Application of Financial Disclosure Laws to Art Purchases in Belgium

Note from PG – He found the following on Clancoo website at the link below. That link lead him to a PDF of a document created by Oliver Lenaerts that was in Clancoo website files. PG’s link is to the Clancoo website. The link to the document stored on the Clancoo website from which PG draws his excerpts is HERE.

PG’s interest in this matter concerned the role that many literary agents play as financial advisors for their authors with respect to contract provisions, the amount of advances, whether or not to accept an offer or not, etc.

PG acknowledges that the parallels are not perfect, but he does believe there may be similarities between the two groups with respect to hidden agendas, etc. Of course, in the United States, agents acting for authors are virtually unregulated even though they almost certainly have some implied fiduciary obligations when they receive large amounts of money from one or more publishers that should be passed on to an author.

As an example, there is no law or regulation of which PG is aware that prohibits a literary agent from commingling funds that belong to one or more authors together with the agent’s funds in a single bank account. An attorney would likely be subject to a disciplinary proceeding should s/he take the same action with client funds. More than one lawyer has been disbarred and prohibited from practicing law for such actions.

One final note – The OP includes many footnotes that PG has omitted (you’ll likely notice traces in the excerpt). If you are interested in deepening your understanding of this topic, it will be well worth your while to review the entire document.

From Clancoo:

The regard for art as a luxury acquisition with the sole purpose of enjoying it in your private home, has undergone some dramatic changes over the past fifteen years. Art is being regarded as an accessible investment. The ability to enjoy art is increasingly tangled up with the possibility of reselling it and making a profit. That rise has caused many art dealers, investors, auction houses and economists to regard art not as a luxury acquisition but rather to regard it as a financial asset.1 And so it can happen that etchings of Picasso are being traded over the counter like coffee futures for millions of euros. The vision of art as an asset has led to an enormous boost on the art market and an increasing financialisation. The manner in which certain artists are being promoted by the press and other media and how their prices are being monitored in indexes and databanks indicates the existence of a market.2 As a result, the chance that an art dealer turns into an investment consultant who defends the interests of the buyer, increases. The attitude, often unarticulated but persistent, that art is being bought in a context of appreciation for its intrinsic and aesthetic merit, may perpetuate reluctance to regulate the art market. Wrongly. If purchasing art is no longer caused by a spontaneous injection of aesthetics but becomes a calculated risk, then regulation becomes inevitable. Art transactions, certainly in the higher segment of the market, appear to be, in essence, investment contracts. In this article we shall, first and foremost, describe the predominant types of art transactions. Subsequently, we shall describe the most important preoccupations of an art investor and the existing protection rules. Thirdly, we shall analyse the criteria the Belgian legislator has put forward to determine whether an artwork qualifies as a financial asset and the consequences thereof on the art market.

I. Types of Art Transactions

A. Auction Houses

Public auction houses account for a substantial proportion of art transactions. They are the counterpart of trading platforms where stock is being traded, it being understood that art is less liquid: so, to resell you must wait for a suitable auction.3 As the agent of the owner, the auctioneer solicits offers and determines the final bid. The most obvious characteristic of this sale platform is the unpredictability of the knock-down price. Because the final sales price results from the open bidding, it is accepted as the fair market value.4 Knowledge of the reserve price would be helpful to the buyer in setting the value of an artwork. If this price is not met during the bidding, the piece will be withdrawn by the auctioneer.

B. Art Galleries

Purchases may be made privately through a gallery or an art dealer. A gallery manages a significantly lesser volume of works than an auction house. A transaction through a gallery is ordinarily in the nature of a purchase at a non-negotiable price. This is especially true for commercial galleries where the taste of the consumer determines whether a purchase shall take place. Rarely, such a dealer will disclose information on past sale prices in order to enable the buyer to determine whether the price is fair. The purchase is determined by the aesthetic reaction the buyer has with the artwork. A promotion gallery, however, represents artists who are selected on the basis of artistic expertise and market knowledge.

In many cases, a promotion gallery represents the artist exclusively and exercises control on the marketing and distribution of the works of that artist. Hence, in the world of contemporary art trading, it is difficult to use the name of promotion galleries without entertaining thoughts of a financial investment environment. An emphatic process for some dealers (thinking from the perspective of the artist), is a technical process for the others (thinking from the perspective of the market).5 Private art dealers operate on the secondary market and offer artworks with provenance. They invest only, at a given point in time, in the value of artworks and are less concerned by the value of an artist’s entire oeuvre on the long term.

C. Art Advisors

As investing in art gradually grows in popularity over the years, opportunities arise on the art market to address the concerns of investors. Logically, the importance of such advice increases in relation to the growth of the sums invested. In order to consider a transaction as an investment, the advice component must be part of the sales process. The bets on that are greater if advisors assist investors in getting the deal through. The advisory function of an art dealer cannot be qualified unambiguously. Certainly, one might expect that an art dealer makes certain (price) statements incidental to art purchases. Doing so, however, does not necessarily mean that he acts as an art advisor. A buyer may solicit certain advisory information regarding the investment value of particular artworks, but, if a buyer relies upon such representations and it can be ascertained that the art dealer’s representation induced the purchase, there is a potential conflict of interest.6

D. Art Funds

Since the beginning of the 21st century, there has been a tendency towards financialisation of the art market. In the wake of that tendency, art funds were rising fast. The art funds industry peaked in 2012 and since then has then slowed down. That decline is due to the fact that art funds have certain handicaps. The most important one is sustainability. It is difficult to create an industry around it because there simply isn’t the depth in the market. Investible art relates to a very small segment of the market and you can’t pour millions into it. Put another way, no significant profits can be made of it. Another burgeoning area is the art lending industry which emerged out of the fund business. Art lending allows the lender to leverage against art and taps into a new business model.

. . . .

III. Art as an Investment

The most obvious investments are shares and bonds. An investor buys shares in anticipation that the investment will offer a return on the sum paid as a result of the efforts of the management of the company whose shares are being sold. The Belgian legislator has taken the view that the subject-matter (shares or something else – e.g. art) of an investment contract is irrelevant and has, therefore, enlarged the scope of the financial rules intended to protect investors.16 The law no longer applies the notion of ‘share’ but the wider notion of ‘investment instrument’ and tackles “alternative investments in movable properties”.17 The legislator has introduced in article 3, §1, 4° of the law of 11 July 2018 relating to the offering of investment instruments to the public and the admission of investment instruments to trading on the regulated market (the ‘Prospectus Law’), certain criteria in order to determine whether an investment instrument is available or not:

If rights are acquired which make it possible to execute a financial investment and which relate to one or more movable goods that are part of a group and whose collective management is assigned to one or more persons acting in a professional capacity (unless those rights provide for unconditional, irrevocable and complete delivery in kind of the goods).

That’s what it all boils down to. The Financial Services and Markets Authority (‘FSMA’), which is the financial regulatory agency in Belgium, applies the notion of ‘alternative investment products’ for products which are offered to the public as an investment and which, directly or indirectly, relate to movable property and which do not take the form of traditional investments (e.g. shares) which are well-defined in Belgian financial law. Below is an analysis of the circumstances under which art could qualify as an ‘investment instrument’ in the meaning of the Prospectus Law.

Link to the rest at Clancoo

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