PART II AND III 2 partii.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 1-A

 

REGULATION A OFFERING CIRCULAR

UNDER THE SECURITIES ACT OF 1933

 

MASTERWORKS 002, LLC

(Exact name of issuer as specified in its charter)

 

Delaware

(State of other jurisdiction of incorporation or organization)

 

Spring Place

6 St. Johns Lane

7th Floor

New York, New York 10013

Phone: (203) 518-5172

(Address, including zip code, and telephone number,

including area code of issuer’s principal executive office)

 

Joshua B. Goldstein

General Counsel and Secretary

Masterworks Administrative Services, LLC

Spring Place

6 St. Johns Lane

7th Floor

New York, New York 10013

Phone: (203) 518-5172

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copy to:

Laura Anthony, Esq.

Craig D. Linder, Esq.

Legal & Compliance, LLC

330 Clematis Street, Suite 217

West Palm Beach, FL 33401

Phone: (561) 514-0936

Fax: (561) 514-0832

 

7380   83-1314709

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

 

 
 

 

An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this preliminary offering circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Securities and Exchange Commission is qualified. This preliminary offering circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a final offering circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the offering circular may be obtained.

 

MASTERWORKS 002, LLC

 

Preliminary Offering Circular

August 15, 2018

Subject to Completion

 

 

171,588 Class A shares

Representing Class A Limited Liability Company Interests

 

$3,612,375 Maximum Offering Amount

 

Masterworks 002, LLC is a Delaware limited liability company formed to hold a single work of art, an oil on canvas painting created in 1881 by Claude Monet entitled, Coup du Vent (or Gust of Wind) (“the Painting”). Masterworks, our Manager, believes, that, for many investors, our Class A shares represent an effective means for public investors to gain economic exposure to the Painting and, by extension, the to the high-end art market.

 

Masterworks, our Manager and the sponsor of this offering, has created the first fine art investment platform that will allow anyone to invest in individual works of art, with share ownership recorded on the Ethereum blockchain to provide transparency to investors.

 

Masterworks 002, LLC , a Delaware limited liability company, is offering up to 171,588 of its Class A shares initially representing Class A limited liability company interests, for $21.05 per share for an aggregate purchase price of $3,612,375, in a “Tier 2” offering under Regulation A (the “Offering”). There is no minimum number of Class A 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.

 

We expect the Offerings will close 90 days from commencement of this Offering or such earlier date on which all the Class A shares are sold, though we may elect to close in advance of such date or extend the Offering beyond such date, in our discretion. This Offering will commence on the date this Offering is qualified by the Securities and Exchange Commission (“SEC”).

 

Prior to the qualification of this Offering by the SEC, we will be conducting a private placement in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Regulation 506(c) and Regulation S of up to 171,588 Class A shares for $18.95 per share for an aggregate subscription amount of $3,251,137 (the “Private Placement”). We will not accept any additional subscriptions in the Private Placement following the commencement of this Offering which will occur upon the qualification of this Offering by the SEC. The Closing of the Private Placement and this Offering are mutually conditioned on the closing of the other.

 

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 individual artworks. Through the Masterworks Platform, investors can establish an account, browse and screen potential artwork investments, view details of an investment and sign contractual documents online. This Offering will be conducted through the Masterworks Platform. For additional information regarding the Masterworks Platform, please see page 59.

 

No public market currently exists for the Class A shares. We intend to seek to list the Class A shares for trading on a trading platform, subject to compliance with applicable laws, although we do not expect any such trading platform will be available for between six- and twelve-months following the closing of this Offering. No assurance can be given that we will be able to establish a trading market for the Class A shares or that any such trading market will be available to all investors.

 

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

 

Class A shares
Offered by Us
  Number of Class A shares   Price to Public   Underwriting Discounts and Commissions (1)   Proceeds, Before Expenses, to Us (2) 
Per Class A share:   171,588   $21.05   $0.00   $21.05 
Total (3)       $3,612,375   $0.00   $3,612,375 

 

  (1) We have not engaged a registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”) as an underwriter to offer the Class A shares to prospective investors. See the section entitled Plan of Distribution” beginning on page 32 of this offering circular for additional information.
     
  (2)

This amount does not include estimated offering expenses of approximately $45,000, all of which will be paid by our sponsor, Masterworks, as such term is defined below, rather than from the net proceeds of the Offering.

     
  (3) Assumes that the maximum aggregate offering amount of $3,612,375 is received by us.

 

We will offer the Class A shares on a best efforts basis primarily through the online Masterworks Platform. No entity involved in the offer and sale of the Class A shares being offered hereby is a member firm of 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 shares.

 

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 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 16.

 

The SEC does not pass upon the merits of or give its approval to any securities offered or the terms of this 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; 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 Spring Place, 6 St. Johns Lane, 7th Floor, 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.

 

The date of this offering circular is ______, 2018.

 

 
 

 

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 14
DETERMINATION OF OFFERING PRICE 16
DIVIDEND POLICY 16
RISK FACTORS 16
DILUTION 31
PLAN OF DISTRIBUTION 32
USE OF PROCEEDS TO ISSUER 41
DESCRIPTION OF BUSINESS 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 51
MANAGEMENT 53
MANAGEMENT COMPENSATION 60
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS 61
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS 62
DESCRIPTION OF SHARES 64
SHARES ELIGIBLE FOR FUTURE SALES 71
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS 72
ADDITIONAL REQUIREMENTS AND RESTRICTIONS 80
ERISA CONSIDERATIONS 81
LEGAL MATTERS 82
EXPERTS 82
APPOINTMENT OF AUDITOR 82
WHERE YOU CAN FIND MORE INFORMATION 82

 

We have 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. We do not 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 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 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. The discussions contained in this offering circular relating to Claude Monet, 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 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. 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 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 shares offered hereby are offered and sold only to “qualified purchasers” or at a time when our Class A 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 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 shares.

 

Q: What is Masterworks 002, LLC?
   

A:

Masterworks 002, LLC is a Delaware limited liability company, formed to hold a single work of art, an oil on canvas painting created in 1881 by Claude Monet entitled, Coup du Vent (or Gust of Wind) (“the Painting”). The Manager believes that the artwork of Claude Monet, including the Painting, is among the greatest examples of Western art of the last two centuries. As such, our Manager, believes, that, for many investors, our Class A shares represent an effective means for public investors to gain economic exposure to the Painting and, by extension, the to the high-end art market.

   
Q: What is Masterworks?
   
A:

Masterworks has created the first fine art investment platform that will allow anyone to invest in individual works of art, with share ownership recorded on the Ethereum blockchain to provide transparency to investors. “Masterworks” refers to a group of companies that sponsored this Offering and will provide administrative and other services to our Company. Masterworks intends to sponsor similar offerings and Masterworks owns and operates 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: 

 

  Sponsored and 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 shares and may seek regulatory licenses to operate its own proprietary trading platform to trade the Class A shares; and
  Plans to own 85,794 Class B shares representing a 20% profits interest in our Company and will own Class A shares if and to the extent this Offering is not fully subscribed upon closing of the Offering and the Private Placement.

 

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

Masterworks plans to own 85,794 Class B shares, representing a 20% “profits interest” in our fully diluted equity. The Class B 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 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 shares. Masterworks will also be entitled to receive fees and expense reimbursement for administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) over five years, following the closing of this Offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding per annum following the five-year anniversary of the closing of this Offering. If the Painting is sold prior to the fifth-anniversary of the closing of this Offering, any remaining unearned amounts prepaid by us to Masterworks shall be credited back to us and included in amounts available for distribution to shareholders. Masterworks will also receive any Class A shares offered by this offering circular that are not sold in the Offering, if any, as partial consideration for the merger pursuant to which we will acquire ownership of the Painting from Masterworks. Masterworks may also receive reasonable and customary trading fees and commissions from the trading of the Class A shares or other administrative fees associated with providing access to a trading platform, 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 of our organization and this Offering and all ordinary and necessary administrative expenses. In exchange for these services and ordinary and necessary administrative expenses, Masterworks will receive a prepayment in the amount of $ $623,956, equal to $124,791 per annum (or 2% of the cost of the Painting per annum) in cash over five years, following the closing of this Offering and thereafter will earn Class A shares at a rate of 2% of the total Class A shares outstanding (excluding Class A shares beneficially owned by Masterworks) per annum following the five-year anniversary of the closing of the Offering.  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 Class A shareholders?
   
A.

Unless we obtain the consent of the holders of a majority of the Class A shares, excluding any Class A shares issued in the Private Placement and shares beneficially owned by Masterworks, we cannot issue additional Class A shares or Class B shares following the completion of the Offering and the Private Placement, except Class A shares issuable to Masterworks for administrative services after the five-year anniversary of the closing of this Offering and pursuant to the conversion of the Class B shares, 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 shares different from investing in other art investment opportunities offered on the Masterworks Platform?
   
A. Masterworks intends to sponsor 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 an individual 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, Masterwork has already been sponsoring a planned Regulation A offering by Masterworks 001, 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 shares?
   
A. An investment in the Class A 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 shares will not be suitable.
   
Q. What risks are involved in buying the Class A shares?
   
A. Investing in the Class A 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 shares.
   
Q. Who can buy Class A 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 shares?
   
A. You may purchase Class A shares in this Offering by creating a new account, or logging into your existing account, at the Masterworks Platform. You will need to fill out a subscription agreement on the Masterworks Platform like the one attached to this offering circular as Exhibit 4.1 for a certain investment amount and pay for the Class A shares at the time you subscribe.
   
Q. Is there any minimum investment required?
   
A. No, other than the $21.05 cost of one Class A share.

 

Q. Is there any maximum investment restriction?
   
A.

Yes. You may only purchase up to 4,751 Class A shares in this Offering, or $100,000 based on the current per Class A 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 shares. For example, the Company may waive the maximum investment amount if there is sufficient demand among fewer investors for the Class A shares. In addition, our operating agreement will restrict ownership by any individual Class A shareholder, together with such Class A shareholder’s affiliates, to a maximum of 19.99% of the total Class A shares issued and outstanding; however, 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 aggregate proceeds from this Offering of up to $3,612,375 and gross proceeds from the Private Placement of up to $3,251,137, or $6,863,512 in the aggregate from the Offering and the Private Placement. We will use $623,956 of the proceeds from the Offering and the Private Placement to prepay ordinary and necessary administrative fees and expense reimbursements to Masterworks for the first five-year period following the closing of the Offering and the remainder will be paid to Masterworks together with any remaining unsold Class A shares, if any, as consideration for a merger pursuant to which we will acquire ownership of the Painting from Masterworks.
   
Q. Can we or Masterworks sell the Painting at any time or in any manner?
   
A. No. We can sell the Painting without Class A 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 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 will be distributed to the then holders of record of the Class A shares. 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. We currently expect that this Offering will remain open for investors for 90 days, unless all Class A shares are subscribed for at an earlier time. Also, we reserve the right to extend or 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 002, LLC

c/o Masterworks Administrative Services, LLC

Spring Place

6 St. Johns Lane

7th Floor

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 shares. You should read this entire offering circular carefully, especially the risks of investing in the Class A 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 002” or the “Company,” refer to Masterworks 002, LLC, a Delaware limited liability company, and its wholly owned subsidiary, Masterworks 002 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 “Manager,” Masterworks Gallery, LLC, 6461230, LLC, which is a wholly owned subsidiary of Masterworks Gallery, LLC and also includes Masterworks Brokerage, LLC, but does not include Masterworks 002, 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 Claude Monet, titled Coupe de Vent, 1881, Oil on canvas. Unless otherwise clear from the context, references throughout this offering circular to “our operating agreement” refers to the Masterworks 002, LLC’s amended and restated operating agreement to be effective upon the qualification of this offering circular by the SEC and the form of which is filed herewith as Exhibit 2.3. Certain monetary amounts relating to Masterworks’ acquisition of the Painting have been converted from British Pounds Sterling (£) to U.S. dollars ($) at an exchange rate of $1.3181 to £1.0, which was the average exchange rate in effect on June 20, 2018. Dollar amounts throughout this offering circular have been rounded to the nearest whole dollar. The discussions contained in this offering circular relating the Painting, the artist 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 is reasonable, and that the factual information therein is fair and accurate.

 

Overview

 

We were formed as a Delaware limited liability company on July 19, 2018 to acquire the Painting. The Manager 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.

 

The Painting was purchased by Masterworks at a public auction held by Christie’s International PLC, on June 20, 2018, for £4,733,750, or $6,239,556 based on the average exchange rate in effect on such date, though closing of the sale will not occur until September 2018. We are offering up to 171,588 Class A shares in this Regulation A+ Offering for an aggregate subscription amount of $3,612,375. Prior to the qualification of this Offering by the SEC, we will be conducting a private placement in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Regulation 506(c) and Regulation S of up to 171,588 Class A shares for $18.95 per share for an aggregate subscription amount of $3,251,137 (the “Private Placement”). We will not accept any additional subscriptions in the Private Placement following the commencement of this Offering which will occur upon the qualification of this Offering by the SEC. The Closing of the Private Placement and this Offering are mutually conditioned on the closing of the other.

 

We expect to receive up to $6,863,512 aggregate proceeds from this Offering and the Private Placement which will be used, together with any remaining unsold Class A shares, as consideration for a merger pursuant to which we will acquire ownership of the Painting from Masterworks and to prepay ordinary and necessary administrative fees and expense reimbursements to Masterworks for the first five-year period following the closing of the Offerings 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 shares on a trading platform 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 discussions contained in this offering circular relating to Claude Monet, 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 Claude Monet, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

Claude Monet was born in Paris, France on November 14, 1840. When Monet was five years old, the family moved to Le Havre on the Norman coast, and the painter spent his formative years by the sea, a subject he would return to many times throughout his life. Following a brief service in the French military, which took the artist to Algeria, Monet returned to France and resumed his artistic education in Paris. In the 19th century, the advent of transportable tube paint and a lightweight box easel enabled artists to work primarily outdoors rather than in the studio, and for Monet, painting en plein air became a lifelong pursuit. It was around this time that Monet started to paint using small brushstrokes of unmixed and complementary colors, all but eliminating black from his palette.

 

The outbreak of the Franco-Prussian war in 1870, provoked Monet to take refuge in London and subsequently, the Netherlands. Though Monet returned to France after the war, he visited Amsterdam once more in 1874. That same year, Monet became a founding member of the Société Anonyme Coopérative des Artistes and participated in the first Impressionist Exhibition organized by the group. Like Monet, many of the artists in the Société Anonyme were interested in exploring avant-garde ideas and themes in their work, such as the effects of atmosphere and light on the perception of color and one’s surroundings. It is widely accepted that the name of the Impressionist movement came about as a response to Monet’s painting Impression, Sunrise, which he had submitted for the inaugural group show.

 

Monet continued to travel between Paris and the Norman coast to paint contemporary scenes and picturesque landscapes throughout his life. Though he noted in a letter to his dealer, Durand-Ruel, that one particular stay on the coast from late summer to early fall of 1881 was not altogether productive, four known works survive to our day. Coup de Vent, or Gust of Wind, was one of the paintings completed during this particular sojourn. The three other paintings were acquired for museum collections and include The Hut in Trouville, Low Tide at the Museo Thyssen-Bornemisza, Madrid, Seacoast at Trouville at the Museum of Fine Arts, Boston, and one landscape painting from Sainte-Adresse held in the Ordrupgaard Museum, Copenhagen. Monet’s focus on nature persisted in his body of work even after he retired to Giverny around 1883, where he continued to paint until his death in 1926.

 

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The Painting

 

Coup de Vent, or Gust of Wind, is one of four known oil paintings completed by Claude Monet on one particular trip to Normandy in the late summer to early fall of 1881. The Painting includes the artist's signature and date on the lower right corner of the canvas. The work, which carried a pre-sale estimate of ₤5,000,000 - ₤7,000,000 (roughly $6,800,000 - $9,500,000 according to the sale catalogue) at Christie’s June 20 auction in London depicts a coastal landscape as it is swept by heavy winds. Though it has been lined for support, the painting, which measures 81.4cm by 65.5cm (32 ⅛ inches by 25 ⅛ inchs), remains on its original stretcher and carries a Durand-Ruel inventory stamp as evidence of its provenance. As Monet's primary dealer, Durand-Ruel brokered the sale of many important works, including Coup de Vent. The Painting had been offered at auction once before on November 12, 1985 by Christie’s in New York at an estimate of $450,000 - $550,000, however the bidding failed to reach a reserve price and no sale occurred. On June 19, 2018, one day prior to Masterworks’ purchase, the fair market value of the Painting was appraised at $8,500,000. The appraisal, a copy of which is attached as an exhibit to the Merger Agreement which is filed as Exhibit 6.1 to this offering statement, is relevant only as of the date it was issued and is subject to important qualifications and limitations as set forth therein.

 

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 2018 Art Basel Report, the global auction market was $28.5 billion in 2017 and global art sales were estimated at $63.7 billion, an increase of 12% from 2016. According to the same report, 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 46% and 52% of all global auction sales in 2017 and 2016, respectively. The Post War and Contemporary segment was followed in size by Modern art and Impressionist and Post-Impressionist art, which accounted for 27% and 17% of the value in the auction market in 2017, respectively. The market for high end art is highly concentrated, both in terms of buyers and top-selling artists. In 2017, just under 50% of the auction market for Impressionist and Post-Impressionist art was captured by the top twenty artists, while the top ten alone captured roughly 40.9%. Monet led the segment, with 8.1% of the sales in this category for 2017.

 

The art market is comprised of the public auction market and the private and gallery sales market. The private and gallery sales market is characterized by its opacity, domination by a small network of industry insiders and a majority of sales occurring through consignments. By contrast, the public auction market is relatively transparent and sells work at specific pre-announced dates. According to the Art Basel Report, the relative size of the private and gallery market as compared to the auction market tends to shift based on overall optimism in the market which tends to favor auction sales. For example, in 2017, auction sales accounted for 47% of total sales by dollar volume, as compared to approximately 43% in 2016. According to Artnet, the auction market has grown considerably since 2000, with total pre-sale 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. According to Artnet, the average pre-sale estimate for works sold in May of 2000 was approximately $600,000 as compared to $1.7 million in May of 2018.

 

Claude Monet, who had achieved fame and success in his own lifetime, still remains as one of the leaders in the Impressionist market and the overall art market today. Works of excellent quality by the artist continue to be in high demand. In 2017 alone, auction sales for works by Monet amounted to over $180 million, which placed him 6th in the auction rankings by total sales for last year. For the first half of 2018, Monet outsold all artists on the market, save Picasso, in the masterpiece category (defined as artworks sold for $5 million or more). His success was due in large part to the extraordinary sale of the Peggy and David Rockefeller collection at Christie’s, which took place over the course of several auctions in May, bringing his masterpiece sales to nearly $250 million for this six month period.

 

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 Manager will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. For the first five-year period following the closing of the Offering, the Manager will pay ordinary and necessary costs and expenses associated with the administration of our business and maintenance of the Painting for cash consideration which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum). If the Painting is sold prior to the fifth-anniversary of the closing of this Offering, any remaining unearned amounts prepaid by us to Masterworks will be credited back to us and included in amounts available for distribution to shareholders. After such five-year period the Manager will continue to fund such ordinary and necessary costs and expenses in exchange for the issuance of Class A shares to the Manager at a rate of 2% of the total Class A shares outstanding per annum. The 2% 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 Manager, 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.

 

8
 

 

Trading of and Market for the Class A shares

 

We intend to seek to list the Class A shares for trading on one or more trading platforms that are approved by us and that are registered with the SEC or exempt from registration. 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 and receive transaction-based compensation from trading the Class A 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 list the Class A shares on one or more trading platforms owned and operated by unaffiliated third parties, though no such arrangement currently exists and it is expected to take between six and twelve months following the consummation of the Offering to implement any such arrangement. When and if Masterworks is able to operate a proprietary trading platform or develops a relationship with a third-party to establish secondary market trading of the Class A shares, it will inform holders of its Class A shares. There is currently no trading market for the Class A shares and no assurance can be provided that we can be successful in listing the Class A shares on any trading platform, that a trading market for the Class A shares will develop or that any such market will provide you with adequate liquidity to sell your Class A shares. Any secondary trading of the Class A 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. The Manager will have the ability, in its 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 fails to develop within twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

In addition, 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 Manager will submit such offer to a vote of the then holders of our Class A shares and if holders of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks vote in favor of accepting such Bona Fide Offer, we will accept the Bona Fide Offer and sell the Painting.

 

Further, 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 Class A shares, and if holders of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks, vote in favor of a sale, the Manager will then effectuate the private sale.

 

9
 

 

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 will be distributed to the holders of record of the Class A shares and the Class B shares.

 

Private Placement

 

Prior to the qualification of this Offering by the SEC, we will be conducting a private placement in a transaction that is exempt from the registration requirements of the Securities Act pursuant to Regulation 506(c) and Regulation S of up to 171,588 Class A shares for $18.95 per share for an aggregate subscription amount of $3,251,137 (the “Private Placement”). We will not accept any additional subscriptions in the Private Placement following the commencement of this Offering, which will occur upon the qualification of this Offering by the SEC. The Closing of the Private Placement and this Offering are mutually conditioned on the closing of the other. Assuming the 171,588 Class A shares offered in the Private Placement are fully subscribed prior to the qualification of this Offering by the SEC, such subscribed shares of the Private Placement will represent 50% of the total Class A shares outstanding immediately following the closing of this Offering. Investors in the Private Placement have agreed to a one-year restriction on transfers in addition to the other transfer restrictions that will also be applicable to investors in this Offering.

 

Merger

 

The Painting was purchased by 6461230, LLC on June 20, 2018, though closing of the sale will not occur until September 2018. The Company intends to use $6,239.556 of the proceeds from the Offering and the Private Placement as consideration for a merger (the “Merger”) between Masterworks Cayman 002, LLC, a wholly owned subsidiary of the Company and 6461230, LLC, with Masterworks Cayman 002, LLC as the surviving entity. As a result of the Merger, the Company will succeed to all of the assets of 6461230, LLC, which shall consist of the Painting and the liabilities of 6461230, LLC, which is expected to be $0 at the effective time of the Merger. The Merger will be consummated pursuant to a Merger Agreement, a form of which is filed as Exhibit 6.1 to this offering statement.

 

10
 

 

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 002, LLC, which is a Cayman Islands limited liability company. All entities, except Masterworks 002, 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. Masterwork is also the sponsor of a planned Regulation A offering by Masterworks 001, LLC, a Delaware limited liability company, that has filed a Regulation A offering with the SEC, which has not yet been qualified.

   
(2) “Manager” refers to Masterworks Administrative Services, LLC, which will operate the Masterworks Platform, will act as our Manager and will perform administrative services for us pursuant to the administrative services agreement. Manager will also retain rights to display the Painting for sale.
   
(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 effectively sell the Painting to us in the Merger for aggregate consideration equal to £4,733,750, or $6,239,556, representing its cost, which will be funded from the proceeds of Offering and Private Placement, plus the issuance of any unsold Class A shares.  Masterworks Gallery will also own 85,794 Class B 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 licenses to operate a trading platform to trade the Class A shares and or to receive transaction fees from third party trading platforms that may be approved by us to trade the Class A shares in the future. No assurance can be given that Masterworks Brokerage, will seek to obtain such licenses or actually obtain such license or engage in such activities.
   
(5)

Represent economic ownership percentages and assumes 100% of the Class A shares are sold in the Offering to investors. To the extent any Class A shares are not sold in the Offering and the Private Placement, such Class A shares will be issued to Masterworks Gallery, as partial consideration for the Merger and the respective ownership percentages of Masterworks Gallery and investors will adjust accordingly. The Class B shares will entitle Masterworks to 20% of the profit on sale of the Painting or the ability to convert such shares into Class A 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 shares.  Class B shares will have no voting rights. Class A shares will have the limited voting rights further described below, and any Class A shares beneficially owned by Masterworks will have no voting rights. Our operations will be controlled by our Manager 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 operations and the operations of the Company.

   
(6) 

As of the date of this filing, 100% of the membership interests of the Company currently are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests currently issued and outstanding will convert automatically into 85,794 Class B shares

 

(7)

The Company intends to use $6,239.556 of the proceeds from the Offering and the Private Placement as consideration for a merger (the “Merger”) between Masterworks Cayman 002, LLC, a wholly owned subsidiary of the Company and 6461230, LLC, with Masterworks Cayman 002, LLC as the surviving entity. As a result of the Merger, the Company will succeed to all of the assets of 6461230, LLC, which shall consist of the Painting and the liabilities of 6461230, LLC, which is expected to be $0 at the effective time of the Merger. The Merger will be consummated pursuant to a Merger Agreement, a form of which is filed as Exhibit 6.1 to this offering statement.

 

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Risk Factors

 

An investment in the Class A 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 shares, and
  Masterworks will receive fees following the Offering for administrative and maintenance services upfront in cash following this Offering and in the form of Class A shares following the five-year anniversary of this Offering which will dilute all holders of the Class A shares.

 

  Our operating agreement contains provisions that reduce and waive fiduciary duties of the Manager and the members.
  Masterworks is subject to cybersecurity risks that could adversely affect us.

 

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

  

  There is no active public market for the Class A shares and no assurance can be given that a trading market will develop.
  You may not be able to sell the Class A shares.
  If a trading market develops, the trading price of the Class A shares may be extremely volatile.
 

Investors in the Class A shares will continue to experience dilution after the five-year anniversary of the Offering, due to our arrangement of paying the Manager in Class A shares.

  Investors using Bitcoin, Ether or foreign currencies to pay for their Class A shares if such payment methods are accepted by us may face currency risks and will also incur fees in connection with the conversion of their Bitcoin to U.S. dollars.
 

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 Spring Place, 6 St. Johns Lane, 7th Floor, 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.

 

12
 

 

We are a manager-managed limited liability company. We are managed by the Manager. We were formed for the specific purpose of acquiring, maintaining, promoting and ultimately selling the Painting. Purchasers of our Class A 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. As of the date of this filing, there are _______ membership interests of Masterworks 002, LLC, which are not represented by shares or units, and on or prior to qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests currently issued and outstanding will convert automatically into 85,794 Class B shares.

 

Subject to applicable law, the Manager will have sole voting power over all matters, including: mergers, consolidations, acquisitions, winding up and dissolution and sale of the Painting; except, the Manager shall not have the authority to amend our operating agreement (except in limited instances described herein ), or the administrative services agreement, issue additional Class A shares (other than pursuant to the administrative services agreement and upon conversion of the Class B 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 holders of a majority of the Class A shares, excluding any Class A shares beneficially owned by Masterworks.

 

The Manager may only be removed for “cause” as defined in our operating agreement, by a vote of the holders of two-thirds (2/3) of the Class A shares in addition to the consent of Masterworks. Prior to the five-year anniversary of the closing of the Offering Masterworks can only withdraw from its role as Manager and its obligations under the administrative services agreement in connection with a withdrawal by Masterworks from the business of operating the Masterworks Platform, sponsoring offerings and administering companies similar to the Company. After the five-year anniversary of the Offering, Masterworks can withdraw for any reason, provided that such withdrawal shall be effective only following a sale of the Painting.

 

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THE OFFERING

 

Class A shares Offered

  171,588 Class A shares, on a “best efforts” basis for up to $3,612,375 of gross proceeds. Purchasers of the Class A shares will become members of the Company.
     
Offering Price per Class A share by the Company  

$21.05 per Class A share.

     
Number of Shares Outstanding Before the Offering   As of the date of this filing, 100% of the membership interests of Masterworks 002, LLC are held by Masterworks  None of such membership interests are represented by shares.
     
Amended and Restated Operating Agreement  

Upon qualification of this offering circular by the SEC, Masterworks 002, LLC will enter into an amended and restated operating agreement, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests of Masterworks 002, LLC will convert automatically into 85,794 Class B shares of Masterworks 002, LLC.

     
Number of Shares Outstanding After the Offerings  

343,176 Class A shares (comprised of Class A shares offered in this Offering and Class A shares offered in the Private Placement).

 

85,794 Class B shares (100% held by Masterworks). Class B shares will be convertible into Class A shares based on a formula that will result in the issuance of a number of Class A 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 shares, divided by (b) the value of the Class A shares at the time of conversion. For a detailed description of the Class B share conversion formula and an example of how it operates, see “Description of Shares.”

     
Maximum Investment Amount  

There is no minimum purchase requirement other than the $21.05 cost of one Class A share. The maximum purchase requirements per investor is $100,000; however, we can waive the 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 Class A shareholder to a maximum of 19.99% of the total Class A shares issued and outstanding; however, 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, review, execute and deliver subscription agreements electronically.

     
Payment for Class A 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 until the closing date of this offering. We may also permit payment to be made in Bitcoin, Ether, foreign currency or by credit card if and to the extent we can establish and maintain relationships with licensed currency and crypto-currency exchange services providers and or payment processing entities to facilitate such transactions. On the closing date, the funds in the account will be released to us and the associated Class A 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 we accept credit cards, any such credit card subscription shall not exceed $5,000. Further, we will use a third-party service to convert any payment in Bitcoin, Ether or 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 Bitcoin, Ether or foreign currency into U.S. dollars will charge a conversion fee. Prior to accepting payment in Bitcoin, Ether or a foreign currency, the Masterworks Platform will display the name of the third-party exchange 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 in the form of U.S. dollars unless a subscriber elects to have such refund in the same form of currency as the subscription was made, in which case we will use a third-party service to convert such U.S. dollars back to Bitcoin, Ether or such foreign currency prior to refunding such subscription and applicable third-party conversion fees.

 

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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 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 shares will be made anywhere in the world prior to the qualification of the offering circular by the SEC in the United States. All Class A 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 shares, the offering price and other selling terms may be subject to change.
     
Voting Rights   The Class A shares have no voting rights other than the right to approve certain acts as described in the Masterworks 002, LLC operating agreement, including the ultimate sale of the Painting in connection with our receipt of a Bona Fide Offer (as defined in the Masterworks 002, 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 any amendment to the administrative services agreement. The Class B shares have no voting rights.
     
Risk Factors   Investing in the Class A 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 shares.
     
Use of Proceeds   We expect to receive proceeds from this Offering of up to $3,612,375 and we expect to receive proceeds from the Private Placement of $ 3,251,137, or aggregate proceeds from the Offering and the Private Placement of $6,863,512. The Manager will pay all expenses of the Offering, fees and expenses associated with qualification of the Offering under Regulation A. Therefore, the gross proceeds from this Offering will equal the net proceeds from this Offering. We will use $623,956 of the proceeds from the Offering to prepay ordinary and necessary administrative fees and expense reimbursements to Masterworks for the first five-year period following the closing of the Offering and the remainder will be paid to Masterworks together with any remaining unsold Class A shares, if any, as consideration for the Merger pursuant to which we will acquire ownership of the Painting from Masterworks.
     
Closing  

The closing will occur when all offered Class A shares are sold, or when we elect to close the Offering in our sole discretion. The Closing is conditioned on the concurrent closing of the Private Placement and the Merger.

 

Termination of the Offering   We expect the Offering will close 90 days from commencement of the Offering or such earlier date on which all the Class A shares are sold, though we may elect to close in advance of such date or extend the Offering beyond such date in our discretion.
     
Transfer Restrictions   The Class A shares may only be transferred:

 

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

 

    As a condition to recording any transfer on our books and records, the transferring holder may be required to pay a transfer fee equal to the actual third-party transaction cost of recording such transfer on the Ethereum blockchain, a distributed ledger technology. These costs will be charged on a per transaction basis irrespective of the number of Class A shares transferred and will vary with processing capacity, supply and demand conditions on the Ethereum blockchain at the time of the transfer. Subject to adjustment, as of the date of this offering circular, the current cost to transfer Class A shares on the Ethereum blockchain is approximately $0.25 per transaction, independent of transaction size. Transfers will also be subject to restrictions imposed under state securities laws.
     
Transfer Agent and Registrar   We intend to engage Computershare to be our transfer agent and registrar.
     
Dividends   None, until there is a sale of the Painting, at which point we plan to pay a liquidating distribution.

 

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DETERMINATION OF OFFERING PRICE

 

The price per each Class A share was determined by in the following manner:

 

Step 1: We selected an average Class A share price for the Offering and Private Placement of $20.00 (i.e. this represents the average price per share of all Class A shares offered in both the Offering and the Private Placement on a combined basis).

 

Step 2: We determined the aggregate proceeds required from the Offering and the Private Placement to be equal to the sum of (a) the purchase price that Masterworks paid for the Painting ($6,239,556), plus (b) 10% of such amount ($623,956), which equals 5-years of prepaid administrative fees and non-extraordinary expense reimbursements at the rate of 2% per year (“Aggregate Proceeds”).

 

Step 3: We determined the aggregate number of Class A shares to be offered in the Offering and the Private Placement by dividing (a) the Aggregate Proceeds, by (b) $20.00.

 

Step 4: We will determine the number of Class A shares to be sold in the Private Placement and the number of shares to be offered in this Offering prior to the qualification of this Offering at which point we will determine the share price to be paid by investors in the Private Placement and the share price offered to investors in this Offering such that we will receive up to the Aggregate Proceeds from the Offering and the Private Placement.

 

Masterworks Gallery will own 85,794 Class B shares representing a 20% profits interest in our Company following the closing of the Offering and will own Class A shares if and to the extent the Offering is not fully subscribed, since any unsold Class A shares will be paid to Masterworks as partial consideration for the merger pursuant to which we will acquire ownership of the Painting. Prior to this Offering, no public market exists for the Class A shares, and there can be no assurance that a public market will ever exist for the Class A shares.

 

DIVIDEND POLICY

 

We have not declared or paid dividends on the Class A shares since our formation and do not anticipate paying dividends in the foreseeable future, unless and until the Painting is sold, at which point we plan to pay a liquidating distribution. However, 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 Manager and will depend on our then current financial condition and other factors deemed relevant by the Manager.

 

RISK FACTORS

 

The purchase of the Class A 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 July 19, 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 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 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 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 shares on a trading platform approved by us 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 shares for an indefinite period, as there can be no assurance that the Class A 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 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 shares, or no liquidating distribution at all.

 

The Manager 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have volume sufficient to permit reasonable trading of the Class A shares, or  
  The Manager 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 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 shares for an indefinite period of time, as there can be no assurance that the Class A 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 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 list the Class A shares on a trading platform approved by us, may compel the Manager to sell the Painting at an earlier time. Accordingly, a risk of investing in the Class A 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 shares for an indefinite period of time, as there can be no assurance that the Class A 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 Class A shareholder approval. Unless we obtain the prior consent of the holders of a majority of the Class A shares, excluding Class A shares owned by Masterworks, to permit such action, our operating agreement, prohibits us from selling the Painting in a private (i.e. non-auction) sale. If the sale is initiated by the Manager, 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 a majority of the then holders of our Class A 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 holders of the Class A shares 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 shares which will have a dilutive effect on the holders of our Class A shares.

 

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 Manager will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. The Manager will pay all ordinary and necessary costs and expenses associated with the administration of our business and maintenance of the Painting for cash consideration which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) for the five-year period following the closing of the Offering. After the initial five-year period, we will issue Class A shares to the Manager at a rate of 2% of the total Class A shares outstanding per annum as consideration for such activities. Any extraordinary or non-routine services, if any, will be managed and paid for by the Manager, 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 Manager to fund our operations. The portion of the foregoing fees that are going to be paid in Class A shares will have a dilutive effect on the holders of our Class A shares and will effectively reduce the tangible book value per Class A 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 $9,000,000 (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 $7,650,000 to $8,280,000, 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 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 pre-sale auction estimate for the Painting at the June 20, 2018 auction held by Christie’s was ₤5,000,000 - ₤7,000,000 (roughly $6,800,000 - $9,500,000 according to the sale catalogue) and the work was appraised prior to the auction at $8,500,000, investors are cautioned not to put undue emphasis on the auction estimate or pre-auction appraisal, which are each 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 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 shares would be adversely affected.

 

If the painting is eventually displayed in a gallery space, 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 store the Painting at an unaffiliated commercial art storage facility in Delaware. The Painting is planned to be initially 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 shares.

 

We may have overpaid for the Painting.

 

We plan to acquire the Painting pursuant to the Merger at the same purchase price paid by Masterworks at a public auction in June 2018. 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 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 Manager to outlay the cost of such defense or settlement.

 

Ownership of Claude Monet’s work may be concentrated, and any large-scale divestiture of a major Monet collection could negatively affect prices.

 

Several sizable collections of Claude Monet paintings exist throughout the world. If any major collector were to liquidate a large number of Monet paintings, the supply demand dynamic could shift dramatically. A significant increase in the number of Monet paintings available for sale could 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 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 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 may expressly exclude damage caused by war, losses caused by chemical or biological contamination and certain other potential loss scenarios. Accordingly, damage or destruction of the Painting will have a material adverse impact on the value of the Painting and, consequently, the value of our Class A shares.

 

Industry sales cycles can be unpredictable.

 

Purchase behavior by collectors is generally unpredictable due primarily to the discretionary nature, relatively scarcity and high values of art purchases. An art buyer may typically purchase art when excess liquidity is abundant. When economic conditions preclude many 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 Manager

 

We are totally reliant on the Manager 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 Manager under the administrative services agreement. We plan to rely on the Manager to perform or administer all necessary services to maintain the Painting, including obtaining insurance and ensuring appropriate storage. The Manager 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 Manager is a newly formed company and has not yet developed a track record of successful performance of these activities. If the Manager were to default on its obligations under the administrative services agreement, it would be extremely difficult for us to replace the Manager or internally manage these functions given our lack of cash flow and lack of employees. Accordingly, in the event of a material default by the Manager 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 Manager, provided that such withdrawal would only become effective upon a sale of the Painting.

 

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

 

Although we believe the Manager 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 Manager will be able to maintain sufficient capital to satisfy its obligations in future periods. The Manager’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 Manager is required to maintain cash reserves on hand for so long as the Class A 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 Manager will be able to maintain such cash reserves. If the Manager’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 shares.

 

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

 

The Manager 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 Manager’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 Manager 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 Manager currently relies on a single investor, Scott Lynn, for all of its capital and liquidity. If Scott Lynn were to cease funding the Manager for any reason, the Manager may not be able to identify additional sources of capital.

 

The Manager will have complete authority to administer our business consistent with the terms and conditions of our operating agreement and the administrative services agreement, other than material amendments to the operating agreement and the administrative services agreement and any private sale of the Painting.

 

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

 

  Amend, waive or fail to comply with any material provision of the operating agreement or the administrative services agreement;
  Issue any additional Class A shares following the completion of the Offering, except Class A shares issued to Masterworks for administrative services and upon the conversion of the Class B 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have volume sufficient to permit reasonable trading of the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

The Manager may only be removed for “cause” as defined in our operating agreement by a vote of the holders of two-thirds (2/3) of the Class A shares, and in addition the consent of our founding member, Masterworks Gallery is required to be obtained in order remove the Manager. This concentration of control in the Manager may delay, deter or prevent acts that would be favored by holders of our Class A shares. The interests of the Manager may not always coincide with our interests or the interests of the holders of our Class A shares. As a result, the market price of our Class A shares could decline, or holders of our Class A shares might not receive a premium over the then-current market price of our Class A shares upon a change in control. In addition, this concentration of control in the Manager may adversely affect the trading price of our Class A shares because investors may perceive disadvantages in owning Class A shares in a company with so much control vested in a single entity.

 

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Holders of our Class A shares do not elect or vote on the Manager 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 Manager. Holders of our Class A shares do not elect or vote on the Manager and can only remove the Manager by a vote of two-thirds (2/3) of the Class A shares and the consent of Masterworks, and, unlike the holders of common stock in a corporation, 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.

 

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 Manager’s Board of Managers is made up of Scott W. Lynn, Joshua B. Goldstein, and___________. One of the members of the Board of Managers,____________, serves as the Independent Representative on the board (the “Independent Representative”). The Independent Representative serves to protect the interests of the holders of the Class A 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 shares and our affiliates. If the Independent Representative 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 a board of directors, 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 Class A 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 Class A 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 shares.

 

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 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 shares. The operation of a trading market in the Class A 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. In addition, Masterworks may charge administrative fees for facilitating access to any such trading platform. If such activities generate 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 shares. This creates a potential conflict of interest between the holders of the Class A 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 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 Manager will execute a discretionary sale of the painting at a time that is in the best interest of holders of our Class A shares.

 

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Although Masterworks will own 85,794 Class B shares representing a 20% profits interest in our Company, and will own Class A shares following the Offering and will agree to a one-year lock-up, Masterworks may eventually sell its shares.

 

Masterworks will own 85,794 Class B shares representing a 20% profits interest in our Company following the Offering and will own Class A shares if and to the extent the Offering is undersubscribed. Masterworks will agree to lock-up provisions in our operating agreement, that will prohibit it from selling 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 Class A shares or Class B 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 Class A 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 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 shares.

 

In addition, Masterworks may arrange for some of the Class A 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 Shares being available for resale and the price of the Class A Shares declining as supply outweighs demand.

 

Masterworks and Members of the Manager’s 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 Manager’s board of managers nor its executive officers 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 Manager’s board of managers and executive officers to successfully operate us. Their other business interests and activities could divert time and attention from operating our business. Further, specifically, the Manager also serves as the Manager for Masterworks 001, LLC, a Delaware limited liability company owned by Masterworks. The Manager’s services to be provided to Masterworks 001, LLC are substantially similar to those to be provided to the Company and these services could divert time and attention from the operations of our Company.

 

Our operating agreement contains provisions that exculpate the Manager and its affiliates, and certain other persons engaged on behalf of the Manager 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 Manager and its affiliates, any of our members, any person who is an officer of ours and any person who serves at the request of the Manager on behalf of us as an officer, director, members of the board of managers of the Manager, independent representative, partner, member, stockholder or employee of such person. None of the foregoing persons shall be liable to us or the Manager 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 Manager, 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 board members, 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 shares for actions taken which may negatively affect us.

 

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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 Masterworks operations through contractual arrangements with the Lynn Family Trust 002, which owns 100% of the Masterworks membership interests. Mr. Lynn is also the Chief Executive Officer of our Manager and a member of the Board of Managers of our Manager. 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.

 

Risks Relating to Ownership of the Class A shares and the Offering

 

There is no active public market for our Class A 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 shares and make it difficult, or even impossible to sell your Class A shares.

 

There is no active market for our Class A shares. Although we intend to seek to make the Class A shares eligible for trading on a trading platform approved by us, 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 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 shares will be traded on any trading platform until six to twelve months after the closing of this Offering, if at all. Any such trading platform 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 shares for an indefinite period of time, as there can be no assurance that the Class A shares will ever be tradable.

 

It is possible that there will be multiple trading markets established for the Class A Shares due to differences in laws, rules, policies and requirements that may preclude investors in certain locations 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 Shares. Most trading platforms do not currently facilitate over the counter trading in securities similar to the Class A 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 list the Class A shares 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 shares will find a willing buyer of those Class A shares. In addition, the existence of multiple trading markets would likely create arbitrage opportunities and the market price of the Class A 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.

 

There can be no assurance that any trading platform eligible to trade the Class A 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 Shares to be limited, as you may be unable to resell your Class A Shares without significant expense, or at all.

 

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

 

Prior to this offering, no public market exists for our Class A shares. You may not be able to sell your Class A shares at or above the initial offering price, or ever. Investors should be prepared to hold their Class A shares for an indefinite period, as there can be no assurance that the Class A shares can ever be tradable.

 

If our Class A shares are ever able to trade, the trading price of our Class A 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 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, economic, market, geopolitical and other external factors. As a result, the market price of our Class A shares may be volatile, and holders of our Class A shares will likely experience a decrease in the value of their Class A shares. No assurance can be given that the market price of our Class A shares will not fluctuate or decline significantly in the future or that you will be able to sell your Class A shares when desired on favorable terms, or at all. Investors should be prepared to hold their Class A shares for an indefinite period, as there can be no assurance that the Class A shares will ever be tradable.

 

If you pay part or all of the purchase price for the Class A shares in this Offering in Bitcoin, Ether or 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 Bitcoin, Ether or foreign currency if we are able to forge and maintain relationships with licensed currency and crypto-currency exchange services providers. For those investors who pay in Bitcoin, Ether or 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 in the form of U.S. dollars, or, at the election of the subscriber, we will exchange the U.S. dollars back into Bitcoin, Ether or foreign currency at the time we return the funds. Because the Bitcoin and Ether markets are extremely volatile as are certain foreign currency markets, and the U.S. dollar value of Bitcoin, Ether or foreign currencies is speculative and the value of Bitcoin, Ether or 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 shares in this Offering in Bitcoin, Ether or foreign currency is subject to such fluctuations in the value of Bitcoin, Ether or 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 shares ever become tradable, and become subject to the penny stock rules, it would become more difficult to trade our Class A 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 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 shares is less than $5.00 per Class A share, our Class A 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 shares, and therefore holders of our Class A shares may have difficulty selling their Class A shares. Investors should be prepared to hold their Class A shares for an indefinite period of time, as there can be no assurance that the Class A shares can ever be tradable.

 

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

 

If our Class A 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 shares, which may have the effect of reducing the level of trading activity in our Class A shares. For these and other reasons, broker dealers may not recommend our Class A shares, which could reduce the liquidity of the Class A shares.

 

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Holders of our Class A shares may face significant restrictions on the resale of the Class A 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 shares will be registered or exempt from registration under the laws of any state. If our Class A 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 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 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 shares to be limited, as you may be unable to resell your Class A shares without the significant expense of state registration or qualification, or at all.

 

Transactions in the Class A shares are planned to be recorded on the Ethereum blockchain, a distributed ledger technology, which could subject us to risks.

 

In addition to the official records maintained by our transfer agent, we intend to use ERC20 tokens to represent ownership of our Class A shares on the Ethereum blockchain which will create a public record of changes in our Class A share ownership. Initially, transfers of our Class A shares will be effectuated via traditional book-entry and not on the Ethereum blockchain. However, we expect that in the future it may become practical from a regulatory, technical and market perspective for shareholders to effect transfers of Class A shares directly on the Ethereum blockchain and that such practice will gain general acceptance. In such event, we may permit holders of Class A shares to elect to hold ERC20 tokens that will represent the Class A shares and permit them to effect transfers of their Class A shares directly on the Ethereum blockchain through licensed exchanges approved by Masterworks that accommodate the trading of security tokens. The term ERC20 is a technical standard for smart contracts on the Ethereum blockchain for implementing tokens. ERC stands for Ethereum Request for Comment and 20 is the number that was assigned to this particular request. We and or Computershare, who we intend to engage as our transfer agent, will maintain central authority over the recording of changes in our Class A share ownership. Ether is used to compensate participants on the Ethereum blockchain for validating transactions. In the event lawmakers or regulatory authorities in the United States determine that the payment of Ether in connection with transactions effected on the Ethereum blockchain is unlawful or the Ethereum blockchain ceases operation for any reason, we may be required to change the method in which we publicly reflect changes in our Class A share ownership and we would need to migrate our systems to an acceptable alternative. Any such event could delay or prevent us from ever being able to permit holders of Class A shares to hold ERC20 tokens and effect transfers directly on the Ethereum blockchain, thereby impairing the future potential liquidity of the Class A shares.

 

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

 

Following this Offering, Masterworks will own 85,794 Class B shares, representing a 20% “profits interest” in our fully diluted equity. The Class B shares will be convertible into Class A 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 shares. Masterworks will agree to lock-up provisions in our operating agreement that will prohibit it from selling 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 its retained shares, other than restrictions 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 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 shares in any 90-day period and resell the Class A shares in an unsolicited brokerage transaction at the market price. The availability for sale of substantial amounts of Class A 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 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 shares will not vary based on the underlying value of our assets at any time. Masterworks is retaining 85,794 Class B shares, representing a 20% “profits interest” in our fully diluted equity. The Class B 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 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 shares. Masterworks will also be entitled to receive fees and expense reimbursement for administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) for the first five years following the closing of this Offering and additional Class A shares at a rate of 2% of the total Class A shares outstanding per annum after the five-year anniversary of the Offering for administrative services. Therefore, the fixed offering price established for our Class A shares may not be supported by the current value of the Company or the Painting at the offering or any particular time in the future.

 

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If we face litigation related to the Offering, the Manager 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 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 shares or find an exemption under the securities laws of each state in which we offer the Class A shares, each investor may have the right to rescind his, her or its purchase of the Class A 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, the Manager 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 Manager or our other affiliates, the Manager will be entitled to sell the painting at auction and recoup its expenses in connection with defending and or settling such litigation.

 

Our operating agreement indemnifies the Manager in all instances not involving fraud or intentional misconduct. In addition, while the Manager 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 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 shares will have to rely on our Manager’s Board of Managers and the Independent Representative 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 Manager’s Board of Managers is made up of Scott W. Lynn, Joshua B. Goldstein and__________. One of the members of the Board of Managers,__________, serves as the Independent Representative on the board. The Independent Representative serves to protect the interests of the holders of the Class A 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 shares and our affiliates. If the Independent Representative 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 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 shares which may be negative and which may significantly and adversely affect the value of our Class A 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 share will be approximately equal to        % of the pro forma net tangible book value per Class A share of our Class A shares outstanding immediately following this Offering. Over time the Manager will earn an administrative services fee in the form of Class A shares. This fee will when issued effectively reduce the tangible book value per Class A share over time. Additionally, if the value of the Class A shares increases over time, the number of Class A shares to be issued upon conversion of the Class B shares will also increase over time resulting in additional dilution to holders of our Class A shares.

 

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Fiduciaries investing the assets of a trust or pension or profit sharing plan must carefully assess an investment in us to ensure compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”).

 

In considering an investment in us of a portion of the assets of a trust or a pension or profit-sharing plan qualified under Section 401(a) of the Code and exempt from tax under Section 501(a), a fiduciary should consider:

 

  Whether the investment satisfies the diversification requirements of Section 404 of ERISA;
  Whether the investment is prudent, since the Class A shares are not freely transferable and there may not be a market created in which the Class A shares may be sold or otherwise disposed; and
  Whether interests in us or the Painting constitute “Plan Assets” under ERISA.
  See “ERISA Considerations” for additional information.

 

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 shares.

 

Provisions of our Certificate of Formation and the operating agreement may be deemed to have anti-takeover effects, which include, among others, the Manager having sole and exclusive control of the operations of us with the exclusion of the holders of the Class A 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 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 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 shares.

 

We intend to be taxed as a partnership for U.S. Federal income tax purposes, but the Manager will have the right in its sole discretion to elect that the Company be taxed as a corporation, which could have significant tax consequences for certain holders of the Class A 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 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 Manager 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.

 

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DILUTION

 

As of the date of this filing, 100% of the membership interests of the Company are held by Masterworks.

 

On or prior to the qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests will convert automatically into 85,794 Class B shares and at that time the Class B shares will become convertible pursuant to a formula into Class A shares. The formula for the conversion of the shares into the Class A shares is as follows:

 

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

 

Definitions for conversion calculation:

 

  Value Increase means, (A) the total number of Class A and Class B shares outstanding at such time, multiplied by (B) the positive remainder, if any, resulting from (i) the Class A Share Value, minus (ii) $20.00.
     
  Conversion Percentage means, (A) the number of Class B shares being converted, divided by (B) the number of Class B shares outstanding upon closing of this offering (85,794 Class B shares).
     
  Class A 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 shares on all trading platforms or trading systems on which the Class A 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 1% 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 1% of the public float, the holder of the Class B shares shall be entitled to request that the Manager obtain an appraisal of the Class A Share Value from one or more independent nationally-recognized third party appraisal companies and such appraisal shall constitute the Class A Share Value.

 

Assuming we sell 100% of the shares being offered in this Offering and the Private Placement, the following table sets forth the number of Class A shares purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing Class A shares in this Offering, after giving pro forma effect to the issuance of Class A shares in the Private Placement, and the issuance of Class A shares to the new investors in this Offering at the offering price of $21.05 per Class A share.

 

   100% of the Offered Class A Shares Sold 
   Shares Purchased   Total Consideration   Average Price 
   Number   Percent   Amount   Percent   per Share 
Existing stockholders as of August 10, 2018   0    0.0%  $0    0.0%  $0.00 
New investors (this Offering)   171,588    46.15%  $3,612,375    100.0%  $21.05 
New Investors (Private Placement)   171,588    46.15%  $3,251,137    50.0%   18.95 
Total   343,176    100.0%  $6,863612    100.0%  $20.00 

 

Examples of conversion calculation

 

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

 

Hypothetical Class A Share Value   $ 20.00     $ 30.00     $ 40.00     $ 50.00     $ 60.00  
No. of Class A shares Masterworks would receive upon conversion of 100% of its Class B shares     0       28,598       42,897       51,476       57,196  
Percentage of total outstanding Class A shares Masterworks would receive upon conversion of 100% of its Class B shares     0 %     7.69 %     11.11 %     13.04 %     14.29 %

 

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Pursuant to the foregoing formula, Class A shares will only be issuable upon a conversion of Class B shares if the value of the Class A shares is higher than $20 per share. Upon the closing of this Offering, for these purposes the value of the Class A shares will be deemed to be $20 per share based on the average offering price of this Offering and the Private Placement on a combined basis and therefore, no shares will be issuable upon a conversion of Class B shares into Class A shares at such time.

 

Therefore, there will be no immediate dilution to the investors purchasing Class A shares in this offering, regardless of the nominal consideration paid for the membership interests which will into the Class B shares prior to qualification of this offering circular by the SEC. The aggregate cash cost to Masterworks for the 85,794 Class B shares (once they are issued) will be $100.00 (representing the cash payment made in consideration of the issuance of membership interests that will convert into Class B shares) or less than $0.01 per share. If in the future the value of the Class A shares increases to where there is a gain in value, based on the above formula, there will be dilution.

 

For example, if the value of the Class A shares is $30 per share, based on the foregoing conversion formula, the Class B shares will be convertible into 28,598 Class A shares if Masterworks decides to convert all of the Class B shares they hold. The new investors ownership interest would be diluted as follows:

 

   Dilution Based on Hypothetical Conversion 
   Shares Purchased   Total Consideration   Average Price 
   Number   Percent   Amount   Percent   per Share 
Existing stockholders as of August 10, 2018   0    0.0%  $0    0.0%  $0.00 
Assumed issuance of Class A shares for converted Class B Shares upon the qualification of the Offering   28,598    

7.70

%  $100    0.0%   0.01 
New investors (this Offering)   171,588    46.15%  $3,612,375    50.0%  $21.05 
New Investors (Private Placement)   171,588    46.15%  $3,251,137    50.0%   18.95 
Total   

371,774

    100.0%  $6,863,612    100.0%  $

18.46

 

 

Further, as additional Class A shares are issued to the Manager as payment for its administrative services after the five-year anniversary of the Offering, the then holders of the Class A shares will suffer dilution.

 

PLAN OF DISTRIBUTION

 

We are undertaking this Offering without an underwriter. We have not engaged any broker-dealers to distribute the Class A shares. We intend to sell the Class A shares directly to the public using the Masterworks Platform. No party inside or outside of us will be compensated for selling the Class A shares. This Offering is being conducted on a “best efforts” basis, which means that there is no guarantee that any minimum amount will be sold. Furthermore, Manager will perform Suitability Verification Services and anti-money laundering and bad actor checks on behalf of us in connection with the Offering (as described below).

 

Online Subscriptions and Bank Account

 

Our affiliate Masterworks.io 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 establish an account, 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 or wire transfer into a segregated non-interest bearing account held by us until the closing date of this Offering. We also permit payment to be made in Bitcoin, Ether, foreign currency or by credit card if and to the extent we can establish and maintain relationships with licensed currency and crypto-currency exchange services providers and or payment processing entities to facilitate such transactions. If we do accept alternative forms of payment, they 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 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 in the form of U.S. dollars or, at the request of such subscriber, we will exchange the U.S. dollars for the same alternative form of payment as was accepted at the time the subscription was received and will refund the amount received upon such exchange.

 

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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).

 

Suitability Verification and Anti-Money Laundering Services

 

The Manager will also perform the following administrative functions in connection with this Offering (“Suitability Verification Services”):

 

  Contact us and/or our agents, if needed, to gather additional information or clarification from investors;
  Advise us as to permitted investment limits for investors pursuant to Regulation A, Tier 2;
  Conduct anti-money laundering checks and bad actor checks;
  Provide us with prompt notice about inconsistent, incorrect or otherwise flagged subscriptions (e.g., for underage investors or anti-money laundering reasons); and
  Transmit the subscription information data to the Transfer Agent.

 

The Manager is not a FINRA member and is not participating as an underwriter of the Offering. As such, it will not solicit any investment in us, recommend our securities or provide investment advice to any prospective investor, or distribute the offering circular or other offering materials to investors. All inquiries regarding this Offering should be made directly to us.

 

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Transfer Agent and Registrar

 

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

 

The Transfer Agent’s address is at 250 Royall Street, Canton, Massachusetts 02021 and its telephone number is (877) 373-6374.

 

Our Manager will pay the Transfer Agent an ongoing account management fee per month in accordance with the Transfer Agent’s fee schedule depending on the number of holder accounts as set forth below to cover the administration of services set forth on that certain Fee and Service Schedule among Computershare Inc., Computershare Trust Company, N.A. and us.

 

Book-Entry Records of Class A shares

 

Ownership of the Class A shares will be represented in “book-entry” only form directly in the name of the respective owner of the Class A shares and shall be recorded by the Transfer Agent and that no physical certificates shall be issued, nor received, by 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. Our operating agreement provides that shares may be recorded in book-entry form or may be evidenced by certificates or electronic or crypto tokens or coins, or in any other form, as determined by the Manager as may be permitted by the Delaware Act.

 

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 shares, or for maintaining, supervising or reviewing any records relating to ownership of Class A shares. We do not supervise the systems of the Transfer Agent.

 

Ethereum Blockchain

 

Transfers of our Class A shares will be effectuated via traditional book-entry, however we use ERC20 tokens from the Ethereum blockchain to illustrate ownership of our Class A shares in a public ledger. By doing so, investors will be able to review all transactions in the Class A shares and while such information will not include personal information of our shareholders, it will provide a permanent pubic record of all transfers of record ownership for the life of the Company, including the number of shares transferred in any specific transaction and the time of such transaction. We believe this will enhance transparency and position the Company to eventually enable transfers to occur directly on the Ethereum blockchain. We expect that in the future it may become practical from a regulatory, technical and market perspective for shareholders to effect transfers of Class A shares directly on the Ethereum blockchain and that such practice will gain general acceptance. In such event, we may permit holders of Class A shares to elect to hold ERC20 tokens that will represent the Class A shares and permit them to effect transfers of their Class A shares directly on the Ethereum blockchain through licensed exchanges approved by Masterworks that accommodate the trading of security tokens.

 

“Ethereum blockchain” refers to distributed ledger technology. Ethereum is an open-source, public, blockchain-based distributed computing platform and operating system featuring smart contract (scripting) functionality. Ether can be transferred between accounts and used to compensate participant mining nodes for computations performed. The official stock register reflecting ownership of our Class A shares will be maintained by Computershare, which we intend to engage as our transfer agent All transfers of our Class A shares must be approved by us, and therefore investors will not be able to transfer Class A shares without our knowledge and prior consent. We and or the transfer agent will maintain control over all transactions that are published over the Ethereum blockchain with respect to tokens used to illustrate and record ownership of our Class A shares. Accordingly, we are not selling tokens to investors in this Offering and as a purchaser of Class A shares, an investor obtains no rights to acquire or hold tokens. This centralized control over tokens is currently necessary to comply with applicable federal and state securities laws in the United States, as well as international securities laws. We believe that blockchain technologies, such as Ethereum, have potential advantages over the traditional securities transfer and settlement regime for creating liquidity in the global capital markets and enabling a more direct relationship between issuers and their investors. Our operating agreement permits the Manager to issue ERC20 tokens or other crypto tokens or coins to represent ownership of the Class A shares in compliance with Delaware law and we may do so in the future if and when the Manager believes that such change in the form of book-entry ownership of the Class A shares (from traditional book-entry to crypto token book entry) would enhance the liquidity of the Class A shares.

 

Investment Amount Limitations

 

There is no minimum purchase requirement, other than the $21.05 cost of one Class A share. The maximum purchase requirement per investor is $100,000; however, we can waive the 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 Class A shareholder to a maximum of 19.99% of the total Class A shares issued and outstanding; however, 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 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 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 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 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 shares as of the date on which the offering statement of which this Offering circular is a part is declared qualified by the SEC. We expect the Offering will close 90 days from commencement of the Offering or such earlier date on which all of the Class A shares are sold, though we may elect to close in advance of such date or extend the offering beyond such date in our discretion.

 

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 Claude Monet. 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 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 to invest.

 

  1. Electronically receive, review, execute and deliver to us a Subscription Agreement; and
     
  2. Deliver funds via ACH or wire transfer (or by such alternative payment method as may be  indicated on the Masterworks Platform) for the amount set forth in the Subscription Agreement directly to the specified segregated non-interest-bearing bank account maintained by us.

 

The website will direct interested investors to receive (upon their acknowledgement that they have had the opportunity to review this offering circular), review, execute and deliver subscription agreements electronically.

 

Any potential investor will have ample time to review the 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 held by us. 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 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 Bitcoin, Ether or foreign currency, we plan to use a third-party service to convert such payment into U.S. dollars at the time a Bitcoin, Ether or foreign currency subscription is received, and then deposit such funds in the account. 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 in the form of U.S. dollars unless a subscriber elects to have such refund in the same form of currency or Bitcoin or Ether as the subscription was made, in which case we will use a third-party service to convert such U.S. dollars back to Bitcoin, Ether or such foreign currency prior to refunding such subscription.

 

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 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 shares for your own account and that your rights and responsibilities regarding your Class A 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 shares in this Offering and prior and subsequent purchasers will be deemed to become party to the Masterworks 002, 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 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 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 shares.

 

In order to purchase Class A 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.

 

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 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 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 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 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 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 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 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 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 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 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 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 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 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 shares. Accordingly, any person making or intending to make an offer in that Relevant Member State of Class A 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 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 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 shares to be offered so as to enable an investor to decide to purchase or subscribe the Class A 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 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 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 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 shares will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of Class A 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 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 shares to which this offering circular relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the Class A shares offered should conduct their own due diligence on the Class A 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 2002, 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 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 shares without disclosure to investors under Chapter 6D of the Corporations Act.

 

The Class A 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 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 shares, whether by sale or subscription, in the People’s Republic of China (the “PRC”). The Class A 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 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 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 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 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 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 shares may not be circulated or distributed, nor may the Class A 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 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 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 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 shares and Debentures) Regulations 2005 of Singapore.

 

USE OF PROCEEDS TO ISSUER

 

We will use the net proceeds of this Offering together with proceeds from the Private Placement for the following purposes in the following order. We expect to receive gross proceeds from the Offering and the Private Placement of up to $6,863,512. The Manager will pay all expenses of the Offering and the Private Placement, including fees and expenses associated with qualification of this Offering under Regulation A. Therefore, the gross proceeds from the Offering and the Private Placement will equal the net proceeds from the Offering and the Private Placement. We will use $623,956 of proceeds to prepaid ordinary and necessary administrative fees and expense reimbursements to Masterworks for the five-year period following the closing of the Offering. The remaining proceeds from the Offering and the Private Placement will be paid to Masterworks together with any remaining unsold Class A shares, if any, as consideration for the Merger pursuant to which we will acquire ownership of the Painting from Masterworks.

 

DESCRIPTION OF BUSINESS

 

The discussions contained in this offering circular relating to Claude Monet, 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 Claude Monet, 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 July 19, 2018, by Masterworks in order to acquire the Painting. We are a manager-managed limited liability company. Upon our formation, Masterworks was issued membership interests of the Company representing 100% of our membership interests. Masterworks Gallery adopted our operating agreement which appointed the Manager to serve as our Manager. After the five-year anniversary of this offering, our Manager can withdraw for any reason from its position as our Manager, provided that such withdrawal shall be effective only following a sale of the Painting. On or prior to the qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests currently issued and outstanding will convert automatically into 85,794 Class B shares.

 

The Painting was purchased by Masterworks at a public auction held by Christie’s in June of 2018, for £4,733,750, or $6,239,556, though closing of the sale will not occur until September 2018. We are offering 171,588 Class A shares in the Offering and 171,588 Class A shares in the Private Placement for aggregate consideration of up to $6,863,512. We will use $623,956 of proceeds to prepay ordinary and necessary administrative fees and expense reimbursements to Masterworks for the five-year period following the closing of the Offering. The remaining proceeds from the Offering will be paid to Masterworks together with any remaining unsold Class A shares, if any, as consideration for the Merger pursuant to which we will acquire ownership of the Painting from Masterworks. 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 shares on a trading platform approved by us for a price higher than they purchased them for. We will be 100% reliant on the Manager to maintain the Painting and administer its business. Upon the closing of the Offering, we intend to effect the Merger, pursuant to which the Painting will be owned by our wholly owned subsidiary, Masterworks 002 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 Manager will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) for the first five years following the closing of this Offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding (excluding Class A shares beneficially owned by Masterworks) per annum following the five-year anniversary of 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 Manager or payments made by the Manager 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.

 

Private Placement

 

Prior to the qualification of this Offering by the SEC, we will be conducting a private placement in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Regulation 506(c) and Regulation S of up to 171,588 Class A shares for $18.95 per share for an aggregate subscription amount of $3,251,137 (the “Private Placement”). We will not accept any additional subscriptions in the Private Placement following the commencement of this Offering which will occur upon the qualification of this Offering by the SEC. The closing of the Private Placement and this Offering are mutually conditioned on the closing of the other. Assuming the 171,588 Class A shares offered in the Private Placement are fully subscribed prior to the qualification of this Offering by the SEC, such subscribed shares of the Private Placement will represent 50% of the total Class A shares outstanding immediately following the closing of this Offering. Investors in the Private Placement have agreed to a one-year restriction on transfers in addition to the other transfer restrictions that will also be applicable to investors in this Offering.

 

Merger

 

The Painting was purchased by 6461230, LLC on June 20, 2018, though closing of the sale will not occur until September 2018. The Company intends to use $6,239,556 of the proceeds from the Offering and the Private Placement as consideration for a merger (the “Merger”) between Masterworks Cayman 002, LLC, a wholly owned subsidiary of the Company, and 6461230, LLC, with Masterworks Cayman 002, LLC as the surviving entity. As a result of the Merger, it is planned that the Company will succeed to all of the assets of 6461230, LLC, which shall consist of the Painting and the liabilities of 6461230, LLC, which is expected to be $0 at the effective time of the Merger. The Merger will be consummated pursuant to a Merger Agreement, a form of which is filed as Exhibit 6.1 to this offering statement.

 

Masterworks Experience in the Art Industry

 

Masterworks is a relatively new organization and the transaction reflected in this offering circular is only the second such transaction of its kind. Masterwork is also the sponsor of a planned Regulation A offering by its subsidiary, Masterworks 001, LLC, a Delaware limited liability company, that has filed a Regulation A offering with the SEC, which has not yet been qualified. Scott W. Lynn, our Founder and Chief Executive Officer and Board Member of the Manager 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 three primary sources of publicly available data on the art market:

 

  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.
     
  Deloitte Luxembourg, a division of a global financial services company & ArtTactic, an art market research and analytics company, publish the Art and Finance Report annually in November.
     
  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 inconsistency relates to differing estimates of the size of the private and gallery market which is based on survey data, but there is also significant disparity in reported auction market sales. According to the 2018 Art Basel Report, global art sales were $63.7 billion in 2017, up 12% from 2016. According to the Art Basel Report, estimated global sales have generally been 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 grown considerably since 2000, with total pre-sale 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 estimate for works sold in May of 2000 was approximately $600,000 as compared to $1.7 million in May of 2018.

 

The high-end fine art market, consisting of works valued at over $1 million, is dominated by a small group of ultra-high-net-worth private collectors and institutions, and the group narrows sharply at the top of the high-end market, commonly regarded as 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, which is the highest percentage since the survey began in 2011 and up from 38% in the prior year.

 

The art market is 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.

 

Impressionism

 

The Impressionist movement emerged in France at the end of the 19th century in opposition to the dominant, polished, naturalistic style of the French Académie des Beaux-Arts. Though the term “Impressionist” was initially used as an insult by French critic Louis Leroy, to point out the unfinished nature of the works he saw in the first group exhibition, it was quickly embraced by the artists whom he had described. Unlike institutional artists, Impressionists focused on contemporary subject matter, which included city life, landscapes, still-life, domestic scenes and glimpses of bourgeois life, among others. Though all of these themes had been painted by academic artists, they were considered to be secondary in status and of lesser importance than paintings which depicted classical or historical subjects which often took a moral stance.

 

Most of the Impressionists preferred to work on their canvases primarily en plein air, meaning outdoors, which allowed them to attempt to capture the momentary nature of light and atmosphere in everyday life. The recent advent in the mid-1900s of tube paints and a lightweight easel made this endeavor a much simpler task for painters like Monet and Pissarro. Color theory was explored by many of the Impressionists, which led some to stop bending colors and paint in short brushstrokes and apply dabs of colors to achieve the desired effect. Complementary colors could be placed next to each other, intensifying the effect of each, so that the eye of the viewer would blend the colors when viewed from afar. The revolutionary departure of Impressionists from the Academic norm paved the way for the Post-Impressionist and Modern Art of Europe for future generations of artists.

 

The Impressionist and Post-Impressionist Market

 

The UBS Art Basel Market Report defines the segment as inclusive of artists born between 1821 and 1874. The report takes into account data on sales from over 4,000 auctions, including several regional Chinese auctions. For the 2017 calendar year, according to the Report, auction sales for this segment totaled $2.3billion, up from $1.3billion in 2016, and $1.9 billion in 2015. The Report places this collecting category in third place by total sales value and volume for the last few years, capturing 17% and 15% of the auction market, respectively, in 2017. Impressionist and Post-Impressionist sales were outpaced by the Modern category, with 27% of value and 31% if volume in 2017, and by the Post-War and Contemporary Market, with 46% of value and 45% of volume in 2017. In 2017, just under 50% of the market for Impressionist and Post-Impressionist art was captured by the top twenty artists, while the top ten alone captured roughly 40.9%. Monet led the segment, with 8.1% of the sales in this category for 2017.

 

Art Basel Art Market Report | Top 20 Selling Impressionist and Post-Impressionist Artists in 2017

 

Rank  Artist  Share of Sales   Nationality
           
1  Claude Monet   8.1%  French
2  Qi Baishi   7.4%  Chinese
3  Vincent van Gogh   5.0%  Dutch
4  Wassily Kandinsky   4.7%  Russian
5  Gustav Klimt   2.9%  Austrian
6  Wu Changshuo   2.9%  Chinese
7  Henri Matisse   2.8%  French
8  Huang Binhong   2.6%  Chinese
9  Paul Gauguin   2.3%  French
10  Auguste Renoir   2.2%  French
11  Edgar Degas   1.4%  French
12  Paul Cézanne   1.3%  French
13  Camille Pissarro   1.3%  Danish/ French
14  Édouard Vuillard   1.2%  French
15  Théo van Rysselberghe   0.8%  Belgian
16  Alfred Sisley   0.7%  French
17  Emil Nolde   0.6%  German/ Danish
18  Pierre Bonnard   0.5%  French
19  Frederic Remington   0.5%  American
20  Alexei Jawlensky   0.5%  Russian
   Others   50.2%  (Various)

 

© Arts Economics (2018) with data from Auction Club and other sources

 

Private and Gallery Sales

 

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

 

The private and gallery sales market is characterized by its opacity. Galleries and other intermediaries that sell high end art have extensive relationships with artists 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 a collection they hold. Accordingly, galleries can be highly selective in determining which collectors to sell to, preferring those that are likely to hold the work for a long period of time and or enhance the provenance of a piece. Most private and gallery sales are confidential. Galleries are typically willing to hold inventory for long periods and generally offer works at posted prices, though discounts are not uncommon. Sellers determine pricing in a gallery sales model in privately negotiated transactions with buyers.

 

Auction Sales

 

Most art auctions sales occur in the United States, the United Kingdom and China, which collectively accounted for more than 68% of global sales in 2017, with the United States leading the world with 35% of global auction sales, followed by China at 33% and the United Kingdom at 16%. According to Artnet, the auction market has grown considerably since 2000, with pre-sale 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 estimate for works sold in May of 2000 was approximately $600,000 as compared to $1.7 million in May of 2018.

 

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In general, the auction market is more transparent and democratic than the gallery market in that pricing is determined by ascending price format bidding among interested buyers competing for a specific item that has been consigned to the auction house by a potential seller, also referred to as a consignor. Auction sales occur at fixed time and are a matter of public record. Buyers determine the price of a piece in an auction sale, though the consignor typically sets a reserve floor price at which they would be unwilling to sell below. A low and high estimate of the sales price are set by the auction house, with consignor’s input, based on a variety of factors, including prior sales, market factors 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 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 of up to 25% of the hammer price. Sotheby’s published buyer’s premiums for its New York salesroom are 25% for a hammer price up to $300,000, 20% for the portion of a hammer price between $300,000 to $3.0 million and 12.9% for the portion above $3.0 million. The sales proceeds received by a consignor in an auction can vary widely. For works of relatively low value, consignors may be required to pay selling commissions to the auction house may retain the full buyer’s premium. For higher value works, consignors pay no commissions and may be entitled to receive a portion of the buyer’s premium or the amount of the purchase price.

 

The public nature of auction sales poses certain risks for consignors. A work failing to sell at auction as a result of not attracting a bid in excess of the reserve price often renders the work 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,” averages over 30%, according to Artnet, and has averaged 31% for Claude Monet works listed during the past seventeen years. The value of a piece of 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 auction 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 largest auction houses, Sotheby’s, Christie’s and Phillips, were approximately $11.1 billion in 2017. According to the 2018 Art Basel Report, the United States accounted for 35% of global auction sales in 2017, followed by China at 33% and the United Kingdom at 16%.

 

Auction houses publicly report sale prices that reflect the hammer price (i.e. the price at which the auctioneer declared the winning bid), plus the buyer’s premium and sales are reported net of 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 them 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 $300,000   25% up to and including $250,000   25% up to and including $300,000
20% from $300,002 to $3.0 million   20% from $250,002 to $4.0 million   20% from $300,002 to $4.0 million
12.9% above $3.0 million   12.5% above $4.0 million   12.5% 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 $9,000,000 (hammer price, plus buyer’s premium), the net proceeds available to the Company would be expected to be in the range of $7,650,000 to $8,280,000, however, the net result could fall outside of this range and such estimate does not account for the potential existence of an arrangement to guarantee 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 received by the Company.

 

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The Artist

 

The discussions contained in this offering circular relating to Claude Monet, 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 Claude Monet, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

Claude Monet was born in Paris, France on November 14, 1840. When Monet was five years old, the family moved to Le Havre on the Norman coast, and the painter spent his formative years by the sea, a subject he would return to many times throughout his life. Following a brief service in the French military, which took the artist to Algeria, Monet returned to France and resumed his artistic education in Paris. In the 19th century, the advent of transportable tube paint and a lightweight box easel enabled artists to work primarily outdoors rather than in the studio, and for Monet, painting en plein air became a lifelong pursuit. It was around this time that Monet started to paint using small brushstrokes of unmixed and complementary colors, all but eliminating black from his palette.

 

The outbreak of the Franco-Prussian war in 1870, provoked Monet to take refuge in London and subsequently, the Netherlands. Though Monet returned to France after the war, he visited Amsterdam once more in 1874. That same year, Monet became a founding member of the Société Anonyme Coopérative des Artistes and participated in the First Impressionist Exhibition organized by the group. Though the Société Anonyme continued to host the annual shows until 1886, few of the original members exhibited continuously exhibited with the group. Like Monet, many of the artists in the Société Anonyme were interested in exploring avant-garde ideas and themes in their work, such as the effects of atmosphere and light on the perception of color and one’s surroundings. It is widely accepted that the name of the Impressionist movement came about as a response to Monet’s painting Impression, Sunrise, which he had submitted for the inaugural group show.

 

Monet continued to travel between Paris and the Norman coast to paint contemporary scenes and picturesque landscapes throughout his life. Though he noted in a letter to his dealer, Durand-Ruel, that one particular stay on the coast from late summer to early fall of 1881 was not altogether productive, four known works survive to our day. Coup de Vent (Gust of Wind) was one of the paintings completed during this particular sojourn. The three other paintings were acquired for museum collections and include The Hut in Trouville, Low Tide at the Museo Thyssen-Bornemisza, Madrid, Seacoast at Trouville at the Museum of Fine Arts, Boston, and one landscape painting from Sainte-Adresse held in the Ordrupgaard Museum, Copenhagen. Monet’s focus on nature persisted in his body of work even after he retired to Giverny around 1883, where he continued to paint until his death in 1926.

 

Claude Monet, who had achieved fame and success in his own lifetime, still remains as one of the leaders in the Impressionists market today. Works of excellent quality by the artist continue to be in high demand. In 2017 alone, auction sales for works by Monet amounted to over $180 million, which placed him 6th in the rankings by total sales for last year. For the first half of the year in 2018, Monet outperformed all artists on the market, save Picasso, in the masterpiece category (sales in the $5 million and up range). His success was due in large part to the extraordinary Rockefeller Auctions which took place in May, bringing his masterpiece sales to nearly $250 million for this six month period.

 

The Painting

 

As evidenced by the artist's signature and date on the lower right corner of the canvas, Coup de Vent, or Gust of Wind, is one of four known oil paintings completed by Claude Monet on one particular trip to Normandy in the late summer to early fall of 1881. The work, which carried a pre-sale estimate of ₤5,000,000 - ₤7,000,000 (roughly $6,800,000 - $9,500,000) at Christie’s June 20 auction in London depicts a coastal landscape as it is swept by heavy winds. Though it has been lined for support, the painting, which measures 81.4cm by 65.5cm (32 ⅛ inches by 25 ⅛ inches), remains on its original stretcher and carries a Durand-Ruel inventory stamp as evidence of its provenance. As Monet's primary dealer, Durand-Ruel brokered the sale of many important works, including Coup de Vent. The Painting had been offered at auction once before on November 12, 1985 by Christie’s in New York at an estimate of $450,000 - $550,000. Since bidding failed to reach a reserve price, no sale occurred. On June 19, 2018, one day prior to Masterworks’ purchase, Winston Art Group appraised the fair market value of the Painting at $8,500,000. The appraisal, a copy of which is attached as an exhibit to the Merger Agreement which is filed as Exhibit 6.1 to this offering statement, is relevant only as of the date it was issued and is subject to important qualifications and limitations as set forth therein.

 

Provenance

 

Galerie Durand-Ruel, Paris, by whom acquired directly from the artist, in January 1883.
Harris Whittemore, Connecticut, by whom acquired from the above, in March 1891, and thence by descent; his sale, Christie’s, New York, 12 November 1985, lot 3.
Galaxy Enterprises Ltd., Tokyo, by 1986.
Private collection.
Acquired from the above through Christie’s, London, 20 June 2018, lot 18B by Masterworks.

 

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History of Prior Sales.

 

Set forth below is a chart reflecting historical sales data for Claude Monet’s paintings sold at public auction from 1997 to 2018. The included works were painted between 1875, when it is believed that Monet returned to France following the Franco-Prussian war and his subsequent sojourn in Holland, and 1882, when it is believed that Monet retired to Giverny. We have excluded all of those works that feature city life, technological innovation, portraits, individuals or figures, restaurants, cafes, entertainment, recreation, winter, still-life, gardens, evening or night-time scenes, especially in a muted palette, 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 the selected set of paintings may 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. Moreover, while we believe the data, viewed as a whole, is useful in illustrating overall valuation trends over time, any individual sale or transaction viewed in isolation should not be relied upon.

 

 

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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 Manager will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. The Manager will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) for the first five years following the closing of this offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding (excluding shares beneficially owned by Masterworks) per annum following the five-year anniversary of the closing of the Offering. If the Painting is sold before the five-year anniversary of the closing of the Offering any prepaid routine administrative fees and reimbursements shall be included in the Company’s liquidating distribution. Any extraordinary or non-routine services, if any, will be managed and paid for by the Manager, 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 the Private Placement; and
  Accounting.

 

Extraordinary or non-routine costs for which the Manager 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 Manager and our affiliates may differ from the best interest of holders of the Class A 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 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 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 shares.

 

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Our affiliate, the Manager, will receive fees and expense reimbursement for administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum, for the first five years following the closing of this Offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding per annum following the five-year anniversary of the closing of the Offering.

 

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

     
  Neither the Manager, or its members, 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 depend on the Manager 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 Manager and us or actions that might otherwise constitute a breach of duty. Our operating agreement contains provisions limiting the liability of the Manager 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 Manager and a member of the Board of Managers of our Manager. 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.
     
 

Our Manager also serves as the Manager for Masterworks 001, LLC, a Delaware limited liability company  owned by Masterworks. The Managers services to be provided to Masterworks 001, LLC are substantially similar to those to be provided to the Company and these services could divert time and attention from the operations of our Company.

 

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. The Manager 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 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 twelve (12) of the closing of the offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

In addition, the Manager 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 002, LLC operating agreement, the Manager will submit such offer to a vote of our Class A shareholders and if holders of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks, vote in favor of a sale in response to such Bona Fide Offer, we will accept the Bona Fide Offer and sell the Painting.

 

Further, 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 our Class A shareholders, and if holders of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks, vote in favor of a sale, the Manager 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 will be distributed to the holders of record of the Class A shares.

 

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 shares are sold.

 

 

 

We were formed as a Delaware limited liability company on July 19, 2018 by Masterworks in order to acquire the Painting. We are an externally-managed limited liability company. The Class A shares to be sold in this Offering, when issued, 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. As of the date of this filing, 100% of the membership interests of the Company are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests will convert automatically into 85,794 Class B shares.

 

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

 

  Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement;
  Issue any additional Class A shares following the completion of the Offering, except Class A shares issued to Masterworks for administrative services and upon conversion of the Class B 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have sufficient transaction volume to permit reasonable trading among holders of the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

EMPLOYEES

 

As of August 10, 2018, we had no full-time employees and no part-time employees. All of our operations are managed by our Manager.

 

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 Manager to address such litigation as necessary. If the Manager settles a case or receives and adverse judgment, the Manager will have the right to auction the Painting and any legal costs, settlement or judgement paid by the Manager 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 July 19, 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 Manager.

 

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 Merger, 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 August 10, 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 Manager 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 Manager deems necessary or appropriate.

 

As of August 10, 2018, we had no federal and state income tax assets, liabilities or expense.

 

Liquidity and Capital Resources of the Manager

 

We will prepay to Masterworks $623,956 raised in this Offering for the payment of administrative fees and expense reimbursements to the Manager, which will cover all ordinary and necessary expenses related to the operation of our business for the five-year period following completion of the Offering pursuant to the administrative services agreement. We do not anticipate that we will maintain any material liquid assets and, accordingly, we will rely upon the Manager to pay for the maintenance of the Painting and the administration of our business in accordance with the administrative services agreement. The Manager will be funded with approximately $100,000 in cash or cash equivalents in addition to any amounts prepaid by us as of the date of qualification of this offering circular and as of the closing and will have no liabilities, commitments or obligations, other than its obligations pursuant to the administrative services agreement as of such dates. We and the Manager believe that revenues and expense reimbursements from the Company pursuant to the administrative services agreement will be sufficient for the Manager 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 shares. The Manager’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 Manager will receive $623,956 upon closing of this Offering, which represents prepaid administrative services fees for the first five years following the closing of the Offering based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) pursuant to the administrative services agreement and the Manager plans to earn additional revenues from similar relationships with other entities sponsored on the Masterworks Platform. After five years the Manager will earn fees in the form of additional Class A shares issued by us, which it will periodically sell to obtain additional liquidity. The direct incremental costs incurred by the Manager to satisfy its obligations under the administrative services agreement are expected to be less than its revenues from the administrative services agreement, though such revenues may be insufficient to cover the Manager’s overhead. The Manager expects to conduct other business activities, including the administration of other entities similar to the Company and expects that, with scale, the Manager’s revenues will exceed its costs. Further, as noted in the foregoing, the Manager 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 Manager 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 Manager to fund our operations until we sell the Painting which is contained in the administrative services agreement.

 

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

 

The costs associated with this Offering are estimated to be $44,500 and shall be paid by the Manager rather than from the net proceeds of the Offering. None of these fees, costs or expenses will be reimbursable by the Company to Manager.

 

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MANAGEMENT

 

Our Manager

 

Our operations are managed by the Manager. The Manager performs its duties and responsibilities pursuant to our operating agreement and administrative services agreement. We were formed by Masterworks which adopted our operating agreement which elected our Manager. The Manager and its affiliates have the exclusive right and power to manage and operate our Company, other than limited voting rights reserved under our operating agreement for the holders of the Class A shares.

 

As of the date of this filing, 100% of the membership interests of the Company are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests will convert automatically into 85,794 Class B shares.

 

Summary of Administrative Services Agreement

 

We plan to enter into an administrative services agreement with the Manager 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 6.3.

 

Services to be Provided

 

Pursuant to the administrative services agreement, the Manager 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 Manager 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 Manager), 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 board members’ 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 Manager 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 Manager with it being understood that the Manager shall not charge any fees in addition thereto with respect to such outsourced services.

 

The obligations of the Manager to us are not exclusive. The Manager 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 Manager

 

Pursuant to the administrative services agreement, the Manager 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, individuals and the like.

 

The Manager will display or exhibit the Painting if and when the Manager reasonably believes that such display or exhibition would increase the exposure, profile and appeal of the Painting.

 

Compensation of the Manager 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 Manager will manage all administrative services relating to our business and custodial services relating to the maintenance of the Painting. The Manager will receive fees and expense reimbursement for administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum, for the first five years following the closing of this Offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding per annum following the five-year anniversary of the closing of the Offering. Any extraordinary or non-routine services, if any, will be managed and paid for by the Manager, 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 Manager 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;

 

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 Manager or any of its executive officers of fraud, gross negligence or willful misconduct;

 

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

 

(iii) A material breach by the Manager of the terms of the administrative services agreement which breach is not cured within 30 days after receipt by the Manager 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 Manager is diligently taking steps to cure the breach, then no such event shall be deemed to have occurred unless and until the Manager fails to cure such breach within 60 days after receiving notice thereof);

 

(iv) A material violation by the Manager 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 Manager.

 

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 Manager through to such date.

 

Indemnification

 

Under the administrative services agreement we agreed to indemnify, hold harmless, protect and defend the Manager, its affiliates, any officer, board member, employee or any direct or indirect partner, member or shareholder of the Manager, any person who serves at the request of the Manager 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, board members, partners, members or employees of the Manager are making claims against the Manager or one or more other officers, board members, partners, members or employees of the Manager; 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 Manager and must be approved by a majority vote of the holders of the Class A shares.

 

Prohibited transactions under our operating agreement

 

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

 

  Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement;
  Issue any additional Class A shares following the completion of the Offering, except Class A shares issued to Masterworks for administrative services and pursuant to the conversion of the Class B 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A shares, or
  The Manager 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. The Manager will have the ability, in its 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

In addition, 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 002, LLC operating agreement, the Manager will submit such offer to a vote of the then holders of our Class A shares and if holders of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks, vote in favor of a sale in response to such Bona Fide Offer, we will accept the Bona Fide Offer and sell the Painting. In determining the outcome of such vote, Class A shareholders that abstain or do not vote will effectively be treated as votes against the proposed sale.

 

Further, 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 Class A shares, and if holders of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks, vote in favor of a sale, the Manager 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 will be distributed to the then holders of record of the Class A shares.

 

Executive Officers and Members of the Board of the Manager

 

As of the date of this offering circular, the executive officers and members of the Board of Managers of the Manager and their positions and offices are as follows:

 

Name   Age   Position
Scott W. Lynn   38   Chief Executive Officer; Board Member
         
Joshua B. Goldstein   51   General Counsel and Secretary; Board Member, Interim Chief Financial Officer

 

Scott W. Lynn. Mr. Lynn has served as the Chief Executive Officer and Board Member of the Manager since March 2018 and has served as the Chief Executive Officer of our affiliate Masterworks.io, LLC since January 2018. 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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Joshua B. Goldstein. Mr. Goldstein has served as a Board Member and the General Counsel and Secretary of the Manager since March 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 Manager. From September 2016 through December 2017, Mr. Goldstein was a Class 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.

 

Limited Liability and Indemnification of the Manager and Others

 

Our operating agreement limits the liability of the Manager and its affiliates, any members of our Company, any person who is an officer of our Company and any person who serves at the request of the Manager on behalf of us as an officer, board member, partner, member, stockholder or employee of such person. None of the foregoing persons shall be liable to us or the Manager 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 Manager, any of the foregoing persons may consult with legal counsel and accountants with respect to our affairs (including interpretations of the Masterworks 002, 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 board members, 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 shares for actions taken which may negatively affect us.

 

Insofar as the foregoing provisions permit indemnification of board members, 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 the Manager

 

Our operating agreement provides that the Manager will serve as our Manager, for an indefinite term, but that the Manager may be removed by the members, or may choose to withdraw as manager.

 

Our members may only remove the Manager for “cause,” following the affirmative vote of two-thirds (2/3) of the issued and outstanding Class A shares and in addition the consent of our founding member, Masterworks Gallery is required to be obtained in order remove the Manager. “Cause” is defined as: 

 

  The commission by the Manager or any of its executive officers of fraud, gross negligence or willful misconduct;
  The conviction of the Manager or any of its executive officers of a felony;
  A material breach by the Manager of the terms of the administrative services agreement which breach is not cured within 30 days after receipt by the Manager of a notice of such breach from any member (provided that if such breach is not capable of cure within 30 days, and Manager is diligently taking steps to cure the breach, then no “Cause” event shall be deemed to have occurred unless and until the Manager fails to cure such breach within 60 days after receiving notice thereof);

 

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  A material violation by the Manager or any of its executive officers of any applicable law that has a material adverse effect on our business; or
  The bankruptcy or insolvency of the Manager.

 

Unsatisfactory financial performance does not constitute “cause” under the Masterworks 002, LLC operating agreement.

 

The Manager may assign its rights under our operating agreement in its entirety or delegate certain of their duties under our operating agreement to any of their affiliates without the approval of the holders of the Class A shares so long as the Manager remains liable for any such affiliate’s performance.

 

In addition, the Manager may notify us of its intention to withdraw, provided that any such withdrawal shall not be effective until the Painting has been sold at a public auction, the net proceeds have been distributed to Class A shareholders and our Company has been dissolved. The Manager may only withdraw prior to the five-year anniversary of the closing of the Offering in connection with a withdrawal by Masterworks from the business of operating the Masterworks Platform, sponsoring offerings and administering companies similar to the Company. After the five-year anniversary, Masterworks can withdraw for any reason, provided that such withdrawal shall be effective only following a sale of the Painting.

 

In the event of the removal of the Manager, the Manager will cooperate with us and take all reasonable steps to assist in making an orderly transition of the management function. the Manager will determine whether any succeeding manager possesses sufficient qualifications to perform the management function.

 

Masterworks Class A shares and Class B shares

 

As of the date of this filing, 100% of the membership interests of the Company are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests will convert automatically into 85,794 Class B shares. The cash proceeds from the offering are planned to be paid to Masterworks Gallery together with any remaining unsold Class A shares in this offering, if any, as consideration for the Merger pursuant to which we will acquire ownership of the Painting from Masterworks. In other words, if not all of the 171,588 Class A shares are sold in this Offering, the remaining Class A shares shall be issued to Masterworks Gallery as part of the consideration for the Merger pursuant to which we will acquire ownership of the Painting. Further, Masterworks will own 85,794 Class B shares, representing a 20% “profits interest” in our fully diluted equity. The Class B 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 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 shares. Masterworks will agree to lock-up provisions in our operating agreement that will prohibit it from selling 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 shares, other than restrictions imposed by applicable securities laws. In addition, Masterworks Gallery owns and will retain at least one share, so as to retain its rights as the founder of the Company.

 

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 shares offered pursuant to this offering circular. The Masterworks Platform is owned Masterworks.io, our sponsor 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, sign legal documents electronically.

 

We intend to distribute the Class A shares exclusively through the Masterworks Platform. If and when a secondary trading market is developed by us or through a third-party broker dealer, we will seek to use the Masterworks Platform in a manner that will integrate with such secondary trading platform 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 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 shares. The Masterworks Platform also hosts the offering of our affiliate, Masterworks 001, LLC, a Delaware limited liability company owned by Masterworks. Masterwork is also the sponsor of a planned Regulation A offering by Masterworks 001, LLC, which has filed a Regulation A offering with the SEC, which has not yet been qualified.

 

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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 Manager ceases to manage us, we would be required to change our name to eliminate the use of “Masterworks”.

 

Involvement in Certain Legal Proceedings

 

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

 

MANAGEMENT COMPENSATION

 

The Manager, 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 Manager nor their affiliates will receive any selling commissions or dealer manager fees in connection with the offer and sale of the Class A shares. In addition, Masterworks will own Masterworks will own 85,794 Class B 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
Our Manager- 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 Manager will manage all of our administrative services and will maintain the Painting. The Manager will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations, which will be paid in cash for the first five years following the closing of this Offering and in the form of Class A shares following the five-year anniversary of the closing of the Offering. The Manager will receive prepaid administrative fees upon the closing of this Offering in the amount of $623,956, based on $124,791 for each 12-month period following the closing and prior to the five-year anniversary of the Offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding (excluding Class A shares beneficially owned by Masterworks) per annum following the five-year anniversary of the closing of the Offering.
Our Manager- Reimbursement of Extraordinary Expenses The Manager 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 Manager 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 of Manager

 

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 of the Manager receive compensation for his or her services, including services performed for us on behalf of the Manager, from Masterworks. As executive officers of the Manager, these individuals will serve to manage our day-to-day affairs and acquire, maintain, promote and sell the Painting. Although we will indirectly bear some of the costs of the compensation paid to these individuals, through fees we pay to the Manager, we do not intend to pay any compensation directly to these individuals.

 

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Compensation of the Manager’s Board of Managers

 

We do not compensate anyone on the Board of Managers of the Manager.

 

SECURITY OWNERSHIP OF

MANAGEMENT AND CERTAIN SECURITYHOLDERS

 

The following table sets forth information about the current beneficial ownership of the Company at August 10, 2018, and the estimated beneficial ownership of the Class A shares at after the Offering, as adjusted to reflect the conversion of Masterwork Gallery’s ownership of 100% of our membership interests into 85,794 Class B shares for:

 

  Each person known to us to be the beneficial owner of more than 5% of the Class A shares;
     
  Each named executive officer of the Manager;
     
  Each member of the Board of Managers of the Manager; and
     
  All of the executive officers of the Manager and members of the Board of Managers of the Manager as a group.

 

As of the date of this filing, 100% of the membership interests of the Company are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests will convert automatically into 85,794 Class B shares.

 

Unless otherwise noted below, the address for each beneficial owner listed on the table is in care of our Company, Spring Place, 6 St. Johns Lane, 7th Floor, 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 shares that they beneficially own, subject to applicable community property laws.

 

We have presented the beneficial ownership of the Class A shares based on the assumption that all 171,588 Class A shares offered in this offering will be sold. If not all of the 171,588 Class A shares are sold in this offering, the remaining Class A shares shall be issued to Masterworks Gallery, LLC as part of the consideration for the Merger pursuant to which we will acquire ownership of the Painting. Accordingly, Masterworks, “the Trust” and Scott Lynn will be deemed to be the beneficial owners of such additional Class A shares.

 

In computing the number of Class A shares beneficially owned by a person and the percentage ownership of that person after this Offering, we deemed outstanding Class A shares subject to any securities held by that person that are currently exercisable or convertible or exercisable or convertible within 60 days of      , 2018, into Class A shares. In computing the number of Class A shares owned after this Offering, we have assumed that the Class A share value at such time would be $30.00. Please see the Hypothetical Class A Share Value chart below which sets for the number of Class A shares issuable upon conversion of the Class B shares based on various hypothetical values of the Class A shares for additional information.

 

   Membership Interests Beneficially Owned Prior to this Offering   Class A Shares Beneficially Owned After this Offering(4) 
Name of Beneficial Owner  Number   Percent   Number   Percent 
Named Executive Officers and Board of Managers of the Manager:                    
Scott W. Lynn, Chief Executive Officer(1)(2)   N/A    100%   27,454    7.41%
                     
Joshua B. Goldstein, General Counsel and Secretary(1)   -    0%   0    0%
All named executive officers and Members of the Board of Managers of the Manager as a group (2 persons)   N/A    100%   27,454    7.41%
                     
5% holders:                    
Masterworks Gallery, LLC(3)   N/A    100%   27,454    7.41%

 

  (1) All named individuals are also members of the Board of Managers of the Manager.
     
  (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 002 (the “Trust”) for the benefit of the Lynn family. By contract, Mr. Lynn has the power to vote 100% of the shares beneficially owned by the Trust and controls Masterworks.

  

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  (3)

Masterworks.io, LLC also owns 100% of the membership interests of Masterworks Administrative Services, LLC, which will be entitled to receive fees and expense reimbursement for administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum, for the first five years following the closing of this Offering and shares at a rate of 2% of the total shares outstanding per annum for administrative services pursuant to an administrative services agreement after the five-year anniversary of the Offering.

     
  (4) The Class B 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 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 shares would be issuable to Masterworks upon conversion of the Class B shares based on hypothetical changes in the value of our Class A shares:

 

Hypothetical Class A Share Value   $ 20.00     $ 30.00     $ 40.00     $ 50.00     $ 60.00  
                                         
No. of Class A shares Masterworks would receive upon conversion of 100% of its Class B shares     0       28,598       42,897       51,476       57,196  
Percentage of total outstanding Class A shares Masterworks would receive upon conversion of 100% of its Class B 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 Manager and its affiliates. 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 002, LLC “operating agreement” refer to the Masterworks 002, LLC amended and restated operating agreement that will become effective upon 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 July 19, 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 our Manager, any of the Manager’s executive officers, or members of the Manager’s board of managers, any of the related Masterworks entities or their applicable beneficial owners, or beneficial owners of more than 5% of the Class A 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 of our Manager and a member of the Board of Managers of our Manager.

 

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 Manager will manage all of our administrative services and will maintain the Painting. The Manager will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations, which will be prepaid upon the closing of this Offering in the amount of $623,956, based on a rate of $124,791 per annum (or 2% of the cost of the Painting per annum) for the first five years following the closing of this Offering and in the form of Class A shares at a rate of 2% of the total Class A shares outstanding (excluding Class A shares beneficially owned by Masterworks) per annum following the five-year anniversary of 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 Manager 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 shares

 

Trading of the Class A shares can only occur on a trading platform approved by us and on a platform that is registered with the SEC or exempt from registration. 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 activities. If our affiliate Masterworks Brokerage is successful in obtaining this approval, it will collect reasonable and customary commissions and fees from the trading of the Class A shares. Masterworks is also seeking to list the Class A shares on one or more trading platforms owned and operated by unaffiliated third parties, 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 trading of the Class A shares, it will inform holders of its Class A shares by means of an amendment to this offering statement. Any such arrangement is not expected to be operational for between six- and twelve-months following completion of this Offering. 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. There is currently no trading market for the Class A shares and no assurance can be provided that we can be successful in listing the Class A shares on any trading platform, that a trading market for the Class A shares will develop, that every holder of Class A 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 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 board members of the Manager and the key professionals of Masterworks who perform services for us on behalf of the Manager are also officers, board members, 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 Manager or Masterworks.io to certain management personnel performing services.

 

Allocation of Our Affiliates’ Time

 

We rely on Masterworks and its key professionals who act on behalf of the Manager, including Scott W. Lynn, and Joshua B. Goldstein for the day-to-day operations of our business. Messrs. Lynn, and Goldstein are also the Chief Executive Officer, Chief Financial Officer and General Counsel/Secretary of the Manager 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 Manager and other Masterworks entities and other business activities in which they are involved. However, we believe that the Manager and its affiliates have sufficient professionals to fully discharge their responsibilities to the Masterworks entities for which they work. The Manager also serves as the Manager for Masterworks 001, LLC, a Delaware limited liability company owned by Masterworks. The Manager’s services to be provided to Masterworks 001, LLC are substantially similar to those to be provided to the Company. Masterwork is also the sponsor of a planned Regulation A offering by Masterworks 001, LLC, a Delaware limited liability company that has filed a Regulation A offering with the SEC, which has not yet been qualified.

 

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

 

The Manager’s officers and members of its Board of Managers and the key professionals of Masterworks, performing services on behalf of the Manager are also officers, board members, managers and/or key professionals of:

 

  Masterworks.io, LLC, the owner of the Masterworks Platform;
     
  Masterworks Administrative Services, LLC, our Manager;
     
  Masterworks Brokerage, LLC, an affiliate of Masterworks which 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 shares;
     
 

Masterworks Gallery LLC, an affiliate of Masterworks from which we plan to acquire the Painting with the proceeds of this Offering through a Merger between or subsidiary and a subsidiary of Masterworks Gallery, LLC; 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 Representative

 

The Manager’s Board of Managers is made up of Scott W. Lynn, Joshua B. Goldstein and__________. One of the members of the Board of Managers,__________, serves as the Independent Representative on the board (the “Independent Representative”). The Independent Representative serves to protect the interests of the holders of the Class A 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 shares and our affiliates. The Independent Representative and any replacement Independent Representative if the Independent Representative 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 will own 85,794 Class B shares, representing a 20% “profits interest” in our fully diluted equity. The Class B 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 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 shares. Masterworks and will also own Class A shares if and to the extent the Offering is undersubscribed. Masterworks will agree to lock-up provisions in our operating agreement that will prohibit it from selling 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 the Manager. Our operating agreement provides that the Manager will serve as the manager for an indefinite term, but that the Manager may be removed by us, or may choose to withdraw as manager under certain circumstances. In addition, our operating agreement provides that holders of two-thirds (2/3) of the Class A shares may affirmatively vote to remove the Manager for “cause” and in addition the consent of our founding member, Masterworks Gallery is required to be obtained in order remove the Manager. Unsatisfactory financial performance does not constitute “cause” under our operating agreement. In the event of the removal of the Manager will cooperate with us and take all reasonable steps to assist in making an orderly transition of the management function.

 

DESCRIPTION OF SHARES

 

As of the date of this filing, 100% of our membership interests are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously the existing membership interests will convert automatically into 85,794 Class B shares. The Company will have two classes of membership interests: Class A membership interests (referred to herein as the “Class A shares”) and Class B membership interests (referred to herein as the “Class B shares”). We are offering up 171,588 of our Class A shares, for an aggregate amount of $3,612,375  pursuant to this offering circular. The following description of the Class A shares and the Class B shares is based upon our certificate of formation, the Masterworks 002, LLC, operating agreement, and applicable provisions of law, in each case as currently in effect. 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 July 19, 2018, Masterworks Gallery was the sole holder of record of 100% of our membership interests. Upon the execution of our operating agreement at the qualification of this offering, Masterworks ownership interest shall be automatically converted into 85,794 Class B shares representing a 20% profits interest.

 

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Membership Interests

 

We were formed as a Delaware limited liability company on July 19, 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. There is no limit on the number of Class A shares we may issue, but we do not expect to issue any additional Class A shares other than as described in this offering circular, including the Class A shares that may be issued to Masterworks as descried herein and those issued upon conversion of the Class B shares. Masterworks Gallery adopted our operating agreement which appointed the Manager to serve as our Manager.

 

As of the date of this filing, there are 16,015 membership interests of the Company currently issued and outstanding, which are held by Masterworks. Upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously the 16,015 membership interests will convert automatically into 85,794 Class B shares.

 

On each matter where the Members have a right to vote, each Class A share shall be entitled to and shall constitute one (1) vote. 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 Class A shares that such member holds, with the power to vote, at the time of such vote. Unless otherwise set forth in the Masterworks 002, LLC operating agreement, or otherwise required by the Delaware Act, the taking of any action by us which required a vote of the members as set forth above shall be authorized by the affirmative vote of a majority of the Class A shares, excluding Class A shares beneficially owned by Masterworks, subject to any approval of the Manager or Masterworks Gallery, as our founder, as required in the Masterworks 002, LLC operating agreement.

 

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

 

  Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement;
  Issue any additional Class A shares following the completion of the offering, except Class A shares issued to Masterworks for administrative services and those issued upon conversion of the Class B 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have sufficient transaction volume to permit reasonable trading in the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

Summary of Operating Agreement

 

We are governed by an agreement titled the “Limited Liability Company Operating Agreement” of Masterworks 002, LLC. As of the date of this filing, all of the membership interests of the Company are held by Masterworks. On or prior to the time of qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, simultaneously the existing membership interests will convert automatically into 85,794 Class B shares. References throughout this offering circular to the Masterworks 002, LLC “operating agreement” and the “operating agreement” of Masterworks 002, LLC, refer to the Masterworks 002, LLC amended and restated operating agreement that will become effective upon the qualification of this Offering and the form of which is filed herewith as Exhibit 2.3. The following summarizes some of the key provisions of the Masterworks 002, 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.

 

Organization and Duration

 

We were formed on July 19, 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 002, LLC operating agreement.

 

Purpose and Powers

 

Under the Masterworks 002, LLC operating agreement, we are permitted to engage in such activities as determined by the Manager 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 Manager pursuant to the agreement relating to such business activity, provided that the Manager is prohibited from engaging in certain activities referred to as “Prohibited Acts” without obtaining the consent of the holders of a majority of the Class A shares, excluding any Class A shares beneficially owned by Masterworks.

 

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Manager 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. Pursuant to the Masterworks 002, LLC operating agreement, our manager was appointed as our non-member Manager.

 

We plan to enter into an administrative services agreement with our Manager 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 Manager 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 002, LLC operating agreement, the Manager shall have full authority in its 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 Manager 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. All fees to be paid to the Manager and its affiliates are to be paid pursuant to the administrative services agreement.

 

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

 

  amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement;
  issue any additional Class A shares following the completion of the Offering, except Class A shares issued to Masterworks for administrative services and those issued upon conversion of the Class B 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have volume sufficient to permit reasonable trading in the Class A shares, or
  the Manager notifies us of its intent to withdraw.

 

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

 

The Manager may be replaced by the affirmative vote of members holding two-thirds (2/3) of the Class A shares for “Cause” only, as such term is defined in our operating agreement and in addition the consent of our founding member, Masterworks Gallery is required to be obtained in order remove the Manager. “Cause” is defined as follows:

 

(a) the commission by the Manager or any of its executive officers of fraud, gross negligence or willful misconduct;

(b) the conviction of the Manager or any of its executive officers of a felony;

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

 

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

(e) the bankruptcy or insolvency of the Manager.

 

Classes of Ownership and Voting Rights

 

As of the date of this filing, 100% of the membership interests of the Company are owned by Masterworks. As set forth above, upon qualification of this offering circular by the SEC, the Company will enter into an amended and restated operating agreement for Masterworks 002, LLC, which will create two classes of membership interests of the Company in the form of the Class A and Class B shares, and simultaneously, the existing membership interests will convert automatically into 85,794 Class B shares.

 

Upon qualification of this offering circular by the SEC, we’ll have two classes of membership interests, Class A shares and Class B shares.

 

The Class A shares being offered in this offering which will represent in the aggregate 100% of our members’ capital accounts and an 80% interest in the profits we recognize upon any sale of the Painting and liquidation. There will be 343,176 Class A shares outstanding upon closing of the Offering and the Private Placement and the number of additional Class A 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 Manager (or any successor) pursuant to the administrative services agreement and shares issuable upon conversion of the Class B shares.

 

The Class B shares to be issued to Masterworks Gallery which will 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 85,794 Class B shares outstanding upon closing of the Offering and the Private Placement and no additional Class B shares may be issued by our Company (subject to stock-splits, recapitalizations or similar transactions) following the closing of the Offering.

 

Conversion of Class B shares

 

Class B shares will be convertible into Class A shares, in whole or in part, at any time prior to the consummation of a sale of the Painting for no additional consideration pursuant to the following conversion formula:

 

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

 

Definitions for conversion calculation:

 

  Value Increase

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

     
  Conversion Percentage

means, (A) the number of Class B shares being converted, divided by (B) the number of Class B shares outstanding upon closing of this offering (85,794 Class B shares).

     
  Class A 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 shares on all trading platforms or trading systems on which the Class A 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 1% 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 1% of the public float, the holder of the Class B shares shall be entitled to request that the Manager obtain an appraisal of the Class A Share Value from one or more independent nationally-recognized third party appraisal companies and such appraisal shall constitute the Class A Share Value.

 

Examples of conversion calculation

 

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

 

Hypothetical Class A Share Value   $       $ 30.00     $ 40.00     $ 50.00     $ 60.00  
No. of Class A shares Masterworks would receive upon conversion of 100% of its Class B shares     0       28,598       42,897       51,476       57,196  
Percentage of total outstanding Class A shares Masterworks would receive upon conversion of 100% of its Class B shares     0 %     7.69 %     11.11 %     13.04 %     14.29 %

 

Ownership limitation

 

In addition, our operating agreement restricts ownership by any individual Class A shareholder, together with such Class A shareholder’s affiliates, to a maximum of 19.99% of the total Class A shares issued and outstanding; however, this 19.99% limitation does not apply to any of the Masterworks entities.

 

Voting

 

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

 

  Amend, waive or fail to comply with any material provision of our operating agreement or the administrative services agreement;
  Issue any additional Class A shares following the completion of the Offering, except Class A shares issued to Masterworks for administrative services and those issued upon conversion of the Class B 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 twelve (12) months of the closing of the Offering, or thereafter such trading market ceases to exist or, the Manager determines that such market ceases to have volume sufficient to permit reasonable trading in the Class A shares, or
  The Manager notifies us of its intent to withdraw.

 

An approval of a majority of the holders of the Class A shares other than those beneficially owned by Masterworks is required for the above listed events. Class A shares beneficially owned by Masterworks shall have no voting rights.

 

The Class B shares shall have no voting rights other than as may be required pursuant to applicable law. The term “other than as may be required pursuant to applicable law,” takes into account the following considerations (i) pursuant to Section 18-806 of the Delaware Limited Liability Company Act (the “Act”), in the event that a limited liability company is dissolved by the occurrence of an event that causes the last remaining member to cease to be a member, the personal representative of the last remaining member of the limited liability company or the assignee of all of the limited liability company interests in the limited liability company may vote to revoke the dissolution, subject to the approval of any other persons whose approval is required under the limited liability company agreement to revoke a dissolution, such a vote could result in holders of the Class B Shares (or more accurately the personal representative of such persons) potentially be deemed to have a “right to vote” and (ii) the Act may be amended in the future to mandate voting rights for all interests in a Delaware limited liability company in certain situations, and if this occurs, without the provision “other than as may be required by law,” the Company could be in a position where its operating agreement would be in violation of the Act.

 

Removal

 

The Manager may only be removed for “cause” as defined in our operating agreement by a vote of the holders of two-thirds (2/3) of the Class A shares and in addition, the consent of our founding member, Masterworks Gallery is required to be obtained in order remove the Manager.

 

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Agreement to be Bound by the Operating Agreement

 

By purchasing a Class A share, you will be admitted as a member of our Company and will be bound by the provisions of, and deemed to be a party to the Masterworks 002, LLC operating agreement. Pursuant to the Masterworks 002, LLC operating agreement, each holder of Class A shares and each person who acquires a Class A share from a holder must execute a form of counterpart signature page thereto agreeing to be bound by the terms and conditions of the Masterworks 002, LLC operating agreement.

 

Class A shareholder Voting

 

Whenever our Class A shareholders are required or entitled to vote on any matter, that vote may be taken at a meeting or may be taken via a written consent in lieu of a meeting and without prior notice if there is a written consent which is signed by not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting. Any meeting or on any matter that is to be voted on by our Class A shareholders, the then holders of our Class A shares, may vote in person or by proxy, and such vote may be made, and a proxy may be granted in writing, by means of electronic transmission or as otherwise permitted by applicable law. Class A shares beneficially owned by Masterworks shall have no voting rights. We have elected to be governed by paragraphs (b), (c), (d) and (e) of Section 212 of the Delaware General Corporation Law (the “DGCL”) and other applicable provisions of the DGCL, as though we were a Delaware corporation and as though holders of our Class A shares were Class A shareholders of a Delaware corporation. Such sections generally regulate proxies for any voting purposes. In the event that we become subject to Regulation 14A under the Exchange Act, pursuant to and subject to the provisions of Rule 14a-16 under the Exchange Act, we may, but are not required to, utilize a Notice of Internet Availability of Proxy Materials, as described in that rule, in conjunction with proxy material posted to an Internet site, in order to furnish any proxy or related material to our Class A shareholders pursuant to Regulation 14A under the Exchange Act. We currently intend to utilize the Masterworks platform to the extent possible for meetings of, and votes of our Class A shareholders.

 

Limited Liability

 

The liability of each member of our Company shall be limited as provided in the Delaware Limited Liability Company Act and as set forth in the Masterworks 002, LLC operating agreement. No member of our Company shall be obligated to restore by way of capital contribution or otherwise any deficits in its capital account (if such deficits occur).

 

The Delaware Limited Liability Company Act provides that a member of a Delaware limited liability company who receives a distribution from such company and knew at the time of the distribution that the distribution was in violation of the Delaware Limited Liability Company Act shall be liable to the Company for the distribution for three years. Under the Delaware Limited Liability Company Act, a limited liability company may not make a distribution to a member if, after the distribution, all liabilities of the Company, other than liabilities to members on account of their Class A shares and liabilities for which the recourse of creditors is limited to specific property of the company, would exceed the fair value of the assets of the Company. The fair value of property subject to liability for which recourse of creditors is limited shall be included in the assets of the Company only to the extent that the fair value of that property exceeds the nonrecourse liability. Under the Delaware Limited Liability Company Act, an assignee who becomes a substituted member of a company is liable for the obligations of his assignor to make contributions to the Company, except the assignee is not obligated for liabilities unknown to him at the time the assignee became a member and that could not be ascertained from the Masterworks 002, LLC operating agreement.

 

Exculpation and Indemnification of the Manager and Others

 

Subject to certain limitations, our operating agreement limits the liability of the Manager and its affiliates, any of our members, any person who is our officer and any person who serves at the request of the Manager on behalf of us as an officer, board member, managers of the Manager, independent representative, partner, member, stockholder or employee of such person (referred to together as the “Protected Persons” or in the singular as the “Protected Person”).

 

Exculpation

 

No Protected Person shall be liable to us or the Manager or any other member of our Company 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 such Protected 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 Protected Person has reasonable cause to believe that such conduct was unlawful). With the prior consent of the Manager, any Protected Person may consult with legal counsel and accountants with respect to our affairs (including interpretations of our 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 a Protected Person acted with the requisite degree of care, such Protected Person shall be entitled to rely on written or oral reports, opinions, certificates and other statements of the board members, officers, employees, consultants, attorneys, accountants and professional advisors of our Company selected with reasonable care; provided, that no such Protected Person may rely upon such statements if it believed that such statements were materially false.

 

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Indemnification

 

To the fullest extent permitted by law, we will indemnify, hold harmless, protect and defend each Protected Person against any losses, claims, damages or liabilities, including reasonable legal fees, costs and expenses incurred in investigating or defending against any such losses, claims, damages or liabilities or in enforcing a Protected Person’s right to indemnification under the Masterworks 002, LLC operating agreement, and any amounts expended in respect of settlements of any claims approved by the Manager (collectively referred to herein as the “Liabilities”), to which any Protected Person may become subject:

 

(i) by reason of any act or omission or alleged act or omission (even if negligent) arising out of or in connection with the activities of our Company;

(ii) by reason of the fact that it is or was acting in connection with the activities of our Company in any capacity or that it is or was serving at the request of our Company as a partner, shareholder, member, board members, managers of the Manager, the independent representative, officer, employee, or agent of any Person;

 

unless, such Liability results from such Protected Person’s own actual fraud, gross negligence, willful misconduct, bad faith, breach of fiduciary duty, reckless disregard of duty or intentional and material breach of our operating agreement or conduct that is subject of a criminal proceeding (where such Protected Person has reasonable cause to believe that such conduct was unlawful).

 

Any indemnification provided under our operating agreement is limited thereunder to the extent of our assets only. Further, insofar as the foregoing provisions permit indemnification of board members, 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.

 

Reimbursement of Expenses

 

We will reimburse (and/or advance to the extent reasonably required) each Protected Person for reasonable legal or other costs and expenses (as incurred) of such Protected Person in connection with investigating, preparing to defend or defending any claim, lawsuit or other proceeding relating to any Liabilities for which the Protected Person may be indemnified pursuant to our operating agreement and for all costs and expenses, including fees, expenses and disbursements of attorneys, reasonably incurred by such Protected Person in enforcing the indemnification provisions of our operating agreement; provided, that such Protected Person executes a written undertaking to repay us for such reimbursed or advanced costs and expenses if it is finally judicially determined that such Protected Person is not entitled to the indemnification provided by our operating agreement.

 

Bona Fide Offer

 

“Bona Fide Offer” refers to an irrevocable offer by a prospective purchaser that has demonstrated to the reasonable satisfaction of the Manager that it has sufficient legally available funds to purchase the Painting (subject only to approval of the holders of a majority of the Class A shares excluding those beneficially owned by Masterworks) at a price that is at least 30% above the volume weighted average trading price over the sixty (60) trading days immediately preceding the date of such offer and where the transaction will not violate any local or international laws, including anti-money laundering laws. If the Class A shares are not actively trading at the time an irrevocable offer is made, such irrevocable offer shall reflect a purchase price that is at least 30% above the price paid by us to acquire the Painting in the Merger.

 

Amendment of Our Operating Agreement

 

Amendments to our operating agreement may be proposed only by or with the consent of the Manager and must be approved by a majority vote of the holders of the Class A shares, excluding Class A shares beneficially owned by Masterworks. Further, the Manager does not need consent of the Class A shares to amend the Masterworks 002, LLC, operating agreement in the following instances: (i) to evidence the joinder of a new Member of the Company; (ii) in connection with the transfer of shares by members; (iii) as otherwise required to reflect capital contributions, distributions and similar actions (iv) to reflect the naming of new officers or replacement of officers of the Company; (v) in connection with the issuance of Class A shares to the Managers pursuant to the administrative services agreement or (vi) in connection with the conversion of the Class B shares into Class A shares.

 

Termination and Dissolution

 

We will continue as a limited liability company until terminated under the Masterworks 002, LLC operating agreement. We will commence winding up upon the first to occur of the following (the “Dissolution Event”):

 

(1) Upon the determination of the members with the approval of the Manager;

(2) Our insolvency or bankruptcy;

(2) The sale of all or substantially all of our assets; or

(3) The entry of a decree of judicial dissolution under Section 18 802 of the Delaware Limited Liability Company Act

 

The Dissolution Event shall be effective on the day on which such event occurs and immediately thereafter we will commence its winding up during which our affairs shall be wound up in accordance with the terms of the Masterworks 002, LLC operating agreement.

 

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Books and Reports

 

We are required to keep appropriate books of our business at our principal offices. The books will be maintained for both tax and financial reporting purposes on a basis that permits the preparation of financial statements in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”). For financial reporting purposes and federal income tax purposes, our fiscal year and its tax year are the calendar year.

 

Term and Removal of the Manager

 

Our operating agreement provides that the Manager will serve as our Manager, for an indefinite term, but that the Manager may be removed by the members, or may choose to withdraw as manager, under certain circumstances.

 

Our members may only remove the Manager for “cause,” following the affirmative vote of two-thirds (2/3) of the issued and outstanding Class A shares excluding those beneficially owned by Masterworks, provided that the consent of our founding member, Masterworks Gallery is required to be obtained in order to remove the Manager. “Cause” is defined as:

 

  The commission by the Manager or any of its executive officers of fraud, gross negligence or willful misconduct;
  The conviction of the Manager or any of its executive officers of a felony;
  A material breach by the Manager of the terms of the administrative services agreement which breach is not cured within 30 days after receipt by the Manager of a notice of such breach from any member (provided that if such breach is not capable of cure within 30 days, and Manager is diligently taking steps to cure the breach, then no “Cause” event shall be deemed to have occurred unless and until the Manager fails to cure such breach within 60 days after receiving notice thereof);
  A material violation by the Manager or any of its executive officers of any applicable law that has a material adverse effect on our business; and
  The bankruptcy or insolvency of the Manager.

 

Unsatisfactory financial performance does not constitute “cause” under the Masterworks 002, LLC operating agreement. In the event of the removal of the Manager, the Manager will cooperate with us and take all reasonable steps to assist in making an orderly transition of the management function.

 

Anti-Takeover Effects under Delaware Law

 

We are a limited liability company organized under Delaware law. Some provisions of Delaware law may delay or prevent a transaction that would cause a change in our control. Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested Class A shareholders in certain situations, does not apply to limited liability companies unless they elect to utilize it. Our operating agreement does not currently elect to have Section 203 of the Delaware General Corporation Law apply to us. In general, this statute prohibits a publicly held Delaware corporation from engaging in a business combination with an interested Class A shareholder for a period of three years after the date of the transaction by which that person became an interested Class A shareholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the interested Class A shareholder, and an interested Class A shareholder is a person who, together with affiliates and associates, owns, or within three years prior did own, 15% or more of voting Class A shares. The Manager may elect to amend the Masterworks 002, LLC operating agreement, subject to majority approval by the members holding the Class A shares, at any time to have Section 203 apply to the Company.

 

Transfer Agent

 

We intend to engage Computershare Trust Company, N.A. to be our transfer agent and registrar for the Class A shares. Computershare Trust Company, N.A.’s address is at 250 Royall Street, Canton, Massachusetts 02021 and its telephone number is (877) 373-6374.

 

Binding Arbitration under Our Subscription Agreement

 

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.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Shares Eligible for Future Sale

 

Prior to this Offering, there has been no public or private market for the Class A shares, and we cannot predict the effect, if any, that market sales of the Class A shares or the availability of Class A shares for sale will have on the market price of the Class A shares prevailing from time to time.

 

Upon the closing of this Offering and the Private Placement, 343,176 Class A shares will be outstanding and 85,794 Class B shares will be owned by Masterworks and such Class B shares may be converted to Class A shares. If not all Class A shares offered are sold in this Offering, the remaining Class A shares shall also be issued to Masterworks, as part of the payment of the purchase price for the Painting.

 

Masterworks will agree to lock-up provisions in our operating agreement that will prohibit it from selling Class B shares or Class A shares prior to the one-year anniversary of the Offering, though it is permitted to pledge all of its Class B shares or Class A 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 Class B shares or Class A shares, other than restrictions imposed by applicable securities laws

 

All of the Class A shares sold in this Offering will be freely tradable under federal securities laws unless issued to our affiliates as set forth above. Any Class A shares or Class B shares owned or acquired by our affiliates may be sold in private transactions that are exempt from the registration requirements of the Securities Act or pursuant to Rule 144. Shares sold by Masterworks in private transactions that are exempt from the registration requirements of the Securities Act will bear a restrictive legend and will be subject to further transfer restrictions for one year from the time such shares are acquired from Masterworks by a non-affiliate.

 

Rule 144

 

In general, under Rule 144 as currently in effect, Masterworks will be entitled to sell, within any three-month period commencing in May 2019, a number of Class A shares that does not exceed the greater of:

 

  1% of the then-outstanding Class A shares; and
     
  The average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale.

 

Sales under Rule 144 by our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. If Masterworks sells its shares in private transactions that are exempt from the registration requirements of the Securities Act to a non-affiliate other than pursuant to Rule 144, such non-affiliate will be able to sell such shares pursuant to Rule 144 after one year has elapsed from the time such shares were acquired from Masterworks and such sales shall not be subject to the volume restrictions set forth above.

 

We are unable to estimate the number of Class A shares that will be sold under Rule 144 or the timing of such sales, since this will depend on the market price for the Class A shares, the personal circumstances of the sellers and other factors. Prior to the Offering, there has been no public market for the Class A shares, and there can be no assurance that a significant, or any, public market for the Class A shares will develop or be sustained after the Offering. Any future sale of substantial amounts of the Class A shares in the open market may adversely affect the market price of the Class A shares offered by this offering circular.

 

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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS

 

The following is a discussion of material U.S. federal income tax considerations relating to the purchase, ownership and disposition of our Class A shares by Holders (as defined below) as of the date hereof. For purposes of this section, under the heading “Material U.S. Federal Tax Considerations,” references to “the Company,” “we,” “our,” and “us” refer only to Masterworks 002, LLC and not its subsidiaries, including Masterworks 002 Cayman, LLC, except as otherwise indicated. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Regulations promulgated or proposed thereunder, and all administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different interpretation.

 

The U.S. federal income taxation of partnerships and partners is extremely complex, involving, among other things, significant issues as to the character, timing of realization and sourcing of gains and losses. This discussion does not address all of the U.S. federal income tax considerations that may be relevant to specific Holders in light of their particular circumstances or to Holders subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, dealers in securities or other Holders that generally mark their securities to market for U.S. federal income tax purposes, tax-exempt entities, retirement plans, regulated investment companies, real estate investment trusts, certain former citizens or residents of the United States or Holders that hold our Class A shares as part of a straddle, hedge, conversion or other integrated transaction) or U.S. Holders that have a “functional currency” other than the U.S. dollar. This discussion does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate (except as discussed below for Non-U.S. Holders), gift or alternative minimum tax considerations. Prospective investors are urged to consult their own tax advisors regarding the purchase, ownership and disposition of our Class A shares with respect to their particular tax situations, including, in the case of prospective Holders subject to special treatment under U.S. federal income tax laws, with reference to any special issues that the purchase, ownership and disposition of our Class A shares may raise for such persons. The activities of a Holder unrelated to such Holder’s status as a member of the Company may affect the tax consequences to such Holder of an investment in the Company.

 

As used in this discussion, the term “U.S. Holder” means a beneficial owner of a Class A share that, for U.S. federal income tax purposes, is (i) an individual who is a citizen or resident of the United States, (ii) a corporation created or organized under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of its source, or (iv) a trust (x) with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions or (y) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person. As used in this discussion, the term “Non-U.S. Holder” means a beneficial owner of a Class A share that is neither a U.S. Holder nor a partnership for U.S. federal income tax purposes, and the term “Holder” means a U.S. Holder or a Non-U.S. Holder.

 

If an entity treated as a partnership for U.S. federal income tax purposes invests in our Class A shares, the U.S. federal income tax considerations relating to such investment will depend in part upon the status and activities of such entity and the particular partner. Any such entity should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners relating to the purchase, ownership and disposition of our Class A shares.

 

PERSONS CONSIDERING AN INVESTMENT IN OUR CLASS A SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. INCOME, ESTATE AND OTHER TAX CONSIDERATIONS RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A SHARES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.

 

Taxation of Our Company

 

Taxation of Masterworks 002, LLC. 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 “—Taxation of U.S. Holders of Class A shares”.

 

An entity that would otherwise be classified as a partnership for U.S. federal income tax purposes may nonetheless be taxable as a corporation if it is a “publicly traded partnership”, unless an exception applies. An entity that would otherwise be classified as a partnership is a publicly traded partnership if (i) interests in the partnership are traded on an established securities market or (ii) interests in the partnership are readily tradable on a secondary market or the substantial equivalent thereof. We intend that we will be publicly traded for purposes of these rules.

 

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A publicly traded partnership will, however, be treated as a partnership, and not as a corporation, for U.S. federal income tax purposes, if (x) 90% or more of such partnership’s gross income during each taxable year consists of “qualifying income” and (y) such partnership is not required to register as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). We refer to this exception as the “qualifying income exception.” Qualifying income generally includes certain interest income, dividends, real property rents, gains from the sale or other disposition of real property, gains from the sale or other disposition of capital assets or other property held for the production of income that otherwise constitutes qualifying income and certain other forms of investment income.

 

We intend to operate such that we will meet the qualifying income exception in each taxable year. We do not expect that the Company will earn any income in any taxable year other than qualifying income including (x) interest income with respect to certain short-term debt investments held by the Company and (y) an income inclusion followed by a liquidating distribution from Masterworks Cayman 002, LLC in the year in which the Painting is sold. At present, we do not expect to seek a ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to our treatment as a partnership for U.S. federal income tax purposes and no assurance can be given that the IRS will not take a contrary position. In the event that such a ruling is sought, and such ruling treats a sale of the Painting as qualifying income, we may structure Masterworks Cayman 002, LLC as an entity disregarded from us for U.S. federal income tax purposes, in which case the tax consequences described herein could be materially different, as described below.

 

If we fail to meet the qualifying income exception (other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after discovery) or if we are required to register under the 1940 Act, we will be treated as if, on the first day in which we fail to meet the qualifying income exception or are required to register under the 1940 Act, we had transferred all of our assets, subject to our liabilities, to a newly formed corporation in exchange for stock of such corporation, and then distributed the stock to the Holders in liquidation of their interests in us. This deemed contribution and liquidation should generally be tax-free to the Holders so long as we do not have liabilities in excess of the tax basis of our assets at such time. Thereafter, we would be treated as a corporation for U.S. federal income tax purposes.

 

If we were treated as a corporation in any taxable year, our items of income, gain, loss, deduction and credit would be reflected our tax return, rather than the returns of our Holders subject to U.S. tax, and we would be subject to U.S. corporate income tax on our taxable income. Distributions of cash or other property to a Holder with respect to our Class A shares generally would be treated as a dividend to the extent such distribution was paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), or in the absence of earnings and profits, as a tax-free return of capital to the extent of such Holder’s adjusted tax basis in such Class A share, and then as capital gain. Accordingly, treatment as a corporation could materially reduce a Holder’s after-tax return and thus could result in a substantial reduction of the value of our Class A shares.

 

The remainder of this discussion assumes that we will be treated as a partnership for U.S. federal income tax purposes.

 

Taxation of Masterworks 002 Cayman, LLC. Masterworks 002 Cayman, LLC, our wholly owned subsidiary, intends to file an election with the IRS to be classified as an association taxable as a corporation and not as a partnership or disregarded entity for U.S. federal income tax purposes. We, as the holder of Masterworks 002 Cayman, LLC’s shares, will not be taxed directly on the earnings of Masterworks 002 Cayman, LLC.

 

However, Holders may be required to report directly income earned by Masterworks 002 Cayman, LLC in certain circumstances. See “— Controlled Foreign Corporations”.

 

Subject to the discussion below under “Controlled Foreign Corporations,” distributions of cash or other property to us from Masterworks 002 Cayman, LLC (other than certain distributions of Masterworks 002 Cayman, LLC’s shares or rights to acquire its shares) generally will be treated as a dividend for U.S. federal income tax purposes (without reduction for any non-U.S. tax withheld from such distribution) to the extent of Masterworks 002 Cayman, LLC’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). To the extent the amount of such distribution exceeds such current and accumulated earnings and profits, it generally will be treated first as a non-taxable return of capital to the extent of our adjusted tax basis in Masterworks 002 Cayman, LLC’s shares and then as capital gain.

 

If, following receipt of a ruling from the IRS, we elected to treat Masterworks 002 Cayman, LLC as an entity disregarded as separate from us, we would directly report any income, gain, loss or deduction of Masterworks 002 Cayman, LLC, and any distributions from Masterworks 002 Cayman, LLC would be disregarded for U.S. federal income tax purposes.

 

Taxation of U.S. Holders of Shares

 

Below is a discussion of material U.S. federal income tax considerations applicable to U.S. Holders of our Class A shares.

 

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Taxation of Holders of Shares on Our Profits and Losses. As a partnership for U.S. federal income tax purposes, 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. It is possible that in any year, a Holder’s tax liability arising from the Company could exceed the distributions made by the Company to such Holder. The Company will file a U.S. federal partnership information return reporting its operations for each year and provide a U.S. Internal Revenue Service Schedule K-1 to each Holder. However, Holders may not receive such Schedule prior to when their tax return reporting obligations become due and may need to file for extensions or file based on estimates.

 

In addition to regular U.S. federal income tax, certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of any interest income we earn that is allocable to such U.S. Holder.

 

Allocation of Profits and Losses. For each of our fiscal years, each Holder’s allocable share of our items of income, gain, loss, deduction or credit will be determined by our operating agreement (the “operating agreement”), provided such allocations either have “substantial economic effect” or are determined to be in accordance with such Holder’s interest in the Company. We believe that for U.S. federal income tax purposes, such allocations will be given effect as being in accordance with such Holder’s interest in the Company and we intend to prepare tax returns based on such allocations. If the allocations provided by our operating agreement were successfully challenged by the IRS, the resulting allocations to a particular Holder for U.S. federal income tax purposes may be less favorable than the allocations set forth in our operating agreement.

 

Section 706 of the Code provides that items of partnership income and deductions must be allocated between transferors and transferees of shares. We will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, loss, deduction and credit to Holders in a manner that reflects such Holders’ beneficial shares of our items. These conventions are designed to more closely align the receipt of cash and the allocation of income between Holders of Class A shares, but these assumptions and conventions may not conform with all aspects of existing Treasury Regulations. If the IRS successfully challenges our conventions, our items of income, gain, loss, deduction or credit may be reallocated among the Holders of Class A shares to the possible detriment of certain Holders. The Manager is authorized to revise our method of allocation between transferors and transferees (as well as among Holders whose interests otherwise could vary during a taxable period).

 

Because we cannot match transferors and transferees of Class A shares, we may adopt depreciation, amortization and other tax accounting positions that may not comply with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the allocations of tax items to Holders and could have a negative impact on the value of Class A shares or result in audits of and adjustments to Holders’ tax returns.

 

Adjusted Tax Basis of Class A Shares. A Holder’s initial tax basis in its Class A shares will generally equal the amount such Holder paid for the Class A shares plus such Holder’s allocable share of our liabilities, if any. A Holder’s adjusted tax basis will be increased by such Holder’s share of items of our income and gain and any increase in such Holder’s share of our liabilities. A Holder’s adjusted tax basis will be decreased, but not below zero, by distributions from us, such Holder’s allocable share of items of our deductions and losses and by any decrease in such Holder’s allocable share of our liabilities.

 

Holders who purchase our Class A shares in separate transactions must combine the basis of those Class A shares and maintain a single adjusted tax basis for all of those Class A shares. Upon a sale or other disposition of less than all of the Class A shares held by such Holder, a portion of that tax basis must be allocated to the Class A shares sold.

 

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Restrictions on Deductibility of Expenses and Other Losses. A Holder may deduct its allocable share of our losses (if any) for U.S. federal income tax purposes only to the extent of such Holder’s adjusted tax basis in the Class A shares it is treated as holding at the end of the taxable year in which the losses occur. If the recognition of a Holder’s allocable share of our losses would reduce its adjusted tax basis for its Class A shares below zero, the recognition of such losses by such Holder would be deferred to subsequent taxable years and will be allowed if and when such Holder has sufficient tax basis so that such losses would not reduce such Holder’s adjusted tax basis below zero. In addition, the “at-risk” rules and the limitation on “excess business losses” could limit the deductibility of losses allocable to a Holder. We do not expect to generate income or losses from “passive activities” for purposes of Section 469 of the Code. Therefore, income allocated by us to a Holder may not be offset by the Section 469 passive losses of such Holder and losses allocated to a Holder generally may not be used to offset Section 469 passive income of such Holder.

 

It is anticipated that our expenses generally will be investment expenses treated as miscellaneous itemized deductions, rather than trade or business expenses, with the result that any individual who is Holder (either directly or through a Holder that is a partnership or other pass-through entity) will not be permitted to claim a U.S. federal income tax deduction for such expenses for taxable years beginning before January 1, 2026 and thereafter may be limited in his or her ability to claim a U.S. federal income tax deduction for such expenses.

 

In general, neither we nor any Holder may deduct organizational expenses. We may elect to amortize any organizational expenses ratably over fifteen years, or we may elect to capitalize such expenses. No deduction is allowed for offering expenses, including placement fees.

 

Treatment of Distributions. For U.S. federal income tax purposes, distributions of cash by us generally will not be taxable to a U.S. Holder to the extent of such U.S. Holder’s adjusted tax basis in its Class A shares. Any cash distributions in excess of a U.S. Holder’s adjusted tax basis generally will be considered to be gain from the sale or exchange of our Class A shares. Under current law, such gain generally will be capital gain and will be long-term capital gain if such U.S. Holder has held such Class A share for more than one year at the time of such distribution, subject to certain exceptions.

 

Disposition of Class Shares. A U.S. Holder generally will recognize gain or loss for U.S. federal income tax purposes upon the sale, exchange or other disposition of our Class A shares in an amount equal to the difference, if any, between the amount realized on the sale, exchange or other disposition and such U.S. Holder’s adjusted tax basis in such Class A share. A U.S. Holder’s adjusted tax basis will be adjusted for this purpose by its allocable share of our income or loss for the year of such sale or other disposition. Any gain or loss so recognized generally will be capital gain or loss and will be long-term capital gain or loss if such Holder has held such Class A share for more than one year at the time of such sale, exchange or other disposition. Certain gain attributable to our investment in Masterworks 002 Cayman, LLC will generally be characterized as ordinary income rather than capital gain. See “—Controlled Foreign Corporations”. Net long-term capital gain of certain non-corporate U.S. Holders generally is subject to preferential rates of tax. The deductibility of capital losses is subject to limitations.

 

Holders who purchase our Class A shares at different times and intend to sell all or a portion of the Class A shares within a year of their most recent purchase are urged to consult their tax advisors regarding the application of certain “split holding period” rules to them and the treatment of any gain or loss as long-term or short-term capital gain or loss. For example, a selling Holder may use the actual holding period of the portion of its transferred Class A shares, provided such Class A shares are divided into identifiable Class A shares with ascertainable holding periods, the selling Holder can identify the portion of the Class A shares transferred, and the selling Holder elects to use the identification method for all sales or exchanges of our Class A shares.

 

Controlled Foreign Corporations. In general, a corporation organized outside the United States is treated as a controlled foreign corporation (“CFC”) for U.S. federal income tax purposes in any taxable year in which more than 50% of (i) the total combined voting power of all classes of stock of such non-U.S. corporation entitled to vote or (ii) the total value of the stock of such non-U.S. corporation is owned (or is considered as owned) by “U.S. Shareholders” on any day during the taxable year of such non-U.S. corporation. A “U.S. Shareholder” with respect to a non-U.S. corporation is any U.S. person that owns (or is treated as owning) 10% or more of the total combined voting power of all classes of stock of th