the Mugrabi family has been largely responsible for the popularity and pricing of Andy Warhol’s work and they have purchased large numbers of Warhol paintings at auction during the past twenty years to keep prices up. If the Mugrabi family or any other major collector were to liquidate a large number of Warhol paintings, the supply demand dynamic that has characterized the Warhol market in recent years could shift dramatically. A significant increase in the number of Warhol paintings available for sale would likely reduce prices.

 

The Painting could be subject to damage, theft or deterioration in condition, which could have a material adverse effect on the value of the Painting.

 

We plan to store the Painting in a protected environment with security measures, but no amount of security can fully protect a painting from damage or theft. The damage or theft of valuable property despite these security measures could have a material adverse impact on the value of the Painting and, consequently, the value of our Class A ordinary shares.

 

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Damage to the reputation of the artist, or the subject matter painted by the artist, could impair the value of the Painting.

 

The value of a work of art is or can be dependent on the individual brand and reputation of the artist and, in the case of this particular work, the subject matter. Although numerous books have been written about the artist and the subject matter, it is possible that historians will uncover previously unknown facts or allegations about them. If any new material revelation were to emerge and such revelation were to cast either the artist of the subject matter in a disparaging light, such revelation could negatively affect demand for the Painting, which could diminish or eliminate its value.

 

Changes in opinions by experts in the art work regarding authenticity could damage or eliminate the value of the Painting.

 

Authenticity is often completed by art world experts, and opinions often matter more than scientific data. If a well-respected art expert were to opine negatively on the authenticity of the Painting, it could reduce or eliminate the value of the Painting.

 

Insurance coverage for the Painting does not cover title claims and may not cover all possible contingencies, exposing us to losses resulting from the damage or loss of the Painting.

 

We plan to maintain insurance coverage for the Painting against damage or loss of the Painting. Our insurance coverage does not cover title claims and may expressly exclude damage caused by war, losses caused by chemical or biological contamination and certain other potential loss scenarios. Accordingly, a successful claim that Masterworks does not have valid title and ownership to the Painting, or uncovered damage or destruction of the Painting, will have a material adverse impact on the value of our Class A ordinary shares.

 

Industry sales cycles can be unpredictable.

 

Purchase behavior by collectors is generally unpredictable due primarily to the discretionary nature, relative scarcity and high values of art purchases. An art buyer may typically purchase art when excess liquidity is abundant. When economic conditions preclude art collectors from purchasing the Painting, such a downturn in sales will affect our ability to sell the Painting. Additionally, many art buyers have significant access to credit to facilitate the purchase of artwork and any changes which would cause art collectors to not access credit could have a serious impact on a collector’s ability to purchase the Painting.

 

Risks Related to our Reliance on the Administrator

 

We are totally reliant on the Administrator to maintain and sell the Painting and manage our administrative services.

 

We do not plan to have employees or intend to maintain or generate any cash flow prior to the sale of the Painting. Accordingly, we are totally reliant on the performance of the Administrator under the administrative services agreement. We plan to rely on the Administrator to perform or administer all necessary services to maintain the Painting, including obtaining insurance and ensuring appropriate storage. The Administrator is also responsible for all administrative services required to maintain our Company, including professional services, regulatory filings, SEC reporting, tax filings and other matters. The Administrator is a newly formed company and has not yet developed a track record of successful performance of these activities. If the Administrator were to default on its obligations under the administrative services agreement, it would be extremely difficult for us to replace the Administrator or internally manage these functions given our lack of cash flow and lack of employees. Any termination of the Administrative Services Agreement will require the prior written consent of Masterworks Gallery, LLC. Accordingly, in the event of a material default by the Administrator under the administrative services agreement, we would likely be forced to sell the Painting. We cannot provide assurance that the timing and or terms of any such sale would be favorable. Further, after the five-year anniversary of this Offering, Masterworks can withdraw for any reason from its position as our Administrator, provided that such withdrawal would only become effective upon a sale of the Painting.

 

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We are totally reliant on the Administrator to maintain sufficient capital resources to pay our fees, costs and expenses.

 

Although we believe the Administrator has sufficient capital resources and sources of liquidity to perform its obligations under the administrative services agreement for the foreseeable future, there can be no assurance that the Administrator will be able to maintain sufficient capital to satisfy its obligations in future periods. The Administrator’s capital resources and sources of liquidity will be relied upon by our auditors in determining our likely ability to continue as a going concern. Pursuant to and in accordance with the administrative services agreement, the Administrator is required to maintain cash reserves on hand for so long as the Class A ordinary shares remain outstanding sufficient to pay at least one year of estimated expenses to satisfy its obligations under the administrative services agreement. However, there can be no assurance that the Administrator will be able to maintain such cash reserves. If the Administrator’s liquid capital resources and sources of liquidity are insufficient to satisfy its operational requirements, including the management of our Company, for at least one year, our Company will receive qualified audit reports that would likely have a material adverse effect on the value and trading price of our Class A ordinary shares.

 

The Administrator is a newly formed business and could run out of capital.

 

The Administrator is a newly formed entity which is responsible for paying expenses of maintaining the Painting, including storage and insurance, as well as administrative costs associated with managing publicly traded companies such as ours. In that regard, we anticipate that the Administrator’s fee revenue will be fixed by contract with each entity that it manages, as it is for our Company, but its expenses will be variable and prone to increases based on market and other factors. In addition, because the Administrator intends to manage entities like ours that do not have liquid assets, it will periodically need to outlay capital for unusual or non-recurring expenses that will only be reimbursable upon a subsequent sale of the underlying Painting, which could result in liquidity shortages. The Administrator currently relies on a single investor, Scott Lynn, for all of its capital and liquidity. If Scott Lynn were to cease funding the Administrator for any reason, the Administrator may not be able to identify additional sources of capital.

 

The Board of Managers will have complete authority to administer our business consistent with the terms and conditions of our operating agreement, other than material amendments to the operating agreement and the administrative services agreement and any private sale of the Painting and other than the services to be provide by the Administrator, which will administer the day to day operations of the Company pursuant to the administrative services agreement.

 

The Board of Managers will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Board of Managers shall not have the authority to do any the following without first obtaining the prior approval or consent of holders of a majority of the voting shares:

 

  Amend, waive or fail to comply with any material provision of the operating agreement or the administrative services agreement, except as provided therein;
  Issue any additional Class A ordinary shares following the completion of the Offering, except Class A ordinary shares issued to Masterworks for administrative services and upon the conversion of the Class B ordinary shares, acquire additional material assets, incur debt for borrowed money or engage in business activities that are unrelated to the ownership, maintenance, promotion and sale of the Painting;
  Effect any sale of Painting in a private transaction (e.g. a non-auction sale), except in connection with a Liquidity Sale to a purchaser that is not a Related Party; or
  Effect any sale of the Painting at a public auction, unless:

 

 

We become subject to the reporting requirements of the Exchange Act,

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have volume sufficient to permit reasonable trading of the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.

 

If, on the seven-year anniversary of the closing of this Offering, the Administrator determines that an active trading market does not exist or that such market does not have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, the Company will solicit the vote of holders of voting shares to sell the Painting (a “Liquidity Sale”). If the holders of a majority of voting shares vote to sell the Painting, the Administrator will use commercially reasonable efforts to sell the Painting at auction or in a privately negotiated transaction as soon as reasonably practicable, but not later than two years following such vote. If the Administrator proposes to execute such Liquidity Sale pursuant to a privately negotiated transaction and the proposed purchaser is known by the Administrator to be the beneficial owner of at least 10% of the voting shares or is an affiliate of the Administrator (a “Related Party”), we shall be required to obtain an additional approval of the terms of such Liquidity Sale with a Related Party purchaser from the holders of a majority of the voting shares as a condition to closing any such Liquidity Sale with a Related Party purchaser.

 

Members of the Board of Managers may be removed by a majority of the Board of Managers for any reason with or without “cause” or for “cause” as defined in our operating agreement by a vote of the holders of two-thirds (2/3) of the voting shares. This concentration of control in the Board of Managers may delay, deter or prevent acts that would be favored by holders of our Class A ordinary shares. The interests of the Board of Managers or the Administrator may not always coincide with our interests or the interests of the holders of our Class A ordinary shares. As a result, the market price of our Class A ordinary shares could decline, or holders of our Class A ordinary shares might not receive a premium over the then-current market price of our Class A ordinary shares upon a change in control.

 

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Holders of our Class A ordinary shares do not elect or vote on the Administrator and have limited ability to influence decisions regarding our business.

 

Our operating agreement provides that our assets, affairs and business will be managed under the direction of the Board of Managers. Holders of our Class A ordinary shares do not elect or vote on the Board of Managers and can only remove the Board of Managers by a vote of two-thirds (2/3) of the voting shares and only for “cause” as defined in the operating agreement. Accordingly, unlike the holders of common stock in a corporation, holders of Class A ordinary shares have only limited voting rights on matters affecting our business, and therefore limited ability to influence decisions regarding our business.

 

As a non-listed company conducting an exempt offering pursuant to Regulation A, we are not subject to a number of corporate governance requirements, including the requirements for a board of directors or independent board committees.

 

We do not intend to list the Class A ordinary shares on a national securities exchange. As a non-listed company conducting an exempt offering pursuant to Regulation A, we are not subject to a number of corporate governance requirements that an issuer listing on a national stock exchange would be. The Board of Managers is made up of Nigel S. Glenday, Joshua B. Goldstein, and Leonard J. Sokolow. One of the members of the Board of Managers, Leonard J. Sokolow, serves as the Independent Manager on the Board of Managers (the “Independent Manager”). The Independent Manager serves to protect the interests of the holders of the Class A ordinary shares and is tasked with reviewing and approving all related party transactions of our Company with our affiliates and address all conflicts of interest that may arise between us and the holders of the Class A ordinary shares and our affiliates. If the Independent Manager resigns from such position on the Board of Managers at any time, the remaining members of the Board of Managers shall appoint a replacement that meets the standards of an independent director pursuant to the standards set forth in NASDAQ Marketplace Rule 4200(a)(15). Accordingly, we do not have, nor are we required to have (i) a board of directors of which a majority consists of “independent” directors under the listing standards of a national stock exchange, (ii) an audit committee composed entirely of independent directors and a written audit committee charter meeting a national stock exchange’s requirements, (iii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting a national stock exchange’s requirements, (iv) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of a national stock exchange, and (v) independent audits of our internal controls. Accordingly, you may not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of a company listed on a national stock exchange.

 

We are reliant on the integrity of the Masterworks Platform and a security or privacy breach could expose us to liability or damage our reputation.

 

We will rely on the Masterworks Platform and other systems and technologies owned or licensed to communicate with our shareholders. Masterworks also uses mobile devices, social networking and other online activities to communicate with employees and investors. Such uses give rise to cybersecurity risks, including security breach, espionage, system disruption, theft and inadvertent release of information. Masterworks collects sensitive and confidential information, including personal information about investors and private information about employees. Information security risks have generally increased in recent years due to the rise in new technologies and the increased sophistication and activities of perpetrators of cyber attacks. The theft, destruction, loss, misappropriation or release of sensitive and/or confidential information, or interference with the Masterworks Platform or any of the Masterworks’ information technology systems or the technology systems of third-parties on which Masterworks relies, could result in business disruption, negative publicity, brand damage, violation of privacy laws and potential liability, any of which could result in a material adverse effect on the value and liquidity of the Class A ordinary shares.

 

Risk of non-compliance with regulations.

 

The Class A ordinary shares are being sold by SDDco-BA, which is a registered broker-dealer under the Securities Exchange Act of 1934 (the “Exchange Act”) and registered in each state where the offer and sales of the Class A ordinary shares will occur, and it is anticipated that Class A ordinary shares will be offered and sold only in states where SDDco-BA is registered as a broker-dealer. If a regulatory authority determines that the Administrator, which is not a registered broker-dealer under the Exchange Act or any state securities laws, has itself engaged in brokerage activities that require registration, including initial sale of the Class A ordinary shares on the Masterworks Platform and permitting a registered broker-dealer to facilitate resales or other liquidity of the Class A ordinary shares on the Masterworks Platform, the Administrator may need to stop operating and therefore, the Company would not have an entity managing the Painting. In addition, if the Administrator is found to have operated as a ‘broker-dealer’ without being properly registered, there is a risk that Class A ordinary shares offered and sold while the Administrator was not registered may be subject to a right of rescission, which may result in the early termination of the Offering.

 

Risks Relating to Potential Conflicts of Interest

 

Our affiliate, Masterworks Brokerage, may seek register to operate or establish relationships with an automated trading system to enable it to earn transactional fees from trading in our Class A ordinary shares which creates various conflicts of interest.

 

Masterworks Brokerage may in the future seek SEC registration to become a broker-dealer and a member of FINRA to enable it to earn transactional fees for providing liquidity in the Class A ordinary shares. The operation of a trading market in the Class A ordinary shares, if a trading market can ever exist, will create conflicts of interest if Masterworks Brokerage is entitled to earn transaction-based revenue from trading or brokerage transactions. In addition, Masterworks may charge administrative fees for facilitating access to any such trading platform. If such activities generate trading profits, our affiliates may be incentivized not to sell the Painting and liquidate us, even in situations in which a sale of the Painting is in the best interest of holders of our Class A ordinary shares. This creates a potential conflict of interest between the holders of the Class A ordinary shares which would benefit from a sale of the Painting and Masterworks which benefits from collecting trading fees from the trading of the Class A ordinary shares. Despite steps we have taken to reduce conflicts, including imposing limitations on our ability to sell the Painting and the manner in which such sale would occur, there are inherent conflicts of interest and we cannot assure investors that the Administrator will execute a discretionary sale of the painting at a time that is in the best interest of holders of our Class A ordinary shares.

 

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Although Masterworks owns 24,956 Class B ordinary shares representing a 20% profits interest in our Company, and will own Class A ordinary shares following the Offering, Masterworks may eventually sell its shares.

 

Masterworks owns 24,956 Class B ordinary shares representing a 20% profits interest in our Company and following the Offering will own Class A ordinary shares if and to the extent the Offering is undersubscribed. Masterworks has agreed to lock-up provisions in our operating agreement, that will prohibit it from selling Class B ordinary shares (or Class A ordinary shares issuable upon conversion of Class B ordinary shares) prior to the one-year anniversary of the Offering, though it is permitted to pledge all of its shares to unaffiliated third-party lenders and such lenders shall not be subject to the lock-up if they obtain ownership of the shares in connection with a default by Masterworks on its indebtedness. After the one-year anniversary, Masterworks will have no restrictions on the disposition of any of its retained shares, other than restrictions imposed by applicable securities laws. Accordingly, the alignment that will exist upon closing of the Offering between Masterworks and our other shareholders may not exist in the future. If Masterworks were to sell a significant portion of its shares, the interests of Masterworks may differ significantly from those of investors in the Offering and subsequent holders of the Class A ordinary shares. As a result, we cannot assure investors that Masterworks will execute a discretionary sale of the Painting at a time that is in the best interests of holders of the Class A ordinary shares.

 

In addition, Masterworks may arrange for some of the Class A ordinary shares it holds to be sold by a broker pursuant to a “10b5-1 trading plan” pursuant to which Masterworks may sell interests at the discretion of their brokers or pursuant to a formula, subject to volume limitations applicable pursuant to federal securities laws. There is a risk that this may result in too many Class A ordinary shares being available for resale and the price of the Class A ordinary shares declining as supply outweighs demand.

 

Masterworks and Members of the Board of Managers and executive officers will have other business interests and obligations to other entities, including interests and obligations relating to the art industry.

 

Masterworks expects to engage in other business activities, including other activities relating to the art industry. Masterworks may buy and sell other works of art, enter into pre-auction guarantees, establish a gallery (for viewing purposes), establish other entities similar to us and other activities. In addition, neither the Administrator nor its executive officers nor the Board of Managers will be required to manage us as their sole and exclusive function and they will have other business interests and will engage in other activities in addition to those relating to us. We are dependent on the Administrator and its officers and employees to successfully operate us. Their other business interests and activities could divert time and attention from operating our business.

 

Our operating agreement contains provisions that exculpate the Board of Managers and the administrative services agreement contains provisions that exculpate the Administrator and its affiliates, and certain other persons engaged on behalf of the Administrator from liabilities with respect to certain actions taken, even if such actions are negligent, which also reduces the remedies available to investors for certain acts by such persons.

 

Our operating agreement limits the liability of the Board of Managers, any of our members, any person who is an officer of ours and any person who serves at the request of the Board of Managers on behalf of us as an officer, director, members of the Board of Managers, Independent Manager, partner, member, stockholder or employee of such person. The administrative services agreement limits the liability of the Administrator, its affiliates, managers, officers and members. None of the foregoing persons shall be liable to us or the Administrator or any other member of us for any action taken or omitted to be taken by it or by other person with respect to us, including any negligent act or failure to act, except in the case of a liability resulting from any of the foregoing person’s own actual fraud, gross negligence, willful misconduct, bad faith, breach of fiduciary duties that have not been waived, reckless disregard of duty or any intentional and material breach of the operating agreement or conduct that is subject of a criminal proceeding (where such person has reasonable cause to believe that such conduct was unlawful). With the prior consent of the Board of Managers, any of the foregoing persons may consult with legal counsel and accountants with respect to our affairs (including interpretations of the operating agreement) and shall be fully protected and justified in any action or inaction which is taken or omitted in good faith, in reliance upon and in accordance with the opinion or advice of such counsel or accountants. In determining whether any of the foregoing persons acted with the requisite degree of care, such person shall be entitled to rely on written or oral reports, opinions, certificates and other statements of the members of the Board of Managers, officers, employees, consultants, attorneys, accountants and professional advisors of us selected with reasonable care; provided, that no such person may rely upon such statements if it believed that such statements were materially false. The foregoing limitations on liability reduce the remedies available to the holders of the Class A ordinary shares for actions taken which may negatively affect us.

 

Scott W. Lynn may Have Conflicts of Interest.

 

Scott W. Lynn, the founder of Masterworks and the individual responsible for funding Masterworks has effective control over the Company’s operations through contractual arrangements with the Lynn Family Trust 001, which currently owns 100% of the membership interests of Masterworks, the Administrator. Mr. Lynn is also our Chief Executive Officer and the Chief Executive Officer of our Administrator and a member of the Board of Managers of the Administrator. Mr. Lynn is an art collector and could have conflicts between business with his personal art collection and the collection of Masterworks, or Mr. Lynn could simply stop funding Masterworks and cause it to cease to exist.

 

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Risks Relating to Ownership of the Class A Ordinary Shares and the Offering

 

There is no active public market for our Class A ordinary shares and an active trading market may not ever develop or, even if developed, may not be available to all shareholders, may not be sustained or may cease to exist following this Offering, which would adversely impact the market for our Class A ordinary shares and make it difficult, or even impossible to sell your Class A ordinary shares.

 

There is no active market for our Class A ordinary shares. Although we intend to seek to make the Class A ordinary shares eligible for trading on a trading platform approved by us or to facilitate brokerage transactions, we cannot provide any assurance that we will do so or that we will choose or be able to maintain that eligibility. Even if the Class A ordinary shares are tradeable, we do not know the extent to which investor interest will lead to the development and maintenance of a liquid trading market. Further, we do not expect that our Class A ordinary shares will be traded on any trading platform within twelve months after the closing of this Offering, if at all. Any such trading platform or brokerage relationships may have rules or restrictions that would prevent certain shareholders from trading based on where they hold citizenship, where they reside, their financial situation or other factors. Investors should be prepared to hold their Class A ordinary shares for an indefinite period of time, as there can be no assurance that the Class A ordinary shares will ever be tradable.

 

It is possible that there will be multiple trading markets established for the Class A ordinary shares due to differences in laws, rules, policies and requirements that may preclude investors in certain geographies from establishing trading accounts on any given platform.

 

We are seeking to forge a relationship with one or more trading platforms to facilitate trading of the Class A ordinary shares. Most trading platforms do not currently facilitate over the counter trading in securities similar to the Class A ordinary shares on a global basis due to differences in laws and the internal rules, policies and requirements of each individual trading platform relating primarily to complications of verifying identity and compliance with anti-money laundering, tax and securities laws that would be applicable to such transactions. Accordingly, we may seek to make the Class A ordinary shares available for trading on multiple trading platforms. The benefit of such approach would be to increase the percentage of investors that would have access to trading, but there is a risk that the aggregate size of the trading market on any given platform will be diminished, resulting in a fragmented market and a lower likelihood that a seller of Class A ordinary shares will find a willing buyer of those Class A ordinary shares. In addition, the existence of multiple trading markets would likely create arbitrage opportunities and the market price of the Class A ordinary shares may not align across markets, so a buyer or seller may not achieve the best possible execution of a trade on any given trading platform. In addition, the trading fee structure may differ between trading platforms. We do not expect to list our securities on a national securities exchange.

 

There can be no assurance that any trading platform eligible to trade the Class A ordinary shares will permit investors from any specific geographic region to participate and any such trading platform may also restrict access to trading based on the financial status of the investor or other factors. Accordingly, you should consider the resale market for our Class A ordinary shares to be limited, as you may be unable to resell your Class A ordinary shares without significant expense, or at all.

 

You may not be able to sell your Class A ordinary shares at or above the offering price.

 

The initial public offering price for our Class A ordinary shares is based on based on a simple formula. The price per each Class A ordinary share is equal to the quotient of (1) 110% of the purchase price that Masterworks paid for the painting, divided by (2) 99,825, which is the total number of Class A ordinary shares offered in this Offering. In addition, Masterworks owns 24,956 Class B ordinary shares representing a 20% profits interest in our Company. Prior to this Offering, no public market exists for our Class A ordinary shares. You may not be able to sell your Class A ordinary shares at or above the initial offering price, or ever. Investors should be prepared to hold their Class A ordinary shares for an indefinite period, as there can be no assurance that the Class A ordinary shares can ever be tradable.

 

If our Class A ordinary shares are ever able to trade, the trading price of our Class A ordinary shares may be extremely volatile.

 

Securities that trade on alternative trading systems, as with other public markets, often experience significant price and volume fluctuations. These fluctuations can be more pronounced for securities that have a small public float, such as our Company. The market price of the Class A ordinary shares could fluctuate widely in price in response to various potential factors, many of which will be beyond our control, including the total number of available buyers or sellers at any point in time, auction listings and sales of other similar paintings, our solicitation of votes in response to a Bona Fide Offer to acquire the Painting or in connection with a Liquidity Sale, economic, market, geopolitical and other external factors. As a result, the market price of our Class A ordinary shares may be volatile, and holders of our Class A ordinary shares will likely experience a decrease in the value of their Class A ordinary shares. No assurance can be given that the market price of our Class A ordinary shares will not fluctuate or decline significantly in the future or that you will be able to sell your Class A ordinary shares when desired on favorable terms, or at all. Investors should be prepared to hold their Class A ordinary shares for an indefinite period, as there can be no assurance that the Class A ordinary shares will ever be tradable.

 

If you pay part or all of the purchase price for the Class A ordinary shares in this Offering in foreign currency, and we do not close the Offering, or choose to reject the subscription, you could have exposure for currency risk.

 

Investors in this Offering may be able to make payment of the purchase price in the form of foreign currency if we are able to forge and maintain relationships with licensed currency exchange services providers and provided we are able to do so in accordance with SEC and FINRA guidelines. For those investors who pay in foreign currency, we plan to use a third-party service to convert such payment into U.S. dollars at the time a subscription agreement is executed, and then deposit such funds into a segregated non-interest bearing account of ours. If any funds are returned by us or if we choose to reject a subscription or elect not to proceed with the Offering, such funds will be returned by mail via a check in U.S. dollars. Because certain foreign currency markets are volatile, and the U.S. dollar value of foreign currencies is speculative and the value of your foreign currency at the time you make your subscription may differ substantially from its U.S. dollar value in the future. You may lose money if we choose to reject a subscription or elect not to proceed with the Offering and refund your subscription. Any investor who chooses to pay for the Class A ordinary shares in this Offering in foreign currency is subject to such fluctuations in the value of such foreign currency and the currency risks stemming therefrom.

 

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We will be required to publicly report on an ongoing basis under the reporting rules set forth in Regulation A for Tier 2 issuers. Therefore, we will be subject to ongoing public reporting requirements that are less rigorous than Exchange Act rules for companies that are not “emerging growth companies,” and our investors could receive less information than they might expect to receive from exchange traded public companies.

 

We will be required to publicly report on an ongoing basis under the reporting rules set forth in Regulation A for Tier 2 issuers. The ongoing reporting requirements under Regulation A are more relaxed than for “emerging growth companies” under the Exchange Act. The differences include, but are not limited to, being required to file only annual and semiannual reports, rather than annual and quarterly reports. Annual reports are due within 120 calendar days after the end of the issuer’s fiscal year, and semiannual reports are due within 90 calendar days after the end of the first six months of the issuer’s fiscal year. Therefore, our investors could receive less information than they might expect to receive from exchange traded public companies.

 

If our Class A ordinary shares ever become tradable, and become subject to the penny stock rules, it would become more difficult to trade our Class A ordinary shares.

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price per Class A ordinary share of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If the price of our Class A ordinary shares is less than $5.00 per Class A ordinary share, our Class A ordinary shares will be deemed a penny stock. The penny stock rules require a broker-dealer, before effecting a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that, before effecting any such transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive:

 

  the purchaser’s written acknowledgment of the receipt of a risk disclosure statement;
  a written agreement to transactions involving penny stocks; and
  a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Class A ordinary shares, and therefore holders of our Class A ordinary shares may have difficulty selling their Class A ordinary shares. Investors should be prepared to hold their Class A ordinary shares for an indefinite period of time, as there can be no assurance that the Class A ordinary shares can ever be tradable.

 

If our Class A ordinary shares are ever able to trade, FINRA sales practice requirements may limit an investors ability to buy and sell our Class A ordinary shares.

 

If our Class A ordinary shares are ever able to trade, in addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. The FINRA requirements may make it more difficult for broker-dealers to recommend that their customers buy our Class A ordinary shares, which may have the effect of reducing the level of trading activity in our Class A ordinary shares. For these and other reasons, broker dealers may not recommend our Class A ordinary shares, which could reduce the liquidity of the Class A ordinary shares.

 

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Holders of our Class A ordinary shares may face significant restrictions on the resale of the Class A ordinary shares due to state “Blue Sky” laws or rules restricting participation by foreign citizens.

 

Each state has its own securities laws, often called “blue sky” laws, which limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration and govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether our Class A ordinary shares will be registered or exempt from registration under the laws of any state. If our Class A ordinary shares are quoted on an alternative trading system, a determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our Class A ordinary shares. There may be significant state blue sky law restrictions on the ability of investors to sell, and on purchasers to buy, our Class A ordinary shares.

 

In addition, many trading platforms do not permit non-U.S. citizens or residents to transact on their platforms due primarily to complications associated with obtaining reasonable assurances as to the identity of such individuals and compliance with anti-money laundering, tax and securities laws that would be applicable to such transactions. Accordingly, you should consider the resale market for our Class A ordinary shares to be limited, as you may be unable to resell your Class A ordinary shares without the significant expense of state registration or qualification, or at all.

 

There is a risk the Offering will not close.

 

The Offering is structured in a manner such that regardless of the number of Class A ordinary shares sold in the Offering to public investors, the number of shares outstanding will be the same, since Masterworks will receive any remaining unsold Class A ordinary shares in lieu of cash as partial consideration for the Painting. Accordingly, there is neither a set “minimum” number of shares that needs to be sold nor is there any guarantee that a minimum number of shares will be sold in the Offering. However, there is no guarantee that the Offering will close. There are numerous possible scenarios pursuant to which the offering may be abandoned, including a material adverse change or event in the capital markets or art markets, which could make it impracticable to consummate the Offering. The emergence of material litigation regarding the painting itself and/or involving Masterworks, the outbreak of war or hostilities, or Masterworks or SDDco-BA’s determination that the offering should be delayed, suspended, or abandoned, due to these or other unforeseeable events.

 

Sales of our Class A ordinary shares under Rule 144 could reduce the price of our stock.

 

Following this Offering, Masterworks will own 24,956 Class B ordinary shares, representing a 20% “profits interest” in our fully diluted equity. Aggregate proceeds from both this Offering will not exceed $1,996,500 and not more than 99,825 Class A ordinary shares will be sold in this Offering. The Class B ordinary shares are convertible into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding Class A and Class B ordinary shares. Masterworks has agreed to lock-up provisions in our operating agreement that will prohibit it from selling Class B ordinary shares (or Class A ordinary shares issuable upon conversion of Class B ordinary shares) prior to the one-year anniversary of the Offering, provided that Masterworks is permitted to pledge all of its shares to unaffiliated third-party lenders and such lenders shall not be subject to the lock-up if they obtain ownership of the shares in connection with a default by Masterworks on its indebtedness. After the one-year anniversary, Masterworks will have no restrictions on the disposition of any of their shares, other than restrictions in our operating agreement and those imposed by applicable securities laws. These shares held by our affiliates, shall be “restricted securities” as defined in Rule 144 of the Securities Act. In general, our affiliates must either sell their restricted shares in a transaction exempt from the registration requirements of the of the Securities Act, in which case the buyer would own restricted securities that could not trade freely with the Class A ordinary shares sold in this Offering for at least one year from the time of such sale, or they could sell their shares in accordance with Rule 144. Rule 144 requires that these affiliates hold their shares for a period of at least one year, not sell more than one percent of the total issued and outstanding Class A ordinary shares in any 90-day period and resell the Class A ordinary shares in an unsolicited brokerage transaction at the market price. The availability for sale of substantial amounts of Class A ordinary shares under Rule 144 could reduce prevailing market prices for our securities.

 

This is a fixed price offering and the fixed offering price may not accurately represent the current value of us or our assets at any particular time. Therefore, the purchase price you pay for Class A ordinary shares may not be supported by the value of our assets at the time of your purchase.

 

This is a fixed price offering, which means that the offering price for our Class A ordinary shares will not vary based on the underlying value of our assets at any time. Masterworks is retaining 24,956 Class B ordinary shares, representing a 20% “profits interest” in our fully diluted equity. The Class B ordinary shares retained by Masterworks will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding Class A and Class B ordinary shares. Masterworks will pay all costs associated with the development and operation of the Masterworks Platform, costs associated with the acquisition of the Painting and all costs of our organization and this Offering. The purchase price of the Painting includes a true-up  payment to Masterworks in the amount of $181,500 from the proceeds of the Offering for acquiring and financing the acquisition of the Painting. Masterworks will also be responsible for all ordinary and necessary costs for ongoing administrative expenses, for which it will receive Class A ordinary shares at a rate of 1.5% of the total outstanding Class A ordinary shares per annum. Therefore, the fixed offering price established for our Class A ordinary shares may not be supported by the current value of the Company or the Painting at the time of the Offering or any particular time in the future.

 

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If we face litigation related to the Offering, we may elect to auction the Painting and the proceeds of any sale at such auction may be insufficient to provide an adequate remedy. Further, if investors successfully seek rescission, we would face severe financial demands that we may not be able to meet.

 

Our Class A ordinary shares have not been registered under the Securities Act and are being offered in reliance upon the exemption provided by Section 3(b) of the Securities Act, including Regulation A promulgated thereunder. We represent that this offering circular does not contain any untrue statements of material fact or omit to state any material fact necessary to make the statements made, in light of all the circumstances under which they are made, not misleading. However, if this representation is inaccurate with respect to a material fact, if this Offering fails to qualify for exemption from registration under the federal securities laws pursuant to Regulation A, or if we fail to register the Class A ordinary shares or find an exemption under the securities laws of each state in which we offer the Class A ordinary shares, each investor may have the right to rescind his, her or its purchase of the Class A ordinary shares and to receive back from us his, her or its purchase price with interest. Such investors, however, may be unable to collect on any judgment, and the cost of obtaining such judgment may outweigh the benefits. If investors successfully seek rescission, we may elect to sell the Painting and there can be no assurance that the proceeds of any such sale would be an adequate remedy for our investors and we would face severe financial demands we may not be able to meet and it may adversely affect any non-rescinding investors.

 

If we face litigation, unless such litigation is proven to involve fraud or intentional misconduct on the part of the Administrator or our other affiliates, we will be entitled to sell the Painting at auction and the Administrator will be entitled recoup its expenses in connection with defending and or settling such litigation.

 

Our operating agreement indemnifies the Board of Managers and the administrative services agreement indemnifies the Administrator in all instances not involving fraud or intentional misconduct. In addition, while the Administrator is responsible for all ordinary and necessary expenses incurred in connection with maintaining the Painting and administering our Company, there is an exception for costs incurred in connection with litigation. Accordingly, if there is any litigation involving our Company which does not involve fraud or intentional misconduct, the costs relating to such litigation will be deducted from the funds to be disbursed to holders of Class A ordinary shares upon our sale of the Painting and subsequent dissolution.

 

Because we do not have an audit or compensation committee, holders of our Class A ordinary shares will have to rely on our Board of Managers and the Independent Manager to perform these functions.

 

We do not have an audit or compensation committee comprised of an independent director. Indeed, we do not have any audit or compensation committee. The Board of Managers is made up of Nigel S. Glenday, Joshua B. Goldstein and Leonard J. Sokolow. One of the members of the Board of Managers, Leonard J. Sokolow, serves as the Independent Manager on the Board of Managers. The Independent Manager serves to protect the interests of the holders of the Class A ordinary shares and is tasked with reviewing and approving all related party transactions between us and our affiliates and address all conflicts of interest that may arise between us and the holders of the Class A ordinary shares and our affiliates. If the Independent Manager resigns from such position on the Board of Managers at any time, the remaining members of the Board of Managers shall appoint a replacement that meets the standards of an independent director pursuant to the standards set forth on NASDAQ pursuant to NASDAQ Marketplace Rule 4200(a)(15).

 

The securities industry or art industry analysts may publish detailed research reports on us or the Painting, but it is possible that those parties, as well as the media, commentators, and industry experts, will publish informal commentary or news stories about us or the Painting, which may be negative and may negatively impact the value the Class A ordinary shares.

 

Given the unique features of our business model and this Offering, it is possible that the analysts, media, commentators and industry experts may publicize opinions on the value of the Painting or the Class A ordinary shares which may be negative and which may significantly and adversely affect the value of our Class A ordinary shares.

 

Purchasers in this Offering and in the aftermarket will experience dilution in the book value of their investment over time.

 

The initial offering price per Class A ordinary share will be approximately $1.82 above the pro forma net tangible book value per Class A ordinary share immediately following this Offering as a result of the true-up amount payable to Masterworks upon closing of the Offering. The Administrator will earn an administrative services fee in the form of Class A ordinary shares. This fee will when issued effectively further reduce the tangible book value per Class A ordinary share over time. Additionally, if the value of the Class A ordinary shares increases over time, the number of Class A ordinary shares to be issued upon conversion of the Class B ordinary shares will also increase over time resulting in additional dilution to holders of our Class A ordinary shares.

 

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Risks of investing using a credit card.

 

We may accept credit cards for subscriptions, provided that any such credit card subscription shall not exceed the lesser of $10,000 or the amount permitted by applicable law, per subscriber. An investment in the Class A ordinary shares is a long-term and highly illiquid investment. Payment by credit card may be appropriate for some investors as a temporary funding convenience, but should not be used as a long term means to finance an investment in the Class A ordinary shares. Investors contemplating using their credit card to invest are urged to review the SEC’s Investor Alert dated February 14, 2018 entitled: Credit Cards and Investments – A Risky Combination which is available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_riskycombination. Credit card investment will result in incurrence of third-party fees and charges (often ranging from 1.5% - 3.0%), interest obligations which will lower your expected investment returns and could exceed your actual returns. In addition, if you cannot meet your minimum payment obligation, you may damage your credit profile which would make it more difficult and more expensive to borrow in the future.

 

Provisions of our Certificate of Formation and our Operating Agreement may delay or prevent a take-over which may not be in the best interests of holders our Class A ordinary shares.

 

Provisions of our Certificate of Formation and the operating agreement may be deemed to have anti-takeover effects, which include, among others, the Board of Managers having sole and exclusive control of the operations of us with the exclusion of the holders of the Class A ordinary shares being able to vote upon certain limited circumstances, and may delay, defer or prevent a takeover attempt.

 

We do not intend to pay distributions in the foreseeable future and may only make a distribution to the holders of our Class A ordinary shares if the Painting can be sold at a profit to the price we paid and after the costs and expenses associated with the sale there are sufficient funds to effect a distribution upon the liquidation of the Company.

 

We do not maintain any cash balances and do not intend to pay any distributions in the foreseeable future and may only make a distribution to the holders of our Class A ordinary shares if the Painting can be sold at a profit to the price we paid and other costs and expenses associated with the sale there are sufficient funds to effect a distribution upon our liquidation. Investors should be prepared to never receive a distribution in connection with their ownership of the Class A ordinary shares.

 

We intend to be taxed as a partnership for U.S. Federal income tax purposes, but the Board of Managers will have the right to elect that the Company be taxed as a corporation, which could have significant tax consequences for certain holders of the Class A ordinary shares.

 

We currently anticipate that the Company will be taxed as a partnership for U.S. Federal income tax purposes. This means that any gains or losses from the operations of the Company will be passed through to holders of the Class A ordinary shares for reporting on their personal tax returns, but the Company will not pay material entity level Federal income taxes upon a sale of the Painting. The Board of Managers has sole discretion to change the tax election such that the Company would be taxed as a corporation for U.S. Federal income purposes, which would mean that the Company would be required to pay entity level U.S. Federal income taxes on gains, if any, from the sale of the Painting. Any such change could adversely impact the net amount of funds you receive, after taxes, from a sale of the Painting.

 

By purchasing shares in this Offering, you are bound by the arbitration provisions contained in our subscription agreement which limits your ability to bring class action lawsuits or seek remedies on a class basis.

 

By purchasing shares in this Offering, investors agree to be bound by the arbitration provisions contained in Section 10 of our subscription agreement which provide that arbitration is the exclusive means for resolving disputes relating to or arising out of the subscription agreement, the shares, the Masterworks Platform, and/or the activities or relationships that involve, lead to, or result from any of the foregoing. Please note that this arbitration provision does not apply to claims made under the federal securities laws. Purchasers of shares in a secondary transaction would also be subject to the same arbitration provisions that are currently in our subscription agreement. Such arbitration provision limits the ability of investors to bring class action lawsuits or similarly seek remedies on a class basis for claims subject to the provision. If invoked, the arbitration is required to be conducted in New York, NY in accordance with New York law. The subscription agreement allows for either the Company or an investor to elect to enter into binding arbitration in the event of any covered claim in which the Company and the investor are adverse parties. While not mandatory, in the event that the Company were to invoke the arbitration clause, the rights of the adverse shareholder to seek redress in court would be severely limited. These restrictions on the ability to bring a class action lawsuit may result in increased costs and/or reduced remedies, to individual investors who wish to pursue claims against the Company.

 

DILUTION

 

As of the date of this filing, there are no Class A ordinary shares issued and outstanding and 24,956 Class B ordinary shares currently issued and outstanding, which are held by Masterworks.

 

Investors in this Offering will suffer immediate dilution in the net tangible book value per Share of $1.82 as a result of the true-up amount to be paid to Masterworks as part of our cost of acquiring the Painting. We estimate that the net tangible book value per share upon closing of the Offering after giving effect to the intended use of proceeds from the Offering will be $18.18.

 

The Class B ordinary shares may also have a dilutive effect following the closing of the Offering. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement which created two classes of membership interests of the Company in the form of the Class A ordinary shares and Class B ordinary shares (collectively, “Shares”), and simultaneously, the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares and the Class B ordinary shares are convertible pursuant to a formula into Class A ordinary shares. The formula for the conversion of the Class B ordinary shares into the Class A ordinary shares is as follows:

 

  Class A ordinary shares issuable upon conversion = (A) Value Increase, multiplied by
      (B) Conversion Percentage, multiplied by
      (C) 20%, divided by
      (D) Class A Ordinary Share Value.

 

Definitions for conversion calculation:

 

  Value Increase

means, (A) the total number of Class A ordinary shares and Class B ordinary shares outstanding at such time, multiplied by (B) the positive remainder, if any, resulting from (i) the Class A Ordinary Share Value, minus (ii) $20.00.

     
  Conversion Percentage means, (A) the number of Class B ordinary shares being converted, divided by (B) the number of Class B ordinary shares outstanding upon closing of this Offering (24,956).
     
  Class A Ordinary Share Value means, as of the close of business on the day preceding the conversion date, the volume weighted average trading price (“VWAP”) of the Class A ordinary shares on all trading platforms or trading systems on which the Class A ordinary shares are being traded over the forty-five (45) trading days then ended, provided, that if the total aggregate trading volume over such 45-trading-day period is less than 5% of the public float, such period shall be extended to the ninety (90) trading days then ended, provided, further, if the total aggregate trading volume over such 90-trading-day period is less than 5% of the public float, the holder of the Class B ordinary shares shall be entitled to request that the Administrator obtain an appraisal of the Class A Ordinary Share Value from one or more independent nationally-recognized third party appraisal companies and such appraisal shall constitute the Class A Ordinary Share Value.

 

Examples of conversion calculation

 

The following table illustrates the number and percentage of Class A ordinary shares that would be issued to Masterworks upon conversion of all of its Class B ordinary shares based on hypothetical changes in the trading price or value of the Class A ordinary shares:

 

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Hypothetical Class A Ordinary Share Value  $20.00   $30.00   $40.00   $50.00   $60.00 
No. of Class A ordinary shares Masterworks would receive upon conversion of 100% of its Class B ordinary shares   0    8,319    12,478    14,974    16,638 
Percentage of total outstanding Shares Masterworks would receive upon conversion of 100% of its Class B ordinary shares   0%   7.69%   11.11%   13.04%   14.29%

 

Pursuant to the foregoing formula, Class A ordinary shares will only be issuable upon a conversion of Class B ordinary shares if the value of the Class A ordinary shares is higher than $20.00 per share. Upon the closing of this Offering, the value of the Class A ordinary shares will be $20.00 per share based on the offering price and therefore, no shares will be issuable upon a conversion of Class B ordinary shares into Class A ordinary shares at such time.

 

Nominal consideration was paid for the 16,015 membership interests which converted into the Class B ordinary shares prior to the time of qualification of this offering circular by the SEC upon the execution of the amended and restated operating agreement for Masterworks 001, LLC. The aggregate cash cost to Masterworks for the 24,956 Class B ordinary shares was $100.00 (representing the cash payment made in consideration of the issuance of 16,015 membership interests that converted into Class B ordinary shares) or less than $0.01 per share. If in the future the value of the Class A ordinary shares increases to where there is a gain in value, based on the above formula, there will be additional dilution.

 

For example, if the value of the Class A ordinary shares is $30 per share, based on the foregoing conversion formula, the Class B ordinary shares will be convertible into 8,319 of Class A ordinary shares if Masterworks decides to convert all of the Class B ordinary shares they hold. The new investors ownership interest would be diluted as follows assuming that 99,825 Class A ordinary shares are sold in the Offering:

 

    Dilution Based on Hypothetical Conversion  
    Shares Purchased     Total Consideration    

Average

Price

 
    Number     Percent     Amount     Percent     per Share  

Existing stockholders as of May 1, 2019

    0       0.0 %   $ 0       0.0 %   $ 0.00  
Assumed issuance of Class A ordinary shares for converted Class B ordinary shares upon the qualification of the Offering     8,319       7.69 %   $ 100       0.0 %     0.01  
New investors in this Offering     99,825       92.31 %   $ 1,996,500       100.0 %   $ 20.00  
Total     108,144       100.0 %   $ 1,996,600       100.0 %   $ 20.01  

 

Further, as additional Class A ordinary shares are issued to the Administrator as payment for its administrative services after the Offering, the then holders of the Class A ordinary shares will suffer dilution.

 

PLAN OF DISTRIBUTION

 

SDDco Brokerage Advisors LLC, a New York limited liability company (“SDDco-BA” or “Underwriter”) will manage the sale of the Class A ordinary shares as an underwriter pursuant to an amended and restated engagement letter agreement dated as of January 29, 2019, which was amended and restated on May 1, 2019, which is attached as Exhibit 1.1 hereto (as amended, the “Engagement Agreement”). SDDco-BA shall use its best efforts to find potential purchasers for the Class A ordinary shares offered pursuant to this offering circular and may engage other broker-dealers to do so. The Underwriter is under no obligation to take the securities and has not committed to purchase any of the Class A ordinary shares offered herein. Subscriptions will be made only through the Masterworks Platform and payment will be made directly to the Company. SDDco-BA shall not directly accept subscriptions or accept payment for the Class A ordinary shares. The subscription funds paid by investors as part of the subscription process will be held in a noninterest-bearing segregated account of the Company with Cross River Bank, Inc. and will not be commingled with any other funds and will not be released, unless and until there is a closing of the Offering. SDDco-BA is a broker-dealer registered with the SEC and a member of the FINRA and the SIPC and is registered in each state where the Offering and sale of the Class A ordinary shares will occur. All fees and expenses of SDDco-BA will be paid by the Administrator and the Company shall have no responsibility for any amounts payable to SDDco-BA. Accordingly, the gross proceeds from the Offering shall be the same as the net proceeds from the Offering.

 

Online Subscriptions and Bank Account

 

Our affiliate Masterworks.io, LLC owns the Masterworks Platform and the principals of Masterworks (including Masterworks Administrative Services, LLC) operate the Masterworks Platform located at https://www.masterworks.io/ that allows investors to acquire ownership of an interest in special purpose companies that invest in distinct artworks. Through the Masterworks Platform, investors can, once they register and obtain a user identification and password, browse and screen potential artwork investments, view details of an investment and sign contractual documents online. After the qualification by the SEC of the offering statement of which this offering circular is a part, the Offering will be conducted through the Masterworks Platform, whereby investors will receive, review, execute and deliver subscription agreements electronically as well as make payment of the purchase price in the form of ACH debit transfer, wire transfer or credit card into a segregated non-interest bearing account held by us until the closing date of this Offering. The subscription funds paid by investors as part of the subscription process will be held in a noninterest-bearing segregated account of the Company with Cross River Bank, Inc. and will not be commingled with any other funds and will not be released, unless and until there is a closing of the Offering. SDDco-BA will not be responsible for collecting or holding investor funds. We may also permit payment to be made in foreign currency or by credit card if and to the extent we can establish and maintain relationships with licensed currency exchange services providers and or payment processing entities to facilitate such transactions and provided we are able to do so in accordance with SEC and FINRA guidelines. If we accept credit cards, any such credit card subscription shall not exceed the lesser of $10,000 or the amount permitted by applicable law, per subscriber. Investors contemplating using their credit card to invest are urged to carefully review “Risk Factors – Risks of investing using a credit card.” Credit card investment will result in incurrence of third-party fees and charges, interest obligations which will lower your expected investment returns and could exceed your actual returns. In addition, if you cannot meet your minimum payment obligation, you may damage your credit profile which would make it more difficult and more expensive to borrow in the future. Class A ordinary shares will be allocated to a purchaser based on the actual exchange rate in effect at the time a subscription is received. Any form of payment other than U.S. dollars will be converted or exchanged for cash and the cash will be deposited into the segregated account pending the closing. On the closing date, the funds in the account will be released to us and the associated Class A ordinary shares will be issued to the investors in this Offering. If there is no closing of this Offering, the funds deposited in the segregated account will be promptly returned to subscribers, without deduction and generally without interest. If any funds are returned by us if we choose to reject a subscription or elect not to proceed with the Offering, such funds will be returned by mail via a check in U.S. dollars.

 

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Upon closing under the terms as set out in this offering circular, funds will be immediately transferred to us (where the funds will be available for use in the operations of the Company’s business in a manner consistent with the “Use of Proceeds” in this offering circular).

 

Engagement Agreement with the Underwriter.

 

We and Masterworks Administrative Services, LLC have entered into an engagement letter agreement, as amended, with the Underwriter which is attached hereto as Exhibit 1.1. The term of the engagement letter agreement began upon execution of the engagement letter agreement on January 29, 2019 and will continue for one-year, unless terminated earlier in accordance with its terms. Masterworks is responsible for the payment of all offering fees and expenses, including the following: (i) fees and disbursements of our legal counsel, accountants, and other professionals we engage; (ii) fees and expenses incurred in the production of offering documents, including design, printing, photograph, and written material procurement costs; (iii) all filing fees, including FINRA and blue sky filing fees; (iv) all of the legal fees related to the registration and qualification of the Class A ordinary shares under state securities laws and FINRA’s issuance of a No Objections Letter; and (v) other distribution expenses. To the extent that any of these fees and expenses are paid by SDDco-BA with our approval, Masterworks will, upon request, reimburse SDDco-BA for such fees and expenses. In the event the offering does not close or the engagement letter agreement is terminated for any reason other than because of SDDco-BA’s material failure to provide the services contemplated by the engagement letter agreement, the Administrator shall reimburse SDDco-BA for all unreimbursed, reasonable, documented, out-of-pocket fees, expenses, and disbursements, including legal fees. SDDco-BA will be entitled to receive commissions from the Administrator in connection with this Offering which will vary depending on a variety of factors, including the total amount of capital raised by SDDco-BA and other broker-dealers engaged by SDDco-BA to assist in the distribution, provided that commissions payable to SDDco-BA for capital raising activities in connection with this Offering shall not exceed 3% of the gross proceeds of the Offering, or $59,895.

 

In addition, SDDco-BA and representatives of SDDco-BA will receive additional payments in respect of various activities that are not directly attributable to this Offering or any other offering conducted through the Masterworks Platform, but are considered underwriting compensation. These payments relate to: (i) a $5,000 monthly retainer for administrative support services, which focus on supervision of the initial FINRA registered representative and his sales practices, including compliance oversight of securities marketing material, investor screening, investor and issuer due diligence and records management; (ii) a $750 monthly supervisory fee as the marginal increase in the retainer for the registration and supervision of an additional FINRA registered representative, and (iii) fixed compensation payments to the two (2) SDDco-BA representatives, which include non-transaction based compensation payable to the representatives in the form of salaries and other costs related to the benefits provided to them. These amounts are payable by Masterworks Administrative Services, LLC, which is not an issuer of securities in this Offering or any other proposed offering and such amounts are payable regardless of whether any particular offering is consummated. We and SDDco-BA determined that $42,300 of such payments are appropriately allocated to this Offering for purposes of determining maximum aggregate underwriting compensation. In making such allocation, we and SDDco-BA determined to use an assumed six (6) month estimated allocation period, which reflects a period of time during the pre-qualification testing-the-waters period and a period of time during the estimated offering period. This assumption, which we believe is a reasonable estimate of the time expended by the representatives on this particular Offering, differs from the 270 day maximum offering period. Lastly, SDDco-BA is entitled to reimbursement for out-of-pocket costs of up to $5,000 in connection with this Offering. Accordingly, the maximum amount of underwriting compensation for this Offering is $107,195, or approximately 5.4% of the gross offering proceeds if the maximum offering is sold. For the avoidance of doubt, the total amount of all items of compensation from any source payable to underwriters, broker-dealers, or affiliates thereof will not exceed an amount that equals ten (10) percent of the gross proceeds of the offering if the maximum offering is sold. All underwriting compensation will become due and payable by Masterworks upon consummation of this Offering including the commissions and the fees and costs set forth above.

 

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Transfer Agent and Registrar

 

We intend to engage Transfer Online, Inc. (“Transfer Agent”) to be the transfer agent and registrar for the Class A ordinary shares and will be subject to the agreed upon fee schedule.

 

The Transfer Agent’s address is at 512 SE Salmon St. Portland, OR 97214 and its telephone number is (503) 227-2950. Our Administrator will pay the fees of the Transfer Agent.

 

Book-Entry Records of Class A ordinary shares

 

Ownership of the Class A ordinary shares will be represented in “book-entry” only form directly in the name of the respective owner of the Class A ordinary shares and shall be recorded by the Transfer Agent and that no physical certificates shall be issued, nor received, by the Transfer Agent or any other person. The Transfer Agent shall send out email confirmations of positions and notifications of changes “from” us upon each and every event affecting any person’s ownership interest, with a footer referencing the Transfer Agent.

 

We have no responsibility for any aspect of the actions of the Transfer Agent. In addition, we have no responsibility or liability for any aspect of the records kept by the Transfer Agent relating to, or payments made on account of investors in, the Class A ordinary shares, or for maintaining, supervising or reviewing any records relating to ownership of Class A ordinary shares. We do not supervise the systems of the Transfer Agent.

 

Investment Amount Limitations

 

There is a $1,000 minimum purchase requirement. The maximum purchase requirement per investor is $100,000; however, we can waive the minimum or maximum purchase requirements on a case-by-case basis in our sole discretion. Subscriptions, once received, are irrevocable by the investors but can be rejected by us. In addition, our operating agreement, restricts beneficial ownership by any individual shareholder to a maximum of 19.99% of the total voting shares issued and outstanding. For these purposes, the term “beneficial owner” is determined in accordance with Section 13d-3(a) of the Securities Exchange Act of 1934, as amended. This 19.99% limitation does not apply to any of the Masterworks entities.

 

Generally, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, you are encouraged to refer to www.investor.gov.

 

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As a Tier 2, Regulation A offering, investors must comply with the 10% limitation to investment in the Offering. The only investor in this Offering exempt from this limitation is an accredited investor, an “Accredited Investor,” as defined under Rule 501 of Regulation D. If you meet one of the following tests you should qualify as an Accredited Investor:

 

(i) You are a natural person who has had individual income in excess of $200,000 in each of the two most recent years, or joint income with your spouse in excess of $300,000 in each of these years, and have a reasonable expectation of reaching the same income level in the current year;
   
(ii) You are a natural person and your individual net worth, or joint net worth with your spouse, exceeds $1,000,000 at the time you purchase Class A ordinary shares (please see below on how to calculate your net worth);
   
(iii) You are an executive officer or general partner of the issuer or a manager or executive officer of the general partner of the issuer;
   
(iv) You are an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or the Code, a corporation, a Massachusetts or similar business trust or a partnership, not formed for the specific purpose of acquiring the Class A ordinary shares, with total assets in excess of $5,000,000;
   
(v) You are a bank or a savings and loan association or other institution as defined in the Securities Act, a broker or dealer registered pursuant to Section 15 of the Exchange Act an insurance company as defined by the Securities Act, an investment company registered under the Investment Company Act of 1940, as amended, or the Investment Company Act, or a business development company as defined in that act, any Small Business Investment Company licensed by the Small Business Investment Act of 1958 or a private business development company as defined in the Investment Advisers Act of 1940;
   
(vi) You are an entity (including an Individual Retirement Account trust) in which each equity owner is an accredited investor;
   
(vii) You are a trust with total assets in excess of $5,000,000, your purchase of Class A ordinary shares is directed by a person who either alone or with his purchaser representative(s) (as defined in Regulation D promulgated under the Securities Act) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, and you were not formed for the specific purpose of investing in the Class A ordinary shares ; or
   
(viii) You are a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has assets in excess of $5,000,000.

 

Offering Period and Expiration Date

 

We will commence the sale of the Class A ordinary shares as of the date on which the offering statement of which this offering circular is a part is declared qualified by the SEC. The closing of the Offering will occur on the earlier of (i) the date that the subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by the Company in its discretion. The maximum offering period is 270 days from commencement of the Offering and will expire on February 4, 2020, though we reserve the right to terminate the Offering at any time for any reason.

 

Testing the Waters

 

We plan to use the Masterworks Platform website at https://masterworks.io/ to provide notification of this anticipated Offering. Prior to the qualification of the Offering by the SEC, if you desire information about this anticipated Offering, you would go to the Masterworks Platform website. The Masterworks Platform website is planned to contain publicly available information regarding prior auction sales of art created by Andy Warhol. This offering circular as well as amendments to this offering circular after it has been publicly filed and prior to qualification by the SEC will be furnished to prospective investors for their review via download 24 hours per day, 7 days per week on the website as well.

 

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Procedures for Subscribing

 

After the qualification by the SEC of the offering statement of which this offering circular is a part, if you decide to subscribe for any Class A ordinary shares in this Offering, you should go to the Masterworks Platform website at https://masterworks.io/, and follow the links and procedures described on the website. The website will direct you to receive (upon your acknowledgement that you have had the opportunity to review this offering circular), review, execute and deliver the subscription agreement electronically. The Masterworks Platform provides a secure portal to enable you to subscribe as follows:

 

  1. Once an offering has been qualified by the SEC, you can initiate the subscription  process by clicking a “Buy Shares” link adjacent to a reference to the particular offering.
     
  2.

The next screen will require you to provide basic identifying information, including your name, email address, phone number, and to establish a password, after which you will be prompted to continue to the next screen.

 

  3. You will then be presented with a link to the final Offering Circular (and any post qualification supplements or amendments, if applicable) and basic information about the Offering, including an image of the relevant artwork, the number of Class A ordinary shares offered, the maximum aggregate offering amount and the minimum investment amount.
     
  4. You will be requested to confirm the number of Class A ordinary shares you wish to subscribe for and the corresponding dollar amount of your proposed subscription.
     
  5.

After a prompt to continue, you will be requested to select a payment method, including: (i) linking a bank account to facilitate payment through the Automated Clearing House, or ACH, (ii) federal funds wire transfer or (iii) credit card, as follows:

 

(a)     ACH. If you choose to link your bank account, you will be requested to select your bank among a directory of banks and you will be prompted to provide your bank user name and password and to select the particular account. You may also confirm your bank account by confirming micro deposits in lieu of using your user name and password.

 

(b)    Wire Transfer. If you choose to pay by wire transfer, you will be provided with the issuer’s bank account number, routing number and bank address, along with a unique identifying code that will enable us to match the incoming wire transfer with your subscription.

 

(c)    Credit Card. If you choose to pay by credit card, you will be prompted to provide your credit card information and will be presented with a screen that reflects the amount of your subscription, the amount of fees that would be charged by the credit card issuer for the transaction and the total amount payable.

     
  6. After selecting the method of payment, Masterworks sends you an email requesting you to click a link that verifies your email address and confirms that you created your account with Masterworks.
     
 

7.

Assuming your email address is valid, you will be directed to review and execute a copy of the subscription agreement, which contains an active hyper-link to the operating agreement for the issuer and is self-populated with your name, address, telephone number, subscription amount and method of payment.

     
  8.

Next, you will be requested to verify your identity and you will be presented with an active hyperlink to a Customer ID Program Notice which describes the identification information you need to provide. You will be prompted to provide us with your address, date of birth and your social security or tax identification number. You will also be asked: (i) whether you are an accredited investor (with appropriate definitions provided) and if not, you will be asked to confirm that your investment will be less than 10% of your net worth or annual gross income, (ii) whether you or anyone in your household are associated with a FINRA member, securities exchange, self-regulatory organization or the SEC and (iii) whether you or anyone in your household or immediate family is a 10% shareholder, officer, or member of the board of directors of a publicly traded company.

 

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  9.

After your identity is cleared against certain governmental terrorist watch lists and lists designed to prevent or deter money-laundering, you will be presented with a confirmation of your accepted subscription. Investors selecting ACH will receive an email that payment has been initiated and a follow-up email indicating that the payment has been received by the issuer.

 

  10. You will receive an email confirmation indicating the amount of your subscription, along with a fully executed copy of the subscription agreement, which will be time and date stamped, for your records.
 

 

11.

 

You will then be presented with a screen requesting certain tax exemption status information that will be used, along with other information previously provided, to populate a Form W-9 (Request for Taxpayer Identification Number and Certification) or W-8 (International), as applicable.

 

  12. Lastly, you will be directed to a “My Account” screen that summarizes the status of your subscription, order history, whether or not shares have been issued, profile information, tax documents and active hyperlinks to the subscription agreement and operating agreement.

 

Any potential investor will have ample time to review the Offering Circular and Subscription Agreement, along with their counsel, prior to making any final investment decision. We will not accept any money until the SEC declares this offering circular qualified.

 

All funds received from investors in this Offering will be held non-interest bearing segregated bank account of the Company with Cross River Bank, Inc. SDDco-BA will not be responsible for collecting or holding investor funds. The funds in the account will be released to us only after we close the Offering on the closing date. We intend to complete one closing on the closing date and until that time, the proceeds for the Offering will be kept in the segregated bank account. At the closing, the proceeds will be distributed to us and the associated Class A ordinary shares will be issued to the investors in this Offering. If there is no closing or if funds remain in the account upon termination of this Offering without any corresponding closing, the funds deposited in the segregated account will be promptly returned to subscribers, without deduction and generally without interest. Further, for those investors who pay in foreign currency, we plan to use a third-party service to convert such payment into U.S. dollars at the time a foreign currency subscription is received, and then deposit such funds in the account. Details about the method of effecting the exchange and how an investor can determine the exchange rate in effect at the time of subscription will be available on the Masterworks Platform. Class A ordinary shares will be allocated to a purchaser based on the actual exchange rate. If any funds are returned by us if we choose to reject a subscription or elect not to proceed with the Offering, such funds will be returned by mail in the form of U.S. dollars.

 

You will be required to represent and warrant in your subscription agreement that you are an accredited investor as defined under Rule 501 of Regulation D or that your investment in the Class A ordinary shares does not exceed 10% of your net worth or annual income, whichever is greater, if you are a natural person, or 10% of your revenues or net assets, whichever is greater, calculated as of your most recent fiscal year if you are a non-natural person. By completing and executing your subscription agreement you will also acknowledge and represent that you have received a copy of this offering circular, you are purchasing the Class A ordinary shares for your own account and that your rights and responsibilities regarding your Class A ordinary shares will be governed by our operating agreement and Certificate of Formation, each filed as an exhibit to the offering circular. Purchasers of our Class A ordinary shares in this Offering and subsequent purchasers will be deemed to become party to the Masterworks 001, LLC operating agreement, a form of which is filed as Exhibit 2.3 hereto.

 

  Right to Reject Subscriptions. After we receive your complete, executed subscription agreement and the funds required under the subscription agreement have been transferred to the non-interest bearing segregated bank account, we have the right to review and accept or reject your subscription in whole or in part, for any reason or for no reason. We will check your identity against certain governmental watchlists designed to detect and prevent money laundering and other criminal activity. We will return all monies from rejected subscriptions immediately to you, without interest or deduction.
     
  Acceptance of Subscriptions. Upon our acceptance of a subscription agreement, we will countersign the subscription agreement and issue the Class A ordinary shares subscribed at closing. Once you submit the subscription agreement and it is accepted, you may not revoke or change your subscription or request your subscription funds. All accepted subscription agreements are irrevocable.

 

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Under Rule 251 of Regulation A, non-accredited, non-natural investors are subject to the investment limitation and may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). A non-accredited, natural person may only invest funds which do not exceed 10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).

 

NOTE: For the purposes of calculating your Net Worth, it is defined as the difference between total assets and total liabilities. This calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the Class A ordinary shares.

 

In order to purchase Class A ordinary shares and prior to the acceptance of any funds from an investor, an investor will be required to represent, to our satisfaction, that he or she is either an accredited investor or is in compliance with the 10% of net worth or annual income limitation on investment in this Offering.

 

The Class A shares will not be offered or sold to prospective investors subject to the Employee Retirement Income Security Act of 1974 and regulations thereunder, as amended (“ERISA”).

 

Non-U.S. investors may participate in the Offering by depositing their funds in the non-interest-bearing account. Any such funds that are received shall be held on deposit until the applicable closing of the Offering or returned if the Offering fails to close.

 

Selling Restrictions

 

Notice to prospective investors in Canada

 

The Offering of the Class A ordinary shares in Canada is being made on a private placement basis in reliance on exemptions from the prospectus requirements under the securities laws of each applicable Canadian province and territory where the Class A ordinary shares may be offered and sold, and therein may only be made with investors that are purchasing as principal and that qualify as both an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus and Registration Exemptions and as a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligation. Any offer and sale of the Class A ordinary shares in any province or territory of Canada may only be made through a dealer that is properly registered under the securities legislation of the applicable province or territory wherein the Class A ordinary shares are offered and/or sold or, alternatively, by a dealer that qualifies under and is relying upon an exemption from the registration requirements therein.

 

Any resale of the Class A ordinary shares by an investor resident in Canada must be made in accordance with applicable Canadian securities laws, which may require resales to be made in accordance with prospectus and registration requirements, statutory exemptions from the prospectus and registration requirements or under a discretionary exemption from the prospectus and registration requirements granted by the applicable Canadian securities regulatory authority. These resale restrictions may under certain circumstances apply to resales of the Class A ordinary shares outside of Canada.

 

Upon receipt of this document, each Canadian investor hereby confirms that it has expressly requested that all documents evidencing or relating in any way to the sale of the securities described herein (including for greater certainty any purchase confirmation or any notice) be drawn up in the English language only. Par la réception de ce document, chaque investisseur canadien confirme par les présentes qu’il a expressément exigé que tous les documents faisant foi ou se rapportant de quelque manière que ce soit à la vente des valeurs mobilières décrites aux présentes (incluant, pour plus de certitude, toute confirmation d’achat ou tout avis) soient rédigés en anglais seulement.

 

Notice to prospective investors in the European Economic Area

 

In relation to each Member State of the European Economic Area (each, a “Relevant Member State”), no offer of Class A ordinary shares may be made to the public in that Relevant Member State other than:

 

  To any legal entity which is a qualified investor as defined in the Prospectus Directive;
     
  To fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives; or
     
  In any other circumstances falling within Article 3(2) of the Prospectus Directive,

 

provided that no such offer of Class A ordinary shares shall require us or the representatives to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

 

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Each person in a Relevant Member State who initially acquires any Class A ordinary shares or to whom any offer is made will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive. In the case of any Class A ordinary shares being offered to a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, each such financial intermediary will be deemed to have represented, acknowledged and agreed that the Class A ordinary shares acquired by it in the offer have not been acquired on a non-discretionary basis on behalf of, nor have they been acquired with a view to their offer or resale to, persons in circumstances which may give rise to an offer of any Class A ordinary shares to the public other than their offer or resale in a Relevant Member State to qualified investors as so defined or in circumstances in which the prior consent of the representatives has been obtained to each such proposed offer or resale.

 

We, the representatives and their affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgements and agreements.

 

This offering circular has been prepared on the basis that any offer of Class A ordinary shares in any Relevant Member State will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of Class A ordinary shares. Accordingly, any person making or intending to make an offer in that Relevant Member State of Class A ordinary shares which are the subject of the Offering contemplated in this offering circular may only do so in circumstances in which no obligation arises for us to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. We have not authorized, nor do we authorize, the making of any offer of Class A ordinary shares in circumstances in which an obligation arises for us to publish a prospectus for such offer.

 

For the purpose of the above provisions, the expression “an offer to the public” in relation to any Class A ordinary shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Class A ordinary shares to be offered so as to enable an investor to decide to purchase or subscribe the Class A ordinary shares, as the same may be varied in the Relevant Member State by any measure implementing the Prospectus Directive in the Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member States) and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

 

Notice to prospective investors in the United Kingdom

 

In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are “qualified investors” (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”).

 

Any person in the United Kingdom that is not a relevant person should not act or rely on the information included in this document or use it as basis for taking any action. In the United Kingdom, any investment or investment activity that this document relates to may be made or taken exclusively by relevant persons. Any person in the United Kingdom that is not a relevant person should not act or rely on this document or any of its contents.

 

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Notice to Prospective Investors in Switzerland

 

The Class A ordinary shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange, or SIX, or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the Class A ordinary shares or this Offering may be publicly distributed or otherwise made publicly available in Switzerland.

 

Neither this document nor any other offering or marketing material relating to this Offering, our Company, the Class A ordinary shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of Class A ordinary shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of Class A ordinary shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes, or CISA. The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of Class A ordinary shares.

 

Notice to Prospective Investors in the Dubai International Financial Centre

 

This offering circular relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority, or DFSA. This offering circular is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this offering circular nor taken steps to verify the information set forth herein and has no responsibility for the offering circular. The Class A ordinary shares to which this offering circular relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the Class A ordinary shares offered should conduct their own due diligence on the Class A ordinary shares. If you do not understand the contents of this offering circular you should consult an authorized financial advisor.

 

Notice to Prospective Investors in Australia

 

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission, or ASIC, in relation to this Offering. This offering circular does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001, or the Corporations Act, and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

 

Any offer in Australia of the Class A ordinary shares may only be made to persons, or the Exempt Investors, who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the Class A ordinary shares without disclosure to investors under Chapter 6D of the Corporations Act.

 

The Class A ordinary shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under this Offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring Class A ordinary shares must observe such Australian on-sale restrictions.

 

This offering circular contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this offering circular is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

Notice to prospective investors in China

 

This offering circular does not constitute a public offer of the Class A ordinary shares, whether by sale or subscription, in the People’s Republic of China (the “PRC”). The Class A ordinary shares are not being offered or sold directly or indirectly in the PRC to or for the benefit of, legal or natural persons of the PRC.

 

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Further, no legal or natural persons of the PRC may directly or indirectly purchase any of the Class A ordinary shares or any beneficial interest therein without obtaining all prior PRC’s governmental approvals that are required, whether statutorily or otherwise. Persons who come into possession of this document are required by the issuer and its representatives to observe these restrictions.

 

Notice to Prospective Investors in Hong Kong

 

The Class A ordinary shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the Class A ordinary shares has been or may be issued or has been or may be in the possession of any person for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Class A ordinary shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.

 

Notice to Prospective Investors in Japan

 

The Class A ordinary shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, “Japanese Person” shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.

 

Notice to Prospective Investors in Singapore

 

This offering circular has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this offering circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Class A ordinary shares may not be circulated or distributed, nor may the Class A ordinary shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

 

Where the Class A ordinary shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

(a) A corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire Class A ordinary share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

(b) A trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Class A ordinary shares pursuant to an offer made under Section 275 of the SFA except:

 

(a) To an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

(b) Where no consideration is or will be given for the transfer;

 

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(c) Where the transfer is by operation of law;

 

(d) As specified in Section 276(7) of the SFA; or

 

(e) As specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Class A ordinary shares and Debentures) Regulations 2005 of Singapore.

 

USE OF PROCEEDS TO ISSUER

 

We expect to receive gross proceeds from this Offering of up to $1,996,500. The Administrator will pay all expenses of the Offering, including fees and expenses associated with qualification of the Offering under Regulation A and all fees and expenses of the Underwriter. Therefore, the gross proceeds from this Offering will equal the net proceeds from this Offering. We will use all of the proceeds, together with any remaining unsold Class A ordinary shares, from this Offering, if any, to acquire the Painting from Masterworks.

 

DESCRIPTION OF BUSINESS

 

The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate. 

 

Overview

 

We were formed as a Delaware limited liability company on March 28, 2018, by Masterworks in order to acquire the Painting. We are a manager-managed limited liability company managed by a Board of Managers. Upon our formation, Masterworks was issued 16,015 shares of membership interests of the Company representing 100% of our membership interests. Masterworks Gallery adopted our operating agreement. The Company has entered into its amended and restated operating agreement, and the Company is authorized to enter into and will enter into the administrative services agreement with our Administrator prior to the completion of the Offering. After the five-year anniversary of this offering, our Administrator can withdraw for any reason from its position as our Administrator, provided that such withdrawal shall be effective only following a sale of the Painting.

 

The Painting was purchased by an agent of Masterworks at a public auction held by Phillips in November of 2017, for $1,815,000. We are offering up to 99,825 Class A ordinary shares for aggregate consideration of up to $1,996,500 in this Offering. The closing of the Offering will occur on the earlier of (i) the date that subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by the Company in its discretion. We will use all of the proceeds from the Offering, together with Class A ordinary shares not sold in this Offering, if any, to purchase the Painting. We do not expect to generate any revenues or cash flow unless and until the Painting is sold and no profits will be realized by investors unless the Painting is sold for more than we acquired it for and we have sufficient funds after payment of all associated costs and fees in connection with the sale of the Painting, or the investors are able sell their Class A ordinary shares on a trading platform approved by us for a price higher than they purchased them for. We will be 100% reliant on the Administrator to maintain the Painting and administer its business. Following the closing of the Offering, we intend to contribute title to the Painting to our wholly owned subsidiary, Masterworks 001 Cayman, LLC, a Cayman Islands limited liability company, which has not yet been formed, but which is planned to be formed prior to the completion of this Offering.

 

Pursuant to an administrative services agreement between Masterworks and us to be entered into prior to the completion of the Offering, Masterworks will manage all of our administrative services and will maintain the Painting. The Administrator will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum following the closing of the Offering. The Administrator will also manage any extraordinary or non-routine services which may be required, from time-to-time, including, without limitation, litigation or services in connection with a sale of the Painting or any sale, merger, third-party tender offer or other similar transaction involving us. Any third-party costs incurred by the Administrator or payments made by the Administrator in connection with litigation or major transactions will be reimbursed upon the sale of the Painting or us, as applicable. For more information regarding the administrative services agreement, see “Related Party Transactions.” We will not conduct any business activities except for activities relating to the ownership, maintenance, promotion and the eventual sale of the Painting. Our strategy will be to display and promote the Painting in a manner designed to enhance its provenance and increase its exposure and its value.

 

Masterworks Experience in the Art Industry

 

Masterworks is a relatively new organization and the transaction reflected in this offering circular is the first such transaction of its kind. Scott W. Lynn, our Founder and Chief Executive Officer has been an active collector of contemporary art for more than fifteen years and has built an internationally-recognized collection of Abstract Expressionism that has included works by Clyfford Still, Barnett Newman, Mark Rothko, Willem de Kooning, and more. In 2017, portions of Mr. Lynn’s collection were exhibited at the Royal Academy in London, the Denver Art Museum, and the Palm Beach Museum. At other periods in time, Mr. Lynn’s collection has been exhibited at museums such as the National Gallery, the Guggenheim (New York), and the Museum of Modern Art. Our acquisition strategy is guided by Mr. Lynn and thus far has relied heavily on various outside consultants and advisors that Mr. Lynn has worked with in his personal collecting. We have recently hired and continue to hire personnel with backgrounds in art investment and analysis and as such individuals become members of our team, their biographies are posted on the “Our Team” section of the Masterworks.io website.

 

About the Art Market

 

Overview

 

Statistical data relating to the art market is difficult to obtain, incomplete, or inconsistent. It is a substantially unregulated industry. Although we believe that available data can be useful to gain a general perspective on the rough size and scope of the industry, and to identify broader trends, data with respect to any particular period or market segment is highly variable and subjective. Accordingly, you should not place undue reliance on any data or general information related to the art market.

 

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Primary Sources of Data

 

There are currently a limited number of sources of publicly available data on the art market. Below are four leading sources often relied upon for information:

 

  Art Basel, a promoter of art fairs and a subsidiary of MCH Group, an international marketing organization & UBS, an international banking organization, publish the Art Market Report, which we refer to as the Art Basel Report, annually in March. Until recently, the report was published by the same art economist in collaboration with TEFAF.
     
  Deloitte Luxembourg, a division of a global financial services company & ArtTactic, an art market research and analytics company, jointly publish the Art and Finance Report biannually in November.
     
 

Artprice, a company of Group serveur, is a leading art market information platform that publishes art market indexes, including the Artprice100® index, which tracks art price trends for the top 100-selling artists from 2000 through 2018.

     
  Artnet, an art market website operated by Artnet Worldwide Corporation, a wholly owned subsidiary of Artnet, AG, a German publicly traded company.

 

Summary

 

The global art market is influenced over time by the overall strength and stability of the global economy, geopolitical conditions, capital markets and world events, all of which may affect the willingness of potential buyers and sellers to purchase and sell art. The global art market is large, but its exact size is unknown and statistical data is inconsistent. Much of the uncertainty stems from differing estimates of the size of the private dealer and gallery market which is based on survey data, but disparities also exist in reported auction sales. According to the most recent Art Basel Report, global art sales were $67.4 billion in 2018, up 6% from 2017. The same report estimates that global sales have remained between $54 billion and $68 billion over the past decade, except during 2009 when sales declined to approximately $40 billion, which has believed to have been caused by the global financial crises. According to Artnet, the auction market has expanded considerably since 2000, with total pre-sale estimates increasing for the marquee spring sales by approximately 400% from May of 2000 to May of 2018. Of this growth, only approximately 25% is attributed to an increased number of works offered, while the remainder is attributed to price inflation. The average pre-sale total estimate for works sold in May of 2000 was approximately $600,000 as compared to $1.7 million in May of 2018, where the total estimate is the sum of the high and low estimates divided by two.

 

The high-end fine art market is defined by works valued in excess of $1 million, is dominated by a small group of ultra-high-net-worth private collectors and institutions, and the group narrows sharply at the very top of the market, with works valued at over $10 million.

 

According to a worldwide survey conducted by AXA Art Insurance in 2014, the art market is driven by purchasers who are typically male, middle-aged and highly educated. The AXA survey identified four subcategories of art buyers:

 

  Aficionados (37% of those surveyed). Aficionados immerse themselves in collecting as a passion. They typically cite passion, opportunity for self-expression and social relationships as the reasons they collect. Approximately 86% of this group primarily collect contemporary art and 79% of their acquisitions occur at art galleries.
     
  Traditionalists (16% of those surveyed). Traditionalists continue a family tradition of collecting. These collectors are typically experienced, having collected for over 20 years and are motivated by preserving and promoting cultural values and owning beautiful things.
     
  Investors (24% of those surveyed). Investors regard art as part of their overall portfolio, with emphasis on value maintenance and appreciation. Investors are typically less experienced collectors and purchase at auctions as often as at galleries.
     
  Other (23% of those surveyed). A significant portion of the respondents do not fit neatly into the other categories.

 

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According to Deloitte/ArtTactic survey results in 2017, 86% of collectors buy art for emotional reasons, but also focus on investment and 54% of wealth managers view art as a means to safeguard value, which is the highest percentage since the survey began in 2011. Deloitte/ArtTactic also reported in 2017 that 44% of wealth managers are increasing focus and resources on art and wealth management services, the highest percentage since the survey began in 2011 and up from 38% in the prior year.

 

The art market is commonly classified into several major collecting categories, the definitions of which may change depending on the auction house or reporting entity, but generally, they include the following:

 

  Post War and Contemporary,
  Impressionist and Modern,
  Chinese and Asian, and
  Old Masters.

 

The UBS Art Basel Market Report defines the Post War and Contemporary collecting segment as inclusive of artists born after 1910, with some exceptions for those born prior, but belonging to specific artistic movements coinciding with art made after 1945. The report takes into account data on sales from over 4,000 auctions, including several regional Chinese auctions, and samples the top 250 in order to provide information on the “Fine Art” category. According to the 2018 Report, the Post War and Contemporary category is the largest category in terms of total dollar value of transactions, representing 50%, or $7.2 billion, of global sales value in 2018, followed by the Modern category with 29% and the Impressionist and Post-Impressionist category with 15%. The 2014 AXA survey found that 82% of respondents collect Contemporary art, not exclusively of other categories.

 

Art sales have become increasingly highly concentrated among a small group of top selling artists, a trend that has been ongoing over the last decade. According to the Art Basel report, despite auction houses selling works by thousands of artists, in 2018, the top 10 artists were responsible for 24% or $1.7 billion in auction sales.

 

Rankings among the top ten artists for 2018 in the Post War and Contemporary category were as follows (based on the Art Basel report and Artprice.com):

 

   Artist (Post War & Contemporary Only)  Country of Birth  ArtPrice 2018 Turnover 
1  ZAO Wou-Ki (1921-2013)  CN  $326,709,980 
2  Jean-Michel BASQUIAT (1960-1988)  US  $254,144,702 
3  Andy WARHOL (1928-1987)  US  $243,515,430 
4  David HOCKNEY (1937)  GB  $206,494,892 
5  Willem DE KOONING (1904-1997)  NL  $152,720,104 
6  Gerhard RICHTER (1932)  DE  $143,079,367 
7  Francis BACON (1909-1992)  IE  $126,612,228 
8  Jackson POLLOCK (1912-1956)  US  $105,077,560 
9  Lucio FONTANA (1899-1968)  AR  $104,900,450 
10  Yayoi KUSAMA (1929)  JP  $103,041,484 

 

The distribution for the top 20 was as follows (Art Basel UBS report):

 

 

Art Appraisals, Valuation, and Auction Estimates

 

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Valuation of artwork is more of an art than a science. There is no efficient market that determines the price of a painting and there is no standardized art valuation methodology. The fair market value of art is usually based on a qualitative assessment by expert appraisers using relative valuation techniques. Art is valued by analyzing the comparative prices of similar works, aspects of the specific work, supply and demand factors and subjective perceptions of value. As an example of the inconsistency in valuations and appraisals, the Internal Revenue Service (“IRS”) published a report in 2015 highlighting the changes in valuation of professionally appraised artwork recommended by its art advisory panel of experts in 2015. In 2015, the IRS panel reviewed 446 items with an aggregated taxpayer valuation of $649 million, of which the panel recommended accepting the valuation of 156 items, or 35% and adjusted the valuation of 290 items, or 65% of the appraisals it reviewed. An artist’s reputation is developed through a combination of factors, including:

 

  Gallery exhibitions,
  Patronage,
  Critical endorsement,
  Museum exhibitions,
  Museum acquisitions,
  Awards,
  Auction prices, and
  Carefully monitored supply by a sponsoring gallery.

 

There is tremendous variability in the market value of individual pieces by any given artist. These differences are influenced by the perceived quality of the work, materials, condition, color, size, subject matter, provenance and other factors.

 

Auction houses may attempt to estimate the value of a painting, but those estimates may not be “arm’s length” and are often negotiated with the selling party. Therefore, they cannot be used as unbiased guidelines in determining the value of an artwork.

 

Private and Gallery Sales

 

According to the Art Basel Report, the relative size of the private dealer and gallery market as compared to the auction market tends to shift based on the overall sentiment, where optimism in the market tends to favor auction sales. For example, in 2018, auction sales accounted for an estimated 43% of total sales by dollar volume, as compared to approximately 47% in 2017. Auction houses are also increasingly participating in the private market, brokering non-auction sales transactions, which in 2016 were estimated by TEFAF to make up over $2 billion.

 

The private dealer and gallery sales market is characterized by its opacity. Galleries and other intermediaries that sell high end art have extensive relationships with figures like artist, critics, collectors and others in the art market and are often committed to long term objectives, such as enhancing the reputation of an artist they represent or the value of their collection. Accordingly, galleries can be highly selective in determining which collectors are permitted to purchase from them, preferring those that are likely to hold works for a long period of time and enhance the provenance of a piece. Most private and gallery sales are confidential. Galleries are often willing to hold inventory for longer periods of time, and generally, offer works at posted prices unless there is a longstanding relationship with the buyer. Sellers determine pricing in a private sales model where the dealer or gallery act as an intermediary in negotiating the transactions with a buyer.

 

Auction Sales

 

Most art auctions sales occur in the United States, the United Kingdom and China. Collectively the three major regions accounted for more than 88% of global sales in 2017, with the United States leading the market with 40% of global auction sales, followed by China at 29% and the United Kingdom at 18%. According to Artnet, the auction market has grown considerably since 2000, with pre-sale total estimates increasing by approximately 400% from May of 2000 to May of 2018. Of this growth, only approximately 25% is attributed to an increased number of works offered, while the remainder is attributed to price inflation. The average pre-sale total estimate for works sold in May of 2000 was approximately $600,000 as compared to $1.7 million in May of 2018, where the total is the sum of the high and low estimates.

 

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In general, the auction market is more transparent and more democratic than the private sales market because the final price is determined through open competition, so that any qualified individual can participate and potentially buy the offered work. Interested buyers place sequential ascending bids in a format referred to by economists as an English Auction. Works which are offered for sale by the auction house on behalf of a potential seller, also referred to as a consignor, are often referred to as lots, which may be comprised of one or more item; most paintings are sold as individual lots. Auction sales occur at a fixed time and are a matter of public record. Bidders determine the price of a piece in an auction sale, though the consignor typically sets a reserve floor price below which they would be unwilling to sell the work.

 

A low and high estimate of the sale price is set by the auction house, with the consignor’s input, based on a variety of factors, including the prior sales history, market factors, like supply considerations and the reserve price floor. If a consignor does not agree with the estimate range proposed by the auction house, they can elect not to consign the work for sale or can withdraw a consignment. Auction houses often set estimates at levels to either entice bidders to participate or potential consignors to offer their work at auction, thus, estimates should not necessarily be viewed as proxies for determining market value. The price at which an auctioneer declares an item sold at a public auction, referred to as the “hammer price,” does not reflect either the amount realized by a consignor or the price paid by a buyer. In addition to the hammer price, a successful bidder must pay the so-called “buyer’s premium,” which is effectively a commission on the sale that ranges from between 14% and 25%% of the hammer price. Sotheby’s published buyer’s premiums are 25% for a hammer price up to $400,000, 20% for the portion of a hammer price between $400,000 to $4.0 million and 13.9% for the portion above $4.0 million. The economics received by a consignor in an auction can vary widely. For works of relatively low value, consignors may be required to pay a seller’s commission to the auction house. For higher value works, consignors often pay no commissions and may be entitled to receive a portion of the buyer’s premium if not the full amount of the purchase price.

 

The public nature of auction sales poses certain risks for consignors. A work that fails to sell at auction as a result of not attracting a bid in excess of the reserve price, will often be much harder to sell in the future. The rate at which artworks fail to sell at public auction, referred to as the “buy-in rate,” hovers around 30%, according to Artprice, and has averaged 31% for Andy Warhol works listed during the past seventeen years. The value of an artwork is almost entirely subjective, so a failure to sell a piece at auction is damaging to the perceived value of the work, a concept referred to the art industry as “burning” the work. A 2008 study by Beggs and Graddy determined that paintings that previously failed to sell at auction returned 30% less in subsequent sales than other paintings.

 

In order to attract high-value consignments, an auction house may offer a guaranteed minimum price to a consignor. In exchange, the consignor agrees, if the final sale is in excess of the guaranteed amount, to pay the auction house a certain percentage of sale proceeds above the guaranteed amount. To offset the risk of a sale below the amount guaranteed to the consignor, an auction house may also secure a minimum guaranteed bid from a potential buyer, also known as a “third-party guarantee” or “irrevocable bid”. These guarantees effectively provide certainty that a successful sale will occur. The economic terms of guarantees and irrevocable bids are not typically disclosed and can vary widely based on negotiations between the relevant parties.

 

Auction sales between the leading Western auction houses, Sotheby’s, Christie’s and Phillips, were approximately $12.5 billion in 2018. According to the 2018 Art Basel Report, the United States accounted for 40% of global auction sales in 2017, followed by China at 29% and the United Kingdom at 18%.

 

Auction houses publicly report total sale prices that reflect the hammer price (i.e. the price at which the auctioneer declared the winning bid), plus the buyer’s premium, but tend to exclude applicable taxes, fees and royalties, which are typically paid by the purchaser. The buyer’s premium schedule is published by the auction house and is updated or revised periodically. The buyer’s premium for the New York salesroom of each of the major auction houses as of the date of this offering circular is as follows (percentages and dollar amounts relate to the hammer price):

 

Sotheby’s   Christie’s   Phillips
         
25% up to and including $400,000   25% up to and including $300,000   25% up to and including $400,000
20% from $400,001 to $4.0 million   20% from $300,001 to $4.0 million   20% from $400,001 to $4.0 million
13.9% above $4.0 million   13.5% above $4.0 million   13.5% above $4.0 million

 

The amount of the published sale price a consignor receives is typically reduced by all or a portion of the buyer’s premium and, in some instances, a sales commission. The percentage of the buyer’s premium received by the consignor, if any, and the amount of any sales commission payable by the consignor, if any, are negotiated between the consignor and the auction house and vary widely depending on a number of factors, including the value and importance of the specific work, whether the work is sold as an individual piece or part of a larger collection, anticipated demand levels and other factors. For high value items auction houses often waive the sales commission and rebate a portion of the buyer’s premium to the consignor, which is commonly referred to in the industry as an “enhanced hammer.”

 

Auction houses do not publicly report the economic terms of transactions with consignors, so the Company cannot determine with any degree of confidence what percentage of a sale price would be received by the Company upon consummation of an auction sale. Based on experience, we believe that it would be reasonable to expect that the net pre-tax cash proceeds receivable by the Company in an auction sale would be in the range of 8% to 15% less than the published sale price, Accordingly, if for example, the Painting were to eventually sell at auction for a sale price of $3.0 million (hammer price, plus buyer’s premium), the net proceeds available to the Company would be expected to be in the range of $2,760,000 to $2,550,000, however, the net result could fall outside of this range and such estimate does not account for the potential existence of an arrangement to guaranty a minimum sale price. The existence of any such guarantee arrangement would provide greater certainty of success at auction, but could reduce the sales proceeds to be received by the Company.

 

Pop Art

 

The Pop Art movement emerged independently in Britain and the United States during the mid- to late-1950s and gained widespread recognition in the 1960s. Andy Warhol immediately established himself as one of the leading figures of Pop Art and continues to be one of the best-selling American artists of all time. Central to the movement was the practice of appropriation, where familiar images of consumer culture and mass media, especially, those from advertisements, cinema and everyday objects, were removed by artists from their original context and isolated or combined with unrelated material. By virtue of the technique, banal or kitschy elements of popular culture could be emphasized and examined by Pop Art, often through the use of irony. Many Pop Artists also came to rely on mechanical means of reproduction or rendering techniques as part of their process, thereby further emphasizing the consumer culture central to the work.

 

Andy Warhol

 

We believe that Andy Warhol is among the most widely known and best-selling American pop artists. It is estimated that Warhol produced about 10,000 works between 1961, when he gave up graphic design until his death in 1987. The exact number is unknown, though the Warhol Foundation for the Visual Arts is in the process of cataloguing his work. Approximately 200 Andy Warhol paintings are auctioned each year on average. Andy Warhol works sold at auction were $427 million in 2013, $653 million in 2014, $526 million in 2015 and, according to TEFAF, $168 million in 2016, $175 million in 2017, and $244 in 2018. According to Artnet, aggregate pre-sale auction estimates for Warhol works offered at May auctions by the leading auction houses over the eighteen-year period from 2000 through 2017 were $2.1 billion, second only to Pablo Picasso, whose total was $2.5 billion and significantly above Claude Monet, who came in third with $1.3 billion. According to auction data published by Artnet, Warhol was ranked the highest grossing artist in 2014 worldwide across categories, the second highest grossing artist in 2015 and the eighth highest grossing artist in 2016. Last year, Andy Warhol was the fifth highest grossing artist globally and the third in his collecting category, according to ArtPrice and the Art Basel UBS report. The highest auction prices paid for Andy Warhol paintings were:

 

  Turquoise Marilyn, which sold for $80 million in May 2007,
  Triple Elvis (Ferus type), which sold for $81.9 million in November 2014, and
  Silver Car Crash (Double Disaster), which sold for $105.4 million in November 2013.

 

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According to an Artnet report published in 2017, Andy Warhol is the second highest selling artist over the 17 years ended prior to the publication of the report, with $4.9 billion of total sales, behind only Pablo Picasso whose works sold for more than $6.2 billion over the same period.

 

The Andy Warhol museum in his hometown of Pittsburgh, Pennsylvania, with 88,000 square feet on seven floors, is the largest museum in North America dedicated to a single artist. The museum features 900 paintings and a variety of other works. The Warhol Foundation, which oversees commercial exploitation of Warhol’s work is thought to own the largest collection of Warhol paintings. It is also widely believed that the Mugrabi family owns the largest collection of Andy Warhol paintings in private hands, estimated to potentially include more than 1,000 Andy Warhol paintings. Many art industry participants believe that the Mugrabi family has been largely responsible for the popularity and pricing of Andy Warhol’s work and they have purchased large numbers of Warhol paintings at auction.

 

The Artist

 

The following description of Andy Warhol is derived from Biography.com, which is owned by A&E Television Networks, LLC. The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

Born on August 6, 1928, in Pittsburgh, Pennsylvania, Andy Warhol was a successful magazine and ad illustrator who became a leading artist of the 1960s Pop art movement. Warhol ventured into a wide variety of art forms, including performance art, filmmaking, video installations and writing, and he controversially blurred the lines between fine art and mainstream aesthetics. Warhol died on February 22, 1987, in New York City.

 

In the late 1950s, Warhol began devoting more attention to painting, and in 1961, he debuted his first paintings of a genre that has come to be known as “pop art” — paintings that focused on mass-produced commercial goods. In 1962, he exhibited the now-iconic paintings of Campbell’s soup cans. These small canvas works of everyday consumer products created a major stir in the art world, bringing both Warhol and pop art into the national spotlight for the first time. Warhol’s other famous pop paintings depicted Coca-Cola bottles, vacuum cleaners and hamburgers. He also painted celebrity portraits in vivid and garish colors; his most famous subjects include Marilyn Monroe, Elizabeth Taylor, Mick Jagger and Mao Zedong. As these portraits gained fame and notoriety, Warhol began to receive hundreds of commissions for portraits from socialites and celebrities. His portrait “Silver Car Crash (Double Disaster)” sold for $105.4 million in 2008, making it one of the most valuable paintings in world history.

 

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In 1964, Warhol opened his own art studio, a large silver-painted warehouse known simply as “The Factory.” The Factory quickly became, one of New York City’s premier cultural hotspots, a scene of lavish parties attended by the city’s wealthiest socialites and celebrities. Warhol’s life and work simultaneously satirized and celebrated materiality and celebrity. On the one hand, his paintings of distorted brand images and celebrity faces could be read as a critique of what he viewed as a culture obsessed with money and celebrity. On the other hand, Warhol’s focus on consumer goods and pop-culture icons, as well as his own taste for money and fame, suggest a life in celebration of the very aspects of American culture that his work criticized. Warhol spoke to this apparent contradiction between his life and work in his book The Philosophy of Andy Warhol, writing that “making money is art and working is art, and good business is the best art.”

 

The Painting

 

As evidenced by the artist’s signature and date on the verso of the canvas, 1 Colored Marilyn (reversal series), is one of the earliest works from a series of oil and silkscreen paintings completed by Andy Warhol between 1979 - 1986. In the works, Warhol revisited one of his most iconic and enduring subjects, the Hollywood star Marilyn Monroe. The Painting, which carried a pre-sale estimate of $1,500,000 - $2,000,000 in Phillips’ November 2017 New York auction, measures 46.4 cm by 34.9 cm (18 ¼ in x 13 ¾ in) and was created in 1979. Following its execution, the work was acquired by an American collector from Warhol’s primary dealer, Bruno Bischofberger, in 1984. The Painting remained in the Los Angeles collection of Douglas S. Cramer after its initial purchase, until its acquisition by Masterworks in 2017.

 

Provenance.

 

Bruno Bischofberger Gallery, Zurich

Douglas S. Cramer, Los Angeles (acquired from the above in 1984).

 

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History of Prior Sales.

 

Set forth below is the historical data for Andy Warhol’s Marilyn Monroe Reversal Series sold at public auction from 1990 to 2018. Each of the considered works was created using the same technique between 1979 and 1986, with a singular image of Marilyn Monroe as the subject matter. We have included all works that feature at least one color, outside of the black negative of the image, and excluded those which lack color or hue, such as the Grey Marilyn or Black on Black Reversals, which we believe are not representative of the Painting. The data was sourced from publicly available auction records and does not include private sales. Such data may be incomplete or inaccurate. Although paintings in the Reversal Series have similar characteristics, each individual painting is unique in terms of artistic content, coloring, condition, provenance and other factors. We, therefore, cannot make any determination or representation that any of the data set forth below is useful in determining the value of the Painting and you are urged not to place undue reliance on such data.

 

 

 

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Based on the auction sale data presented above, an investment in a composite index of Reversal Series paintings without grey or black works at the beginning of 2008 would have yielded a gross annualized return which is significantly higher than the performance of the S&P 500 Index with dividend reinvestment or the 10-Year U.S. Government Bond Index during the same period, as reflected in the chart below. The historical composite return of the Reversal Series is useful to show historical trends in the value of similar works, but it is not a direct proxy for performance of the Class A ordinary shares, since it reflects composite changes in sales prices and not the returns on any particular painting, there is no current market for the Class A ordinary shares, and it does not include the fees and selling costs described in this Offering Circular. While the below graph shows historical appreciation in the value of the Painting, investors in this offering will only receive net proceeds from the sale of the Painting, if any, after the sale of the Painting and only after reduction of fees and expenses payable by the company are paid. In addition, the past performance of the Reversal Series paintings is not necessarily indicative of future performance. Accordingly, investors should not place undue reliance on historical trends.

 

 

INDICES ARE UNMANAGED. AN INVESTOR CANNOT INVEST DIRECTLY IN AN INDEX. INDICES ARE USED FOR COMPARATIVE MODELLING PURPOSES ONLY. THE TIMING OF TRANSACTIONS RELATING TO AN ASSET OR PORTFOLIO, ADVISORY, AND TRANSACTION FEES, AND OTHER MANAGEMENT ACTIVITIES CAN CREATE SIGNIFICANT DIFFERENCES BETWEEN THE PERFORMANCE OF AN INDEX AND AN INVESTMENT SEEKING SIMILAR OR SUPERIOR RELATIVE PERFORMANCE RESULTS

 

The above disclosures in this section represent auction sales only and do not purport to include data regarding the total number of Andy Warhol Marilyn (Reversal Series) paintings currently in existence. The Company has been unable to find a reliable source of information regarding the total number of Andy Warhol Marilyn (Reversal Series) paintings currently in existence and therefore is unable to provide such information at this time.

 

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Administrative Services

 

There are various services required to administer our business and maintain the Painting. Pursuant to an administrative services agreement between us and Masterworks to be entered into prior to the completion of the Offering, the Administrator will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. The Administrator will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding(excluding Class B ordinary shares) per annum following the closing of the Offering. Any extraordinary or non-routine services, if any, will be managed and paid for by the Administrator, but such extraordinary costs will be reimbursed upon the sale of the Painting or a sale of our Company, as applicable.

 

Ordinary and necessary administrative and maintenance costs and expenses include:

 

  Storage costs;
  Insurance costs;
  Display or gallery costs;
  Crating and shipping costs related to traveling exhibitions;
  Costs associated with SEC filings and compliance with applicable laws;
  Transfer agent fees;
  Other fees associated with the Offering; and
  Accounting.

 

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Extraordinary or non-routine costs for which the Administrator shall be entitled to seek reimbursement include:

 

  Payments associated with litigation, judicial proceedings or arbitration, including, without limitation, attorneys’ fees, settlements or judgments;
  Costs associated with any material transactions, such as any third-party costs and expenses incurred in connection with any merger, third-party tender offer or other similar transaction; and
  Costs and taxes, if any, associated with selling the Painting.

 

Our Inter-Company Agreements with our affiliated entities raise various conflicts of interests in which the best interest of our Administrator and our affiliates may differ from the best interest of holders of the Class A ordinary shares.

 

Conflicts of Interest include but are not limited to the following:

 

 

Masterworks may at some point in the future seek to register to become a broker-dealer and a member of FINRA to enable it to earn transactional fees for trading the Class A ordinary shares or it may seek to earn administrative or other fees associated with making a trading market available. The operation of a trading market in the Class A ordinary shares by Masterworks or the receipt of trading or administrative fees would create conflicts of interest. If such activities generate profits, our affiliates will be incentivized not to sell the Painting and liquidate us, even in situations in which a sale of the Painting is in the best interest of holders of the Class A ordinary shares.

     
 

Our affiliate, the Administrator, will receive fees and expense reimbursement for administration of our operations in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum following the closing of the Offering.

 

Therefore, the interests of the Administrator and the other affiliates may differ significantly from those of investors in the Offering and subsequent holders of the Class A ordinary shares. As a result, we cannot assure investors that we will execute a discretionary sale of the Painting at a time that is in the best interests of holders of the Class A ordinary shares.

     
  Neither the Board of Managers, the Administrator, or its members, will be required to manage or administer our operations, as applicable, as their sole and exclusive function and they will have other business interests and will engage in other activities in addition to those relating to us. We depend on the Administrator to successfully operate us. Their other business interests and activities could divert time and attention from operating our business.
     
 

Our operating agreement contains provisions that limit remedies available to our investors against the Board of Managers, and the administrative services agreement contains certain provisions that limit the remedies available to our investors against the Administrator and its affiliates and us for actions that might otherwise constitute a breach of duty. Our operating agreement contains provisions limiting the liability of the Board of Managers and the administrative services agreement contains certain provisions limiting the liability of the Administrator and its affiliates which also reduces remedies available to investors for certain acts by such person or entity.

     
 

Scott Lynn, the individual responsible for funding Masterworks.io, is an art collector and is able to control the activities of all of the Masterworks entities, as well as us. Mr. Lynn is also the Chief Executive Officer of our Administrator and a member of the Board of Managers of the Administrator and our Chief Executive Officer. Mr. Lynn could have conflicts between business with his personal art collection and business with the Masterworks collection, or Mr. Lynn could simply stop funding Masterworks and cause it to cease to exist.

 

Selling the Painting

 

Our intention is to own the Painting for a five- to ten-year period, although we may elect to hold the Painting for a longer period or sell the Painting at any time due to certain circumstances. We will have the ability, in our sole and absolute discretion, to sell the Painting at a public auction and liquidate us if:

 

 

We become subject to the reporting requirements of the Exchange Act of 1934,

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,

 

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  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.

 

The Administrator will continuously offer the Painting for sale and any person can make an offer to purchase the Painting at any point in time. If such offer constitutes a “Bona Fide Offer” as defined in the Masterworks 001, LLC operating agreement, the Administrator will submit such offer to a vote of our shareholders and if holders of a majority of the voting shares vote in favor of a sale in response to such Bona Fide Offer, we will accept the Bona Fide Offer and sell the Painting.

 

If, on the seven-year anniversary of the closing of this Offering, the Administrator determines that an active trading market does not exist or that such market does not have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, the Company will solicit the vote of holders of voting shares to sell the Painting (a “Liquidity Sale”). If the holders of a majority of voting shares vote to sell the Painting, the Administrator will use commercially reasonable efforts to sell the Painting at auction or in a privately negotiated transaction as soon as reasonably practicable, but not later than two years following such vote. If the Administrator proposes to execute such Liquidity Sale pursuant to a privately negotiated transaction and the proposed purchaser is known by the Administrator to be the beneficial owner of at least 10% of the voting shares or is an affiliate of the Administrator (a “Related Party”), then we shall be required to obtain an additional approval of the terms of such Liquidity Sale with a Related Party purchaser from the holders of a majority of the voting shares as a condition to closing any such Liquidity Sale with a Related Party purchaser.

 

Further, if at any time we or Masterworks decide to sell the Painting in a private sale transaction (i.e., non-auction sale), except in connection with a Liquidity Sale to a Purchaser that is not a Related Party, we must submit such proposed sale to a vote of our shareholders, and if holders of a majority of voting shares vote in favor of a sale, the Administrator can then effectuate the private sale.

 

Following a sale of the Painting, we will pay or reimburse Masterworks for any expenses for which it is responsible, including applicable sales commissions, income taxes, if any, and other transactional expenses. Following the payment of all of such expenses, we will be liquidated, and the remaining net proceeds, if there are any, will be distributed to the holders of record of the Shares entitled to such distribution. However, there can be no assurance as to the timing of a liquidating distribution or that we will pay a liquidating distribution at all.

 

Competition

 

At the time we attempt to sell the Painting, we may face substantial competition from other entities and individuals who are selling or seeking to sell similar artwork. These other parties may be better funded and may be able to sell their artworks at a lower price than us. Further, we will face significant risks from other competitive factors, such as the available supply of similar artworks for sale.

 

Government Regulation

 

Art Market Regulation

 

Art as tangible personal property is subject to regulation under different city, state and federal statutory schemes. Generally, domestic art transactions that are conducted within the United States are subject to state Uniform Commercial Code statutes, which govern the sale of goods. Some states have additionally enacted art specific legislation, such as New York’s Arts and Cultural Affairs Law and California’s Resale Royalty Act. In addition, federal statutes such as the Holocaust Expropriated Art Recovery Act and the National Stolen Property Act can apply to title disputes in the art market context. International art transactions involving the import and export of art into and out of the United States will subject us to the rules and regulations established by the United States Customs and Border Protection. Further, we and Masterworks will be subject to the requirements of the federal Cultural Property Implementation Act which is the United States’ accession legislation for the 1970 United Nations Educational, Scientific, and Cultural Organization (UNESCO) Convention which protects countries’ cultural property, including artwork. New York City, as a major art auction center, has enacted legislation governing the activities of auctioneers in the New York City Administrative Code and Masterworks may be subject to these regulations through its transactions and financing arrangements with auctioneers.

 

Patriot Act

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act) is intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to work together to combat terrorism on a variety of fronts. The Patriot Act, to which we are subject, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act required us to implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, and currency transaction reporting and due diligence on customers. The Patriot Act also requires federal banking regulators to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve a proposed bank acquisition.

 

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ORGANIZATIONAL STRUCTURE

 

The diagram below depicts our organizational structure after this Offering assuming all Class A ordinary shares are sold

 

 

 

We were formed as a Delaware limited liability company on March 28, 2018 by Masterworks in order to acquire the Painting. We are a manager-managed limited liability company managed by a Board of Managers. The Class A ordinary shares to be sold in this Offering, when issued, together will represent 80% of the membership interests in us and have certain approval and voting rights in connection with the sale of the Painting as further described in this offering circular and voting on certain amendments to our operating agreement and administrative services agreement and other certain rights pursuant to our operating agreement. Upon formation, Masterworks was issued 16,015 membership interests of the Company. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement, which created two classes of membership interests of the Company in the form of Class A ordinary shares and Class B ordinary shares, and simultaneously, the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares.

 

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The Board of Managers will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Board of Managers will not have the authority to do any the following without first obtaining the prior approval or consent of holders of a majority of voting shares:

 

  Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement, except as provided therein;
  Issue any additional Class A ordinary shares following the completion of the Offering, except Class A ordinary shares issued to Masterworks for administrative services and upon conversion of the Class B ordinary shares, acquire additional material assets, incur debt for borrowed money or engage in business activities that are unrelated to the ownership, maintenance, promotion and sale of the Painting;
  Effect any sale of Painting in a private transaction (e.g. a non-auction sale), except in connection with a Liquidity Sale to a person that is not a Related Party; or
  Effect any sale of the Painting at a public auction, unless:

 

 

We become subject to the reporting requirements of the Exchange Act,

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have sufficient transaction volume to permit reasonable trading among holders of the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.

 

EMPLOYEES

 

As of May 1, 2019, we had no full-time employees and no part-time employees. All of our day to day operations are administered by our Administrator.

 

LEGAL PROCEEDINGS

 

There are no legal proceedings currently pending against us which would have a material effect on our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings contemplated or threatened. It is possible that we will find ourselves involved in litigation, in which case we will be wholly reliant on the Administrator to address such litigation as necessary. If the Administrator settles a case or receives and adverse judgment, the Administrator will have the right to auction the Painting and any legal costs, settlement or judgement paid by the Administrator would then be reimbursed upon a sale of the Painting pursuant to the terms of the administrative services agreement.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

We were formed as a Delaware limited liability company on March 28, 2018 by Masterworks to acquire the Painting. We have not conducted any operations prior to the date of this offering circular and will not conduct any business activities except for activities relating to the ownership, maintenance, promotion and the eventual sale of the Painting. Our strategy will be to display and promote the Painting in a manner designed to enhance its provenance and increase its exposure and its value. We are not aware of any trends, uncertainties, demands, commitments or events that will materially affect our operations or the liquidity or capital resources of the Administrator.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our consolidated financial statements.

 

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Investment in Artwork

 

When we acquire the Painting upon closing of the Offering, it will be recorded on the balance sheet at cost, which is the purchase price we pay for the Painting from our affiliate, Masterworks Gallery. The Painting has an indefinite life. We will review the Painting for impairment in accordance with the requirements of ASC 360-10, Impairment and Disposal of Long-Lived Assets (“ASC 360”). Those requirements will require us to perform an impairment analysis whenever events or changes in circumstances indicate that the carrying amount of the Painting might not be recoverable, i.e., information indicates that an impairment might exist. In accordance with ASC 360, we will:

 

  Consider whether indicators of impairment are present; Indicators or triggers of impairment management considers are: deteriorating physical condition of the artwork, trends in the art market, reputation of the artist, recent sales of other paintings by the artist and other events, circumstances or conditions that indicate impairment might exist;
  If indicators are present, perform a recoverability test by comparing the estimated amount realizable upon sale of the Painting, to its carrying value; and
  If the amount realizable upon sale of the Painting is deemed to be less than its carrying value, we would measure an impairment charge.

 

If it is determined that measurement of an impairment loss is necessary, the impairment loss would be calculated based on the difference between the carrying amount of the Painting and its estimated fair value. An impairment loss would be reported as a component of income from continuing operations before income taxes in our financial statements.

 

Contingent Liabilities

 

We may be subject to lawsuits, investigations and claims (some of which may involve substantial dollar amounts) that can arise out of our normal business operations. We would continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a thorough analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. There were no contingent liabilities as of December 31, 2018.

 

Income Taxes

 

We expect that we will be treated as a partnership for U.S. federal income tax purposes and not as an association or publicly traded partnership subject to tax as a corporation. As a partnership, we generally will not be subject to U.S. federal income tax. Instead, each Holder that is subject to U.S. tax will be required to take into account its distributive share, whether or not distributed, of each item of our income, gain, loss, deduction or credit. See “Material U.S. Federal Tax Considerations”. The Administrator will have the authority to act on our behalf with respect to tax audits and certain other tax matters and to make such elections under the Internal Revenue Code and other relevant tax laws as the Administrator deems necessary or appropriate.

 

As of December 31, 2018, we had no federal and state income tax assets, liabilities or expense.

 

Liquidity and Capital Resources of the Administrator

 

Masterworks will pay all costs associated with the development and operation of the Masterworks Platform, costs associated with the acquisition of the Painting and all costs of our organization and this Offering. Masterworks will also be responsible for all ordinary and necessary costs for ongoing administrative expenses, for which it will receive Class A ordinary shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum, after the Offering. We do not anticipate that we will maintain any material liquid assets and, accordingly, we will rely upon the Administrator to pay for the maintenance of the Painting and the administration of our business in accordance with the administrative services agreement. The Administrator will be funded with approximately $100,000 in cash or cash equivalents as of the date of qualification of this offering circular and as of the closing the Company will have no liabilities, commitments or obligations, other than its obligations pursuant to the administrative services agreement as of such dates. We and the Administrator believe that revenues and expense reimbursements from the Company pursuant to the administrative services agreement will be sufficient for the Administrator to perform its obligations under the administrative services agreement for at least the first five-years following the Offering. We do not believe we will need to raise any additional funds through the issuance and sale of securities in the foreseeable future and are not permitted to do so under our operating agreement without the prior approval of holders of the Class A ordinary shares. The Administrator’s original source of financing will be equity contributions from Masterworks.io, LLC. Masterworks.io, LLC is currently funded through a $5.0 million loan from Scott Lynn. Because Scott Lynn controls Masterworks, the loan can effectively be declared due and payable at any time in the discretion of Mr. Lynn. The Administrator will earn fees in the form of additional Class A ordinary shares issued by us and other similar issuer entities, which it may periodically sell to obtain additional liquidity. The direct incremental costs incurred by the Administrator to satisfy its obligations under the administrative services agreement are expected to be less than its revenues, though such revenues may be insufficient to cover the Administrator’s overhead. In addition, the Administrator has covenanted in the administrative services agreement that for so long as such agreement remains in effect, the Administrator will maintain on hand cash reserves sufficient to pay at least one year of estimated expenses to satisfy its obligations under the administrative services agreement to fund the operations of the Issuer until the sale of the Painting.

 

The Administrator expects to conduct other business activities, including the administration of other entities similar to the Company and expects that, with scale, the Administrator’s revenues will exceed its costs. Further, as noted in the foregoing, the Administrator intends to engage in other business activities, including performing services similar to those to be provided to the Company to other companies, and the Company cannot estimate at this time what the aggregate costs and expenses of the Administrator will be with respect to such activities as they will depend on many factors. Additionally, the Company plans to own the Painting for a five- to ten-year period, although it may elect to hold the Painting for a longer period.

 

Commitments from Affiliates to Fund Operations

 

We have a written commitment from the Administrator to fund our operations until we sell the Painting which is contained in the administrative services agreement.

 

Commitments from Affiliates to Fund Class A ordinary shares, Offering Costs and Expenses

 

The costs associated with this Offering are estimated to be $150,000 and shall be paid by the Administrator rather than from the net proceeds of the Offering. None of these fees, costs or expenses will be reimbursable by the Company to Administrator, although Masterworks will receive a true-up amount of $181,500 for acquiring and financing the acquisition of the Painting upon closing of the Offering.

 

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MANAGEMENT

 

Our Administrator

 

Our day to day operations are managed by the Administrator. The Administrator performs its duties and responsibilities pursuant to our operating agreement and administrative services agreement. Masterworks appointed the Administrator and the Board of Managers can only terminate the administrative services agreement with the prior written consent of Masterworks Gallery, LLC. The Administrator and its affiliates have the exclusive right and power to manage and operate our Company, subject to the powers of our Board of Managers and other than limited voting rights reserved under our operating agreement for the holders of the Class A ordinary shares.

 

Upon formation, there were 16,015 membership interests of the Company issued to Masterworks. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company in the form of Class A ordinary shares and Class B ordinary shares, and simultaneously, the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares.

 

Summary of Administrative Services Agreement

 

We plan to enter into an administrative services agreement with the Administrator prior to the closing of this Offering. The following summarizes some of the key provisions of the administrative services agreement. This summary is qualified in its entirety by the administrative services agreement itself, which is included as Exhibit 6.2.

 

Services to be Provided

 

Pursuant to the administrative services agreement, the Administrator agreed to provide us, though itself directly or through its affiliates, with investment management, advisory, asset management, consulting and other services with respect to the Painting and our operations on the terms and conditions set forth in the administrative services agreement.

 

The services to be provided by the Administrator under the administrative services agreement include the following:

 

(i) Painting-level services with respect to the Painting, including:

 

  (A) Custodial and storage services for the Painting;
  (B) Maintaining asset-level insurance requirements for the Painting;
  (C) Managing transport for the Painting in the ordinary course of business, including the display and exhibition thereof; and
  (D) Research, conservation, restoration (as deemed necessary by the Administrator), framing services; and

 

(ii) Entity-level services, including:

 

  (A) Oversight and management of banking activities;
  (B) Management of preparation and filing of SEC and other corporate filings;
  (C) Financial, accounting and bookkeeping services, including retention of an auditor for the Company;
  (D) Record keeping, shareholder registrar and regulatory compliance;
  (E) Providing listing services, subject to the approval of the members of our Company as may be required by law;
  (F) Tax reporting services;
  (G) Bill payment;
  (H)

Selecting and negotiating insurance coverage for our Company, including operational errors and omissions coverage and members of the Board of Managers’ and officers’ coverage;

  (I) Maintain our stock ledger and coordinating activities of our transfer agent, escrow agent and related parties;
  (J) Software services; and

 

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(iii) Transactional services with respect to the Painting, including:

 

  (A) Legal and professional transactional services;
  (B) Negotiation of terms of potential sales and the execution thereof;
  (C) Obtaining appraisals and statements of condition in connection with a sale transaction relating to the Painting;
  (D) Other transaction-related services and expenditures relating to the Painting;
  (E) Administrative services in connection with liquidation or winding up of our Company;
  (F) Selection and engagement of an underwriter, placement agent and other financial intermediaries with respect to any offering of securities of our Company; and
  (G) Managing litigation.

 

Third Parties and Exclusivity

 

Pursuant to the administrative services agreement the Administrator may to the extent it determines that it would be advisable, arrange for and coordinate the services of other professionals, experts and consultants to provide any or all of the services under the administrative services agreement in which case, the costs and expenses of such third parties for providing such services shall be borne by the Administrator with it being understood that the Administrator shall not charge any fees in addition thereto with respect to such outsourced services.

 

The obligations of the Administrator to us are not exclusive. The Administrator may, in its discretion, render the same or similar services as rendered to us to any person or persons whose business may be in direct or indirect competition with us.

 

Rights of the Administrator

 

Pursuant to the administrative services agreement, the Administrator and its affiliates shall have the right to engage in the following activities, and will be responsible for all incremental costs associated with such activities (including taxes):

 

(a) Rights to commercialize the Painting for the duration of the operations of our Company;
(b) Display rights; and
(c)

The right to lend the Painting to museums, galleries, private entities or individuals, and the like.

 

The Administrator will display or exhibit the Painting if and when the Administrator reasonably believes that such display or exhibition would increase the exposure, profile and appeal of the Painting. In the event that any revenues are generated from such activities, the Administrator may retain such revenues to the extent they offset actual incremental third-party costs associated with such activities and any excess revenues above such incremental third-party costs, if any, shall belong to the Company.

 

Compensation of the Administrator and Reimbursement

 

There are various services required to administer our business and maintain the Painting. Pursuant to an administrative services agreement between us and Masterworks to be entered into prior to the completion of the Offering, the Administrator will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. The Administrator will receive fees and expense reimbursement for administration of our operations in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum following the closing of the Offering. Any extraordinary or non-routine services, if any, will be managed and paid for by the Administrator, but such extraordinary costs will be reimbursed upon the sale of the Painting or a sale of our Company, as applicable.

 

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Ordinary and necessary administrative and maintenance costs and expenses include:

 

  Storage costs;
  Insurance costs;
  Display or gallery costs;
  Crating and shipping costs related to traveling exhibitions;
  Costs associated with SEC filings and compliance with applicable laws;
  Transfer agent fees;
  Other fees associated with the Offering; and
  Accounting.

 

Extraordinary or non-routine costs for which the Administrator shall be entitled to seek reimbursement include:

 

  Payments associated with litigation, judicial proceedings or arbitration, including, without limitation, attorneys’ fees, settlements or judgments;
  Costs associated with any material transactions, such as any third-party costs and expenses incurred in connection with any merger, third-party tender offer or other similar transaction; and
  Costs and taxes, if any, associated with selling the Painting;

 

Provision of Financial Information

 

The Administrator will report to the Company on a semi-annual basis its current and total assets, current and total liabilities, and total equity and the Company intends to include such amounts in its SEC reports.

 

Termination

 

The term of the administrative services agreement will terminate upon the first to occur of (i) the dissolution of our Company; or (ii) our termination of the administrative services agreement on the terms set forth in the agreement.

 

Under the administrative services agreement, we may terminate the agreement at any time upon a vote of our members pursuant to our operating agreement following any of the following:

 

(i) The commission by the Administrator or any of its executive officers of fraud, gross negligence or willful misconduct;

 

(ii) The conviction of the Administrator of a felony;

 

(iii) A material breach by the Administrator of the terms of the administrative services agreement which breach is not cured within 30 days after receipt by the Administrator of a notice of such breach from any member of our Company (provided that if such breach is not capable of cure within 30 days, and the Administrator is diligently taking steps to cure the breach, then no such event shall be deemed to have occurred unless and until the Administrator fails to cure such breach within 60 days after receiving notice thereof);

 

(iv) A material violation by the Administrator or any of its executive officers of any applicable law that has a material adverse effect on our business; or

 

(v) The bankruptcy or insolvency of the Administrator.

 

On the date of termination, or if we do not have the available funds on such date, then as soon as practicable after we do have the available funds, we will pay any accrued but unpaid costs subject to reimbursement owed to the Administrator through to such date.

 

Indemnification

 

Under the administrative services agreement we agreed to indemnify, hold harmless, protect and defend the Administrator, its affiliates, any officer, member of the Board of Managers, employee or any direct or indirect partner, member or shareholder of the Administrator, any person who serves at the request of the Administrator on behalf of us (referred to herein as the “Indemnified Persons”) against any losses, claims, damages or liabilities, including legal fees, costs and expenses incurred in investigating or defending against any such losses, claims, damages or liabilities or in enforcing the Indemnified Persons’ rights to indemnification under the administrative services agreement. The indemnification under the administrative services agreement shall not apply to any actions, suits or proceedings in which (i) one or more officers, member of the Board of Managers, partners, members or employees of the Administrator are making claims against the Administrator or one or more other officers, member of the Board of Managers, partners, members or employees of the Administrator; or (ii) we are not a plaintiff, defendant or other party in such action, suit or proceeding and/or will not or could not be reasonably expected to receive any monetary benefit from the outcome of such action, suit or proceeding.

 

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Amendment of Administrative Services Agreement

 

Amendments to the administrative services agreement may be proposed only by or with the consent of the Administrator and may be approved by the Board of Managers, provided that any amendment that would be adverse or detrimental to the interests of members of the Company must be approved by holders of a majority of voting shares.

 

Prohibited transactions under our operating agreement

 

The Board of Managers will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Board of Managers shall not have the authority to do any the following without first obtaining the prior approval or consent of holders of a majority of the voting shares:

 

 

Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement, except as provided therein;

 

Issue any additional Class A ordinary shares following the completion of the Offering, except Class A ordinary shares issued to Masterworks for administrative services and pursuant to the conversion of the Class B ordinary shares, acquire additional material assets, incur debt for borrowed money or engage in business activities that are unrelated to the ownership, maintenance, promotion and sale of the Painting;

  Effect any sale of Painting in a private transaction (e.g. a non-auction sale); or
  Effect any sale of the Painting at a public auction, unless:

 

 

We become subject to the reporting requirements of the Exchange Act,

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.

 

Sale of Painting

 

Our intention is to own the Painting for a five- to ten-year period, although depending on market conditions and other circumstances we may elect to hold the Painting for a longer period or sell the Painting at any time. We will have the ability, in our sole and absolute discretion, to sell the Painting at a public auction and liquidate our Company if:

 

 

We become subject to the reporting requirements of the Exchange Act,

  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.

 

The Painting is effectively perpetually available for sale following the Offering and we intend to promote the sale of the Painting. Any person can make an offer to purchase the Painting at any point in time. If such offer constitutes a “Bona Fide Offer” as defined in the Masterworks 001, LLC operating agreement, the Administrator will submit such offer to a vote of the then holders of our voting shares and if holders of a majority of the voting shares vote in favor of a sale in response to such Bona Fide Offer, we will accept the Bona Fide Offer and sell the Painting.

 

If, on the seven-year anniversary of the closing of this Offering, the Administrator determines that an active trading market does not exist or that such market does not have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, the Company will solicit the vote of holders of voting shares to sell the Painting (a “Liquidity Sale”). If the holders of a majority of voting shares vote to sell the Painting, the Administrator will use commercially reasonable efforts to sell the Painting at auction or in a privately negotiated transaction as soon as reasonably practicable, but not later than two years following such vote. If the Administrator proposes to execute such Liquidity Sale pursuant to a privately negotiated transaction and the proposed purchaser is known by the Administrator to be the beneficial owner of at least 10% of the voting shares or is an affiliate of the Administrator (a “Related Party”), we shall be required to obtain an additional approval of the terms of such Liquidity Sale with a Related Party purchaser from the holders of a majority of the voting shares as a condition to closing any such Liquidity Sale with a Related Party purchaser.

 

Further, if at any time we or Masterworks decide to sell the Painting in a private sale transaction (i.e., non-auction sale), except in connection with a Liquidity Sale to a purchaser that is not a Related Party, we must submit such proposed sale to a vote of the then holders of our voting shares, and if  holders of a majority of voting shares vote in favor of a sale, the Administrator can then effectuate the private sale.

 

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Following a sale of the Painting, we will pay or reimburse Masterworks for any expenses for which we are responsible, including applicable third-party sales commissions, income taxes, if any, and other transactional expenses. Following the payment of all of such taxes and expenses, our Company will be liquidated, and the remaining net proceeds, if there are any, will be distributed to the then holders of record of the shares in accordance with our operating agreement. There can be no assurance as to the timing of a liquidating distribution or that we will pay a liquidating distribution at all.

 

Executive Officers and Members of the Board of Managers  of the Company

 

As of the date of this offering circular, the following sets forth the executive officers and members of the Board of Managers of the Company and their positions and offices as follows:

 

Name   Age   Position
Scott W. Lynn   38   Chief Executive Officer
Nigel S. Glenday   36   Chief Financial Officer; Member of the Board of Managers
Joshua B. Goldstein   51   General Counsel and Secretary; Member of the Board of Managers,
Leonard J. Sokolow   61   Member of the Board of Managers; Independent Manager

 

Scott W. Lynn. Mr. Lynn has served as the Chief Executive Officer since November 18, 2018 and has served as the Chief Executive Officer of our affiliate Masterworks.io, LLC since January 2018. From November 18, 2018 to April 2019, Mr. Lynn served as a member of the Company’s board of managers. Mr. Lynn has been an active collector of contemporary art for more than fifteen years and has built an internationally-recognized collection of Abstract Expressionism that has included works by Clyfford Still, Barnett Newman, Mark Rothko, Willem de Kooning, and more. In 2017, portions of Mr. Lynn’s collection were exhibited at the Royal Academy in London, the Denver Art Museum, the Palm Beach Museum. Mr. Lynn is an Internet entrepreneur and has founded, acquired, or acted as a majority-investor in over a dozen advertising technology, content, and fintech companies. In addition to Masterworks, during the past five years Mr. Lynn has served as Founder, controlling shareholder and a board member of v2 ventures (which is a holding company he controls that owns Adparlor, Inc., Giant Media, Inc., Reachmobi, Inc., Amply, Inc. and Sellozo, Inc.) and Payability, LLC (which he founded and is majority-owner). Mr. Lynn also serves as a board member the Brooklyn Rail (a non-profit publication in the art industry).

 

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Nigel S. Glenday. Mr. Glenday has served as Chief Financial Officer and member of the Board of Managers of the Company and our affiliate Masterworks.io, LLC since April 2019. From March 2015 through April 2019, Mr. Glenday was a Managing Director for Athena Art Finance Corp., a leading independent art-secured finance company. From July 2012 to March 2015, Mr. Glenday was a Vice President at StormHarbour Securities, LLP, a global markets and financial advisory firm. From 2009 to 2012, Mr. Glenday was an Associate at Morgan Stanley in the Financial Institutions Group, Investment Banking Division, and from 2005 through 2009, Mr. Glenday was an Analyst and Associate Director in the Financial Institutions Group at UBS Investment Bank. Mr. Glenday holds a B.A. in Economics and History from the University of Virginia, where he graduated as a member of Phi Beta Kappa Honor Society.

 

Joshua B. Goldstein. Mr. Goldstein has served as a Board Member and the General Counsel and Secretary, and Interim Chief Financial Officer of the Company since November 18, 2018 and has served in such capacities with our affiliate Masterworks.io, LLC since January 2018. On June 1, 2018, Mr. Goldstein was appointed as the interim CFO of the Administrator. From September 2016 through December 2017, Mr. Goldstein was a shareholder in the Denver office of Greenspoon Marder, P.A. From April 2015 through August 2016, Mr. Goldstein was self-employed as a corporate attorney. From September 2012 through March 2015, Mr. Goldstein was Executive Vice President, Chief General Counsel and Corporate Secretary of Intrawest Resorts Holdings, Inc., a NYSE-listed resort and adventure company. Prior to joining Intrawest, Mr. Goldstein was a Counsel in the New York office of Skadden, Arps, Slate, Meagher & Flom, LLP from June 2007 to August 2012 and he was an Associate at Skadden from September 1996 until August 2005, where he concentrated on corporate finance, corporate securities and mergers and acquisitions. Mr. Goldstein was also previously a Partner in the New York office of Torys, LLP. Mr. Goldstein holds a B.A. in business administration from the University of Wisconsin-Madison and a J.D. from Fordham University School of Law and is a Certified Public Accountant (inactive).

 

Leonard J. Sokolow. Mr. Sokolow has served as a Board Member and the Independent Manager of the Company since November 18, 2018. Since January 1, 2016, Mr. Sokolow has been Chief Executive Officer and President of Newbridge Financial, Inc. and Chairman of its principal subsidiary, Newbridge Securities Corporation. From July 2014 until December 2015, Mr. Sokolow was a consultant and partner at Caribou LLC, a strategic advisory services firm. From July 2008 until July 2013, Mr. Sokolow was President of National Holdings Corporation, and from July 2008 until July 2014 he was Vice-Chairman of the Board of Directors of National Holdings Corporation. From November 1999 until January 2008, Mr. Sokolow was Chief Executive Officer and President, and a member of the Board of Directors, of vFinance Inc., a publicly-traded financial services company, which he cofounded. Mr. Sokolow was the Chairman of the Board of Directors and Chief Executive Officer of vFinance Inc. from January 2007 until July 2008, when it merged into National Holdings Corporation, a publicly traded financial services company. Mr. Sokolow was Founder, Chairman and Chief Executive Officer of the Americas Growth Fund Inc., a closed-end 1940 Act management investment company, from 1994 to 1998. From 1988 until 1993, Mr. Sokolow was an Executive Vice President and the General Counsel of Applica Inc., a publicly-traded appliance marketing and distribution company. From 1982 until 1988, Mr. Sokolow practiced corporate, securities and tax law and was one of the founding attorneys and a partner of an international boutique law firm. From 1980 until 1982, he worked as a Certified Public Accountant for Ernst & Young and KPMG Peat Marwick. Since January 2016 Mr. Sokolow has served as a member of the Board of Directors of SQL Technologies Corp. (SQFL) and Chairman of its Audit Committee and since September 2016, Chairman of its Corporate Development Committee, and since April 2010, he has served as a Director and a member of the Audit Committee of Marquee Energy, Ltd. (formerly, Alberta Oilsands Inc.) (TSX-Venture: MQX). Since June 2006, Mr. Sokolow served on the Board of Directors of Consolidated Water Company Ltd. (NASDAQ: CWCO) and as Chairman of its Audit Committee and, since January 2012, a member of its Nominations and Corporate Governance Committee.

 

The foregoing individuals have also served in the capacity as executive officers and members of the board of managers of our affiliated entities of Masterworks.

 

Limited Liability and Indemnification of the Board of Managers, the Administrator and Others

 

Our operating agreement limits the liability of the Board of Managers, any members of our Company, any person who is an officer of our Company and any person who serves at the request of the Board of Managers on behalf of us as an officer, member of the Board of Managers, partner, member, stockholder or employee of such person and the administrative services agreements limits the liability of the Administrator and its affiliates. None of the foregoing persons shall be liable to us or the Administrator or any other of our members for any action taken or omitted to be taken by it or by other person with respect to us, including any negligent act or failure to act, except in the case of a liability resulting from any of the foregoing person’s own actual fraud, gross negligence, willful misconduct, bad faith, breach of fiduciary duty, reckless disregard of duty or any intentional and material breach of our operating agreement or conduct that is subject of a criminal proceeding (where such person has reasonable cause to believe that such conduct was unlawful). With the prior consent of the Board of Managers, any of the foregoing persons may consult with legal counsel and accountants with respect to our affairs (including interpretations of the Masterworks 001, LLC operating agreement) and shall be fully protected and justified in any action or inaction which is taken or omitted in good faith, in reliance upon and in accordance with the opinion or advice of such counsel or accountants. In determining whether any of the foregoing persons acted with the requisite degree of care, such person shall be entitled to rely on written or oral reports, opinions, certificates and other statements of the members of the Board of Managers, officers, employees, consultants, attorneys, accountants and professional advisors of our Company selected with reasonable care; provided, that no such person may rely upon such statements if it believed that such statements were materially false. The foregoing limitations on liability reduce the remedies available to the holders of the Class A ordinary shares for actions taken which may negatively affect us.

 

Insofar as the foregoing provisions permit indemnification of members of the Board of Managers, officers or persons controlling us for liability arising under the Securities Act, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

Term, Withdrawal and Removal of Members of the Board of Managers

 

Our operating agreement provides that each member of our Board of Managers will serve as our Manager, for an indefinite term, but that the Manager may be removed by a majority of the Board of Managers for any reason or may choose to withdraw as a Manager.

 

Our members may only remove a member of the Board of Managers for “Cause,” following the affirmative vote of two-thirds (2/3) of the issued and outstanding voting shares. “Cause” is defined as: 

 

  The commission by a member of the Board of Managers of fraud, gross negligence or willful misconduct;
  The conviction of a member of the Board of Managers of a felony;

 

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  A material violation by a member of the Board of Managers of any applicable law that has a material adverse effect on our business; or
  The bankruptcy or insolvency of a member of the Board of Managers.

 

Masterworks Shares

 

Upon formation there were 16,015 membership interests of the Company issued to Masterworks. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company in the form of Class A ordinary shares and Class B ordinary shares, and simultaneously, the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares. The cash proceeds from the Offering are planned to be paid to Masterworks Gallery together with Class A ordinary shares in an amount equal to any remaining unsold Class A ordinary shares not sold in this Offering, if any, to purchase the Painting. In other words, if not all of the 99,825 shares are sold in this Offering, Class A ordinary shares in the amount of such shortfall shall be issued to Masterworks Gallery as part of the payment for the Painting. Further, Masterworks owns 24,956 Class B ordinary shares, representing a 20% “profits interest” in our fully diluted equity. The Class B ordinary shares retained by Masterworks will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding Shares. Masterworks has agreed to lock-up provisions in our operating agreement that will prohibit it from selling Class B ordinary shares (or Class A ordinary shares issuable upon conversion of Class B ordinary shares) prior to the one-year anniversary of the Offering. After the one-year anniversary, Masterworks will have no restrictions on the disposition of any of its shares, other than restrictions in our operating agreement and those imposed by applicable securities laws.

 

Masterworks Platform

 

We will conduct this Offering on the Masterworks Platform, which will host this Offering in connection with the distribution of the Class A ordinary shares offered pursuant to this offering circular. The Masterworks Platform is owned Masterworks.io, and is operated by the principals of Masterworks (including Masterworks Administrative Services, LLC). Through the Masterworks Platform, investors can:

 

  Browse and screen potential investments,
  Provide us with information, including information required to determine whether they are qualified to invest in an offering and sufficient to enable us to verify their identity and satisfy our compliance obligations under applicable laws,
  Obtain information about offerings, including current and future SEC filings; and
  Indicate interest in participating in offerings and, with respect to offerings that have been qualified by the SEC, review, execute and deliver legal documents electronically.

 

We intend to distribute the Class A ordinary shares exclusively through the Masterworks Platform. For additional information on how to subscribe for Class A ordinary shares through the Masterworks Platform, see the section of this offering circular entitled “Plan of Distribution – Procedures for Subscribing.” If and when a secondary trading market or brokerage relationships to facilitate secondary sales is established, we will seek to use the Masterworks Platform in a manner that will integrate with such secondary trading market or brokerage relationships to the extent practical in compliance with applicable rules and regulations to enhance its overall utility for investors. We will not pay Masterworks, the owner of the Masterworks Platform, any sales commissions or other remuneration for hosting this offering on the Masterworks Platform. Neither Masterworks.io, LLC nor any other affiliated entity involved in the offer and sale of the Class A ordinary shares is currently a member firm of the Financial Industry Regulatory Authority, Inc., or FINRA, and no person associated with us will be deemed to be a broker solely by reason of his or her participation in the sale of the Class A ordinary shares.

 

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License Agreement

 

We will enter into a license agreement with Masterworks, effective upon the commencement of this Offering, pursuant to which Masterworks will grant us a non-exclusive, royalty free license to use the name “Masterworks”. Other than with respect to this license, we will have no legal right to use the “Masterworks” name. In the event that the Administrator ceases to administer our operations, we would be required to change our name to eliminate the use of “Masterworks”.

 

Involvement in Certain Legal Proceedings

 

No executive officer, member of the Board of Managers, or significant employee or control person of our Company or the Administrator has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

 

MANAGEMENT COMPENSATION

 

The Administrator, and its affiliates will receive certain fees and expense reimbursements for services relating to this Offering and the acquisition, maintenance and sale of the Painting. The items of compensation are summarized below. Neither the Administrator nor their affiliates will receive any selling commissions or dealer manager fees in connection with the offer and sale of the Class A ordinary shares. In addition, Masterworks owns 24,956 Class B ordinary shares, representing a 20% “profits interest” in our fully diluted equity.

 

The following table sets forth the form of compensation and the recipient of such compensation together with the determination of the amount and the estimated amount.

 

Form of Compensation and Recipient Determination of Amount Estimated Amount

Masterworks Gallery - true up amount

Masterworks will true-up the cost of the Painting to the Company by 10% above its cost of acquisition. Masterworks has owned and financed the Painting for more than one-year and the true-up amount is intended to be reasonable compensation for sourcing and financing the Painting for such period, as well as establishing a purchase price for investors that factors in appreciation in value during the time period of Masterworks’ ownership. Masterworks currently intends to charge a “true-up” on all offerings through its platform in an amount equal to the lessor of (i) 10%, or (ii) the estimated historical appreciation rate of the painting based on historical sales of similar works applied to the period starting when Masterworks is committed to purchase the painting and ending upon the estimated closing of the relevant offering. The true-up is not intended to imply that the Painting has actually increased in value since its purchase by Masterworks.

$181,500

Our Administrator- fees paid for services

Pursuant to an administrative services agreement between us and Masterworks to be entered into prior to the completion of the Offering, it is planned the Administrator will manage all of our administrative services and will maintain the Painting. The Administrator will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations, which must be paid in the form of Class A ordinary shares following the closing of the Offering since the Company will not have any liquidity until the Painting is sold.

The Administrator will receive prepaid administrative fees upon the closing of this Offering in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum following the closing of the Offering.

Our Administrator- Reimbursement of Extraordinary Expenses

The Administrator will also manage any extraordinary or non-routine services which may be required, from time-to-time, including, without limitation, litigation or services in connection with a sale of the Painting or any sale, merger, third-party tender offer or other similar transaction involving us. Any third-party costs incurred by the Administrator in connection with litigation or major transactions will be reimbursed upon the sale of the Painting or our Company, as applicable. Actual amounts are dependent upon the amount and timing of payments received and we cannot determine these amounts at the present time.

 

Compensation of Executive Officers

 

We do not currently have any employees nor do we currently intend to hire any employees who will be compensated directly by us. Each of the executive officers receive compensation for his or her services, including services performed for us, from Masterworks. Although we will indirectly bear some of the costs of the compensation paid to these individuals, through fees we pay to the Administrator, we do not intend to pay any compensation directly to these individuals.

 

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Compensation of the Board of Managers

 

Members of the Board of Managers who are also officers of Masterworks and the Company receive no compensation in respect of their service on the Board of Managers. The Independent Manager receives compensation from Masterworks for serving in such capacity on multiple issuer entities. Although we will indirectly bear some of the costs of the compensation paid to the Independent Manager, through fees we pay to the Administrator, we do not intend to pay any compensation directly to this individual.

 

SECURITY OWNERSHIP OF

MANAGEMENT AND CERTAIN SECURITYHOLDERS

 

The following table sets forth information about the current beneficial ownership of the Company at May 1, 2019, and the estimated beneficial ownership of the Class A ordinary shares at after the Offering, as adjusted to reflect the conversion of Masterworks Gallery’s ownership of 16,015 of our membership interests into 24,956 Class B ordinary shares for:

 

  Each person known to us to be the beneficial owner of more than 10% of the Class A ordinary shares;
     
  Each named executive officer;
     
  Each member of the Board of Managers; and
     
  All of the executive officers and members of the Board of Managers as a group.

 

Upon formation, there were 16,015 membership interests of the Company issued to Masterworks. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company in the form of: (i) the Class A ordinary shares and (ii) Class B ordinary shares (collectively referred to herein as “Shares”), and simultaneously, the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares.

 

Unless otherwise noted below, the address for each beneficial owner listed on the table is in care of our Company, 497 Broome Street, New York, New York 10013. We have determined beneficial ownership in accordance with the rules of the SEC. We believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all Class B ordinary shares that they beneficially own, subject to applicable community property laws.

 

We have presented the beneficial ownership of the Class A ordinary shares based on the assumption that all 99,825 shares offered in this Offering will be sold. If not all of the 99,825 shares are sold in this Offering, the remaining shares shall be issued to Masterworks Gallery, LLC as part of the payment for the Painting. Accordingly, Masterworks, “the Trust” and Scott Lynn will be deemed to be the beneficial owners of such additional Class A ordinary shares.

 

In computing the number of Class A ordinary shares beneficially owned by a person and the percentage ownership of that person after this Offering, we deemed outstanding Class A ordinary shares subject to any securities held by that person that are currently exercisable or convertible or exercisable or convertible within 60 days of May 1, 2019, into Class A ordinary shares. In computing the number of Class A ordinary shares owned after this Offering, we have assumed that the Class A ordinary share value at such time would be $30.00. Please see the Hypothetical Class A ordinary share Value chart below which sets for the number of Class A ordinary shares issuable upon conversion of the Class B ordinary shares based on various hypothetical values of the Class A ordinary shares for additional information.

 

    Membership Interests Beneficially Owned Prior to this Offering     Class A ordinary shares Beneficially Owned After this Offering(4)  
Name of Beneficial Owner   Number     Percent     Number     Percent  
Named Executive Officers and Board of Managers:                                
Scott W. Lynn, Chief Executive Officer(1)(2)     16,015       100 %     8,139       7.69 %
Leonard J. Sokolow, Independent Manager(1)     -       0     0       0 %

Nigel S. Glenday, Chief Financial Officer(1)

            0 %     0       0 %
Joshua B. Goldstein, General Counsel and Secretary(1)     -       0 %     0       0 %
All named executive officers and Members of the Board of Managers as a group (4 persons)     16,015       100 %     8,139       7.69 %
                                 
10% holders:                                
Masterworks Gallery, LLC(3)     16,015       100 %     8,139       7.69 %

 

  (1)

All named individuals are also members of the Board of Managers of the Company other than Scott Lynn.

     
  (2)

In April 2018, Scott Lynn sold 100% of the membership interests of Masterworks.io, LLC, which owns 100% of the membership interests in the other Masterworks entities, including Masterworks Gallery, LLC, to the Lynn Family Trust 001 (the “Trust”) for the benefit of the Lynn family. By contract, Mr. Lynn has the power to vote 100% of the membership interests beneficially owned by the Trust and controls Masterworks.

  

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  (3)

Masterworks.io, LLC owns 100% of the membership interests of Masterworks Gallery, LLC which will sell the Painting for the Company for 110% of its cost. Masterworks.io, LLC also owns 100% of the membership interests of Masterworks Administrative Services, LLC, which will be entitled to shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum for administrative services pursuant to an administrative services agreement after the closing of the Offering.

     
  (4) The Class B ordinary shares retained by Masterworks will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding Class A and B shares. The following table indicates how many Class A ordinary shares would be issuable to Masterworks upon conversion of the Class B ordinary shares based on hypothetical changes in the value of our Class A ordinary shares:

 

Hypothetical Class A ordinary share Value  $20.00   $30.00   $40.00   $50.00   $60.00 
                          
No. of Class A ordinary shares Masterworks would receive upon conversion of 100% of its Class B ordinary shares   0    8,319    12,478    14,974    16,638 
Percentage of total outstanding Shares Masterworks would receive upon conversion of 100% of its Class B ordinary shares   0%   7.69%   11.11%   13.04%   14.29%

  

INTEREST OF MANAGEMENT AND

OTHERS IN CERTAIN TRANSACTIONS

 

We are subject to various conflicts of interest arising out of our relationship with our Masterworks. These conflicts are discussed below and this section is concluded with a discussion of the corporate governance measures we have adopted to mitigate some of the risks posed by these conflicts. References throughout this offering circular to the Masterworks 001, LLC “operating agreement” refer to the Masterworks 001, LLC amended and restated operating agreement that became effective prior to the time of qualification of this offering circular by the SEC.

 

In addition to the compensation arrangements discussed in the section titled “Management Compensation,” the following is a description of each transaction since March 28, 2018 (our inception) and each currently proposed transaction in which:

 

  We have been or will be a participant;
     
  The amount involved exceeds one percent of our total assets; and
     
 

In which any member of the Board of Managers or executive officer of the Company or of the related Masterworks entities or their applicable beneficial owners, or beneficial owners of more than 5% of the Class A ordinary shares or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

 

Funding of Masterworks

 

Scott Lynn is the individual responsible for funding Masterworks.io and is also able to control the activities of all of the Masterworks entities as well as our Company. Mr. Lynn is also the Chief Executive Officer and a member of the Board of Managers of the Administrator.

 

Administrative Services Agreement and Fees Paid to Affiliates

 

Pursuant to an administrative services agreement between us and Masterworks to be entered into prior to the completion of the Offering, the Administrator will manage all of our administrative services and will maintain the Painting. The Administrator will be entitled to receive an administrative fee in the form of Class A ordinary shares at a rate of 1.5% of the total Shares outstanding (excluding Class B ordinary shares) per annum following the closing of the Offering. Masterworks will also manage any extraordinary or non-routine services which may be required, from time-to-time, including, without limitation, litigation or services in connection with a sale of the Painting or any sale, merger, third-party tender offer or other similar transaction involving us. Any third-party costs incurred by the Administrator in connection with litigation or major transactions will be reimbursed upon the sale of the Painting or our Company, as applicable.

 

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Trading Fees to our Affiliate Associated with trading of the Class A ordinary shares

 

Trading or brokerage sales of the Class A ordinary shares can only occur on a trading platform approved by us on a platform that is registered with the SEC or exempt from registration or through brokerage relationships. Masterworks Brokerage may at some point in the future apply to be become a registered broker dealer and a member of FINRA and seek approval to operate a trading platform or receive transaction-based compensation from trading or sales activities. If our affiliate Masterworks Brokerage is successful in obtaining this approval, it will collect reasonable and customary commissions and fees from sales and trading of the Class A ordinary shares. Masterworks is also seeking to make the Class A ordinary shares available for trading on one or more trading platforms owned and operated by unaffiliated third parties and is also seeking to enable sales through brokerage relationships, though no such arrangement currently exists. When and if Masterworks is able to operate a proprietary trading platform or develops a relationship with a third-party to establish secondary market sales or trading of the Class A ordinary shares, it will inform holders of its Class A ordinary shares by means of an amendment to this offering statement. Any such arrangement is not expected to be operational within twelve-months following completion of this Offering. In addition, many U.S. broker dealers do not permit non-U.S. citizens to hold accounts and U.S. trading platforms do not permit non-U.S. citizens or residents to transact on their platforms due primarily to complications associated with obtaining reasonable assurances as to the identity of such individuals and compliance with anti-money laundering, tax and securities laws that would be applicable to such transactions. There is currently no trading market for the Class A ordinary shares and no assurance can be provided that we can be successful in making the Class A ordinary shares available for trading on any trading platform or facilitating your ability to sell shares through brokerage relationships, that a trading market for the Class A ordinary shares will develop, that every holder of Class A ordinary shares will be able to participate on such trading platform or that any such market will provide you with adequate liquidity to sell your Class A ordinary shares.

 

Beneficial Owner of Affiliated Entities

 

The Trust is the beneficial owner of all of the Masterworks affiliated entities. Mr. Lynn may also be deemed the beneficial owner of the Masterworks entities given his power to exercise voting control through an agreement with the Trust. Mr. Lynn is the individual responsible for funding Masterworks.io and, is an art collector and is also able to control the activities of all of the Masterworks entities as well as our Company. Mr. Lynn could have conflicts with his personal art collection and the collection of Masterworks, or Mr. Lynn could simply stop funding Masterworks and cause it to cease to exist.

 

Our Affiliates’ Interests in Other Masterworks Entities

 

General

 

The officers and members of the Board of Managers who perform services for us are also officers, members of the Board of Managers, managers, and/or key professionals of Masterworks and other Masterworks entities. These persons have legal obligations with respect to those entities that are similar to their obligations to us. In the future, these persons and other affiliates of Masterworks may organize other art-related programs and acquire for their own account art-related assets. In addition, Masterworks may grant equity interests in the Masterworks.io, LLC to certain management personnel performing services.

 

Allocation of Our Affiliates’ Time

 

We rely on Masterworks and its key professionals who act on our behalf and on behalf of the Administrator, including Scott W. Lynn, Nigel S. Glenday and Joshua B. Goldstein for the day-to-day operations of our business. Messrs. Lynn, Glenday and Goldstein are also the Chief Executive Officer, Chief Financial Officer and General Counsel/Secretary of the Administrator, respectively, and are officers of the other Masterworks entities. As a result of their interests in other Masterworks entities, their obligations to other investors and the fact that they engage in and will continue to engage in other business activities on behalf of themselves and others, they will face conflicts of interest in allocating their time among us, the Administrator and other Masterworks entities and other business activities in which they are involved. However, we believe that the Administrator and its affiliates have sufficient professionals to fully discharge their responsibilities to the Masterworks entities for which they work.

 

Duties Owed by Some of Our Affiliates to the Administrator and the Administrator’s Affiliates

 

Our officers and members of the Board of Managers and the key professionals performing services for us are also officers, members of the Board of Managers, managers and/or key professionals of:

 

  Masterworks.io, LLC, the owner of the Masterworks Platform;
     
  Masterworks Administrative Services, LLC, our Administrator;
     
 

Masterworks Brokerage, LLC, an affiliate of Masterworks may in the future apply to become a registered broker dealer and a member of FINRA and may seek approval to operate a trading platform to trade the Class A ordinary shares;

     
 

Masterworks Gallery LLC, an affiliate of Masterworks from which we plan to purchase the Painting with the proceeds of this Offering; and

     
  Other Masterworks entities.

  

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As a result, they owe duties to each of these entities, their equity holders, members and limited partners. These duties may from time to time conflict with the duties that they owe to us.

 

Certain Conflict Resolution Measures

 

Independent Manager

 

The Board of Managers is made up of Nigel S. Glenday, Joshua B. Goldstein and Leonard J. Sokolow. One of the members of the Board of Managers, Leonard J. Sokolow, serves as the Independent Manager on the Board of Managers (the “Independent Manager”). The Independent Manager serves to protect the interests of the holders of the Class A ordinary shares and is tasked with reviewing and approving all related party transactions of our Company with our affiliates and address all conflicts of interest that may arise between us and the holders of the Class A ordinary shares and our affiliates. The Independent Manager’s role is solely related to governance and he has no involvement in the operations of the Company or Masterworks and does not participate in any offering activities. The Independent Manager and any replacement Independent Manager if the Independent Manager resigns or is removed from such position on the Board of Managers at any time, shall meet the standards of an “independent director” pursuant to the standards set forth in NASDAQ Marketplace Rule 4200(a)(15).

 

Other Operating Agreement Provisions Relating to Conflicts of Interest

 

Our operating agreement contains other restrictions relating to conflicts of interest including the following:

 

Lock-Up Agreement. Masterworks owns 24,956 Class B ordinary shares, representing a 20% “profits interest” in our fully diluted equity. The Class B ordinary shares retained by Masterworks will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A ordinary shares with a value at the time of conversion equal to 20% of the increase in value of our issued and outstanding Class A and Class B ordinary shares. Masterworks and will also own Class A ordinary shares if and to the extent the Offering is undersubscribed. Masterworks has agreed to lock-up provisions in our operating agreement that will prohibit it from selling or transferring Class B ordinary shares (or Class A ordinary shares issuable upon conversion of Class B ordinary shares) prior to the one-year anniversary of the Offering, though it is permitted to pledge all of its shares to unaffiliated third-party lenders and such lenders shall not be subject to the lock-up if they obtain ownership of the shares in connection with a default by Masterworks on its indebtedness. After the one-year anniversary, Masterworks will have no restrictions on the disposition of any of its retained shares, other than restrictions imposed by applicable securities laws.

 

Term of each Manager. Our operating agreement provides that each member of the Board of Managers will serve for an indefinite term, but that each member of the Board of Managers may be removed by a majority of the Board of Managers for any reason, or may choose to withdraw as a member of the Board of Managers under certain circumstances. In addition, our operating agreement provides that holders of two-thirds (2/3) of the voting shares may affirmatively vote to remove any members of the Board of Managers for “cause.”

 

DESCRIPTION OF SHARES

 

Upon formation, there were 16,015 membership interests of the Company issued to Masterworks. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company: Class A membership interests (referred to herein as the “Class A ordinary shares”) and Class B membership interests (referred to herein as the “Class B ordinary shares”). Class A ordinary shares and Class B ordinary shares are collectively referred to herein as “Shares”. We are offering up to 99,825 of our Class A ordinary shares, for an aggregate amount of up to $1,996,500 pursuant to this offering circular. The closing of the Offering will occur on the earlier of (i) the date that subscriptions for the Class A ordinary shares offered hereby total $1,996,500 or (ii) a date determined by the Company in its discretion. The following description of the Shares is based upon our certificate of formation, the Masterworks 001, LLC, operating agreement, and applicable provisions of law, in each case as in effect prior to the qualification of this offering circular. This discussion does not purport to be complete and is qualified in its entirety by reference to the certificate of formation and the operating agreement, copies of which are filed with the SEC as exhibits to this offering circular.

 

As of May 1, 2019, Masterworks Gallery was the sole holder of record of 100% of our membership interests consisting of 16,015 membership interest. Upon the execution of our operating agreement prior to the qualification of this Offering, Masterworks ownership interest was automatically converted into 24,956 Class B ordinary shares representing a 20% profits interest.

 

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Membership Interests

 

We were formed as a Delaware limited liability company on March 28, 2018 by Masterworks Gallery, our founder, in order to acquire the Painting. We are a manager-managed limited liability company. Upon our formation, Masterworks Gallery was issued 100% of our membership interests. Pursuant to our operating agreement we may not issue any additional Class A ordinary shares after the consummation of this Offering, other than as described in this offering circular, including the Class A ordinary shares that may be issued pursuant to the administrative services agreement and those that may be issued upon conversion of the Class B ordinary shares. Masterworks Gallery adopted our operating agreement.

 

Upon formation, there were 16,015 membership interests of the Company issued to Masterworks. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company: (i) membership interests in the form of Class A ordinary shares and (ii) membership interests in the Form of Class B ordinary shares, and simultaneously the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares.

 

Summary of Operating Agreement

 

We are governed by an agreement titled the “Limited Liability Company Operating Agreement” of Masterworks 001, LLC. Upon formation, there were 16,015 membership interests of the Company issued to Masterworks. Prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company in the form of Class A ordinary shares and Class B ordinary shares, simultaneously the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares. References throughout this offering circular to “shares” refer collectively to the Class A ordinary shares and Class B ordinary shares and references to the Masterworks 001, LLC “operating agreement” and the “operating agreement” of Masterworks 001, LLC, refer to the Masterworks 001, LLC amended and restated operating agreement that became effective prior to the qualification of this Offering and the form of which is filed as Exhibit 2.3 to the offering statement of which this offering circular forms an integral part. The following summarizes some of the key provisions of the Masterworks 001, LLC operating agreement. This summary is qualified in its entirety by our operating agreement itself, the form of which is included as Exhibit 2.3 to the offering statement.

 

Organization and Duration

 

We were formed on March 28, 2018, as a Delaware limited liability company pursuant to the Delaware Limited Liability Company Act. We will remain in existence until liquidated in accordance with the Masterworks 001, LLC operating agreement.

 

Purpose and Powers

 

Under the Masterworks 001, LLC operating agreement, we are permitted to engage in such activities as determined by the Board of Managers that lawfully may be conducted by a limited liability company organized under Delaware law and, in connection therewith, to exercise all of the rights and powers conferred upon us and the Board of Managers pursuant to the agreement relating to such business activity, provided that we are prohibited from engaging in certain activities referred to as “Prohibited Acts” without obtaining the approval of holders of a majority of voting shares.

 

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Board of Managers and its Powers

 

We are a manager-managed limited liability company as set forth in Section 401 and Section 101 of the Delaware Limited Liability Company Act. Our amended and restated operating agreement appoints the Board of Managers of the Company.

 

We plan to enter into an administrative services agreement with the Administrator prior to the closing of this Offering which is further described in the “Summary of Administrative Services Agreement” section of this document. Pursuant to our operating agreement and the administrative services agreement, the Administrator will have complete and exclusive discretion in the management and control of our affairs and business, subject to the requirement to obtain consent for Prohibited Acts, and shall possess all powers necessary, convenient or appropriate to carrying out the purposes and business of our Company, including doing all things and taking all actions necessary to carry out the terms and provisions of each of the foregoing agreements.

 

Pursuant to the Masterworks 001, LLC operating agreement which became effective prior to the qualification of this offering by the SEC, the Board of Managers shall have full authority in their discretion to exercise, on our behalf and in our name of the Company, all rights and powers of a “manager” of a limited liability company under the Delaware Limited Liability Company Act necessary or convenient to carry out our purposes. Any person not a party to our operating agreement dealing with us will be entitled to rely conclusively upon the power and authority of the Board of Managers to us in all respects, and to authorize the execution of any and all agreements, instruments and other writings on behalf of us and in our name.

 

The Board of Managers will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Board of Managers shall not have the authority to do any the following without first obtaining the prior approval of holders of a majority of the voting shares:

 

 

amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement, except as provided therein;

 

issue any additional Shares following the completion of the Offering, except Class A ordinary shares issued to Masterworks for administrative services and those issued upon conversion of the Class B ordinary shares, acquire additional material assets, incur debt for borrowed money or engage in business activities that are unrelated to the ownership, maintenance, promotion and sale of the Painting;

  effect any sale of Painting in a private transaction (e.g. a non-auction sale); or
  effect any sale of the Painting at a public auction, unless:

 

 

we become subject to the reporting requirements of the Exchange Act,

  we settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
 

an active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have volume sufficient to permit reasonable trading in the Class A ordinary shares, or

  the Administrator notifies us of its intent to withdraw.

 

The foregoing actions shall be referred to herein as the “Prohibited Acts.”

 

Any member of the Board of Managers may be removed and replaced by a majority of the Board of Managers with or without “Cause.” In addition, any member of the Board of Managers may be removed or replaced by the affirmative vote of members holding two-thirds (2/3) of the voting shares for “Cause” only, as such term is defined in our operating agreement “Cause” is defined as follows:

 

(a) the commission by a member of the Board of Managers of fraud, gross negligence or willful misconduct;

(b) the conviction of a member of the Board of Managers of a felony;

 

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(c) a material violation by a member of the Board of Managers of any applicable law that has a material adverse effect on our business;

(d) the bankruptcy or insolvency of a member of the Board of Managers.

 

Classes of Ownership

 

Upon formation, there were 16,015 membership interests of the Company issued to Masterworks. As set forth above, prior to the time of qualification of this offering circular by the SEC, the Company entered into an amended and restated operating agreement for Masterworks 001, LLC, which created two classes of membership interests of the Company: (i) membership interests in the form of Class A ordinary shares and (ii) membership interests in the form of Class B ordinary shares, and simultaneously, the 16,015 membership interests converted automatically into 24,956 Class B ordinary shares.

 

We have two classes of membership interests, Class A ordinary shares and Class B ordinary shares, but only Class B ordinary shares shall be outstanding prior to the closing of this Offering.

 

Class A Ordinary Shares. The Class A ordinary shares being offered in this Offering which will represent in the aggregate 100% of our members’ capital accounts and at least a 80% interest in the profits we recognize upon any sale of the Painting and liquidation assuming that at least 99,825 Class A ordinary shares are sold in this Offering. Assuming the foregoing, there will be at least 99,825 Class A ordinary shares outstanding upon closing of the Offering and the number of additional Class A ordinary shares that may be issued by our Company following the Offering (subject to issuances pursuant to stock-splits, recapitalizations or similar transactions) is limited to shares issued to our Administrator (or any successor) pursuant to the administrative services agreement and shares issuable upon conversion of the Class B ordinary shares.

 

Class B Ordinary Shares. The Class B ordinary shares held by Masterworks Gallery represent in the aggregate 0% of our members’ capital accounts and a 20% interest in the profits we recognize upon any sale of the Painting and liquidation. There will be 24,956 Class B ordinary shares outstanding upon closing of the Offering and no additional Class B ordinary shares may be issued by our Company (subject to stock-splits, recapitalizations or similar transactions) following the closing of the Offering.

 

Voting Rights.

 

We refer to our Class A ordinary shares, excluding Class A ordinary shares beneficially owned by Masterworks as our “voting shares.” On each matter where the members have a right to vote, each voting share shall be entitled to and shall constitute one (1) vote, and all voting shares shall vote together as a single class, except as otherwise set forth in our operating agreement, or otherwise required by the Delaware Act. In determining any action or other matter to be undertaken by or on behalf of us, each member shall be entitled to cast a number of votes equal to the number of voting shares that such member holds, with the power to vote, at the time of such vote. Unless otherwise set forth in our operating agreement, or otherwise required by the Delaware Act, the taking of any action by us which requires a vote of the members as set forth above shall require the receipt of votes from members holding a majority of the voting shares to constitute a quorum, provided, that in the case of a proposed removal of a member of the Board of Managers for “Cause”, an affirmative vote of holders of two-thirds (2/3) of the voting shares shall be required to authorize and approve such action. In determining the outcome of any vote at a meeting, shareholders that abstain or do not vote will effectively be counted as votes against such action.

 

Subject to the Delaware Act, the Board of Managers will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Board of Managers shall not have the authority to do any the following without first obtaining the prior approval or consent of holders of a majority of the voting shares:

 

 

Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement, except as provided therein;

  Issue any additional Class A ordinary shares following the completion of the Offering, except Class A ordinary shares issued to Masterworks for administrative services and those issued upon conversion of the Class B ordinary shares, acquire additional material assets, incur debt for borrowed money or engage in business activities that are unrelated to the ownership, maintenance, promotion and sale of the Painting;
  Effect any sale of Painting in a private transaction (e.g. a non-auction sale), except in connection with a Liquidity Sale to a purchaser that is not a Related Party; or
  Effect any sale of the Painting at a public auction, unless:

 

  We become subject to the reporting requirements of the Exchange Act,
  We settle or receive an adverse judgement in any material litigation, judicial proceeding or arbitration,
  An active trading market fails to develop within twenty-four (24) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Administrator determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A ordinary shares, or
  The Administrator notifies us of its intent to withdraw.