I see a lot of investment ideas. I get a lot of information about alternative investments from the marketplace. I prepare about 100 PPMs a year for my clients, and I review probably about 200 other alternative investments, just to keep abreast and make sure that I’m providing the best service to my clients and also for my own deals. It is rare that something jumps out at me as such a great and creative idea as what we’re going to talk about now. This is not a pitch for anything of mine; I’m not doing this, I’m not responsible for it, and they’re not a client. I just thought it was a brilliant idea for an investment and kudos to them.

So with that kind of build-up, you must be wondering what it is that I’m talking about. Well, before I make the big reveal on which investment I think is just brilliant, let’s talk a little bit again about founder investment theory. It’s the drum I bang all day long that is absolutely critical. Founder investment theory can almost be boiled down to just one word: story. The story that your investors are getting about your investment, what is it that makes it compelling for them to invest?

We can break that down into four components:

  1. The strategy: What’s the general strategy that’s taking place? Is this a value add? Is it appreciation? Is it cash flow? What is it?
  2. The philosophy: Why is this a good investment? What is this asset class?
  3. The risk tolerance level: Is it low or high? Some people like to invest in very safe assets with very stable returns, some people like high-risk, high-return assets.
  4. The story.

Without further ado, I’m going to talk about what I think is one of the most creative ideas for using an exempt offering for an investment in the alternative investment space: Masterworks. Masterworks is a Regulation A offering that’s put out there to raise money for investing in art. It is an incredibly great idea. I mean, who wouldn’t want to own some of the masterpieces that they invest in? Banksy, Sam Gilliam, Andy Warhol, Yayoi Kusama – and I totally butchered her name, and I apologize. But these are some of the great works of our time and even before our time. I mean, they’ve got a Monet, how cool is that? You can own a piece of that and then take part in the appreciation.

So that’s the whole idea behind Masterworks. Their strategy, of course, is just pure appreciation. This is not a cash play. This is something where you buy into one of these pieces of art, and then it’s sold at some point. They’ve got a whole mechanism here: they purchase the art, they scrutinize it. The whole period is three to 10 years. You can also trade and sell your shares because it’s taking place under Regulation A.

It’s an extremely cool idea with a very cool strategy. Obviously, the philosophy is art appreciates. Art is actually a very good asset class that’s oftentimes ignored because the asset prices are so high and it is such an illiquid market. But I think what Masterworks has done here is they’ve liquefied the market as much as it can possibly be liquefied, and in such a great, compelling way.

Regarding risk tolerance, I mean, it’s fairly safe to say that Banksy paintings are going to be worth a fortune and going to be worth even more. So I think it’s pretty safe to say that it’s going to be a very safe asset class. Nothing’s guaranteed, but in general, pretty safe, low risk and good returns. I mean, on some of these paintings, these are reasonable returns. Even on a more classical painter, like Claude Monet, you’ve got a 9.2% return which, yes, isn’t stellar, but for that low risk tolerance level, it’s right there in the play.

And really, at the end of the day, it’s the story. How cool is this? Under each painting, they have descriptions of all the different pieces they’ve done. They have what their estimated sales are, they have an investment thesis that describes the work to you, why they chose it, and why they think it’s going to have these kinds of returns.

Here’s the bottom line: these guys, kudos to you. They’re not a client of mine. I’m not invested in them. I don’t get anything for saying it. But I thought it was such a great example to bring to you of a fit that I think is so unique and compelling. Wow, great job, guys.

Now, that said, we do lots of Regulation D work for our clients. I would love to see my clients bring me something that is as cool as this or nearly as cool as this. There are a lot of deals that people are working on, my clients included, that can be this cool, that have a unique vision, but they also haven’t crafted it because they haven’t spent the time to think about what their fit is.

So it all starts with fit if you want to be able to get investors into your project with little friction. Founder investment theory is the way to do it. If you’d like to talk about your Regulation D offering, I would be happy to talk with you and see if we can help you not only put together all the compliance work that needs to take place – PPM, operating agreements, subscription agreement, filing in the Form D, state notices under blue sky laws – but also help you with that fit and how you can communicate better with your investors.