Form 1-A Masterworks 001, LLC

  
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      Masterworks 001, LLC
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      0001738134
      7380
      82-5165851
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      0
    
    
      SPRING PLACE, 6 ST JOHNS LANE
      7th FLOOR
      NEW YORK
      NY
      10013
      203-518-5172
      LAURA ANTHONY
      Other
      100.00
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      Mayer Hoffman McCann, P.C.
    
    
      Membership Interests
      16015
      000000000
      NONE
    
    
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      true
    
    
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      99825
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      20.0000
      1996500.00
      0.00
      0.00
      0.00
      1996500.00
      N/A
      0.00
      N/A
      0.00
      N/A
      0.00
      Mayer Hoffman McCann, P.C
      20000.00
      Legal and Compliance, LLC
      100000.00
      N/A
      0.00
      Legal and Compliance, LLC
      9500.00
      000000000
      1996500.00
      Estimated Net Proceeds Calculation (above) of $1,996,500 does not include any offering fees as all fees in connection with the offering are to be paid by Masterworks Administrative Services, LLC.
    
    
      true
      AL
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      Masterworks 001, LLC
      Membership Interests
      16015
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      16,015 membership interests were issued to Masterworks Gallery, LLC, a Delaware limited liability company which was issued for $100.
    
    
      The foregoing issuances were pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, for transactions by an issuer not involving any public offering.
    
  

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 1-A

 

REGULATION A OFFERING CIRCULAR

UNDER THE SECURITIES ACT OF 1933

 

MASTERWORKS 001, 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

7^th 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. John s Lane

7^th 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		82-5165851
(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 001, LLC

 

Preliminary Offering Circular

July 31 , 2018

Subject to Completion

 

 

99,825 Class A shares

Representing Class A Limited Liability Company Interests

$1,996,500 Maximum Offering Amount 

 

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

 

Masterworks 001, LLC, a Delaware limited liability company, is offering up to 99,825 of its Class A shares initially representing Class A limited liability company interests, for an aggregate purchase price of $1,996,500, in a “Tier 2” offering under Regulation A. The offering price will be $20.00 per Class A share. 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 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. The offering will commence on the date the offering is qualified by the Securities and Exchange Commission (“SEC”).

 

Our affiliate Masterworks.io, LLC owns an online investment platform located at https://www.masterworks.io/ (the “Masterworks Platform”) that allows investors to acquire ownership of an interest in special purpose companies that invest in distinct artworks. Through the Masterworks Platform, investors can, once they establish an account, browse and screen potential artwork investments, view details of an investment and sign contractual documents online. The offering will be conducted through the Masterworks Platform. For additional information regarding the Masterworks Platform, please see page 63.

 

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 the 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:						$	20.00			$	0.00			$	20.00
Total (3)			99,825			$	1,996,500			$	0.00			$	1,996,500

  

	(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 30 of this offering circular for additional information.
	(2)	This amount does not include estimated offering expenses of approximately $129,500 , 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 $1,996,500 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 15.

 

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

 

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

 

Our principal office is located at 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	13
DETERMINATION OF OFFERING PRICE	15
DIVIDEND POLICY	15
RISK FACTORS	15
DILUTION	29
PLAN OF DISTRIBUTION	30
USE OF PROCEEDS TO ISSUER	39
DESCRIPTION OF BUSINESS	39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	55
MANAGEMENT	57
MANAGEMENT COMPENSATION	64
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS	65
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS	66
DESCRIPTION OF SHARES	68
SHARES ELIGIBLE FOR FUTURE SALES	75
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS	76
ADDITIONAL REQUIREMENTS AND RESTRICTIONS	84
ERISA CONSIDERATIONS	85
LEGAL MATTERS	86
EXPERTS	86
APPOINTMENT OF AUDITOR	86
WHERE YOU CAN FIND MORE INFORMATION	86

 

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.

 

 

THIRD PARTY DATA

 

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

 

TRADEMARKS AND COPYRIGHTS

 

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

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

STATE LAW EXEMPTION AND PURCHASE RESTRICTIONS

 

Our Class A 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.

 

 

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?
A:	Masterworks has created the first fine art investment platform that will allow anyone to invest in specific 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 24,956 Class B shares representing a 20% profits interest in our Company and will own Class A shares if and to the extent the offering is not fully subscribed upon closing of the offering.

 

Q.	What will Masterworks own or receive in connection with these relationships?
A.	Masterworks plans to own 24,956 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 paid in cash at a rate of $36,300 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. 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 Painting. Masterworks may also receive reasonable and customary trading fees and commissions from the trading of the Class A shares, subject to applicable laws, rules and regulations.

 

 

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. Masterworks will earn $36,300 per annum in cash for the first five years following the closing of this offering and thereafter 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 exchange for these services and these payments for ordinary and necessary administrative expenses.  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 beneficially owned by Masterworks, we cannot issue additional Class A shares or Class B shares following the completion of the offering, 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.	If this offering is successful, 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 a unique artwork and will therefore have different investment characteristics from every other offering. We believe that the long-term value of each company will heavily depend on the relative popularity and market value of the particular genre, artist and specific work owned by such company.
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.

 

 

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 $20.00 cost of one Class A share.

 

Q.	Is there any maximum investment restriction?
A.	Yes. You may only purchase up to 5,000 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 proceeds from this offering of up to $1,996,500.  We will use $181,500 of the proceeds from this 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, for us to acquire 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.

  

 

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 001, LLC

c/o Masterworks Administrative Services, LLC

Spring Place

6 St. Johns Lane

7th Floor

New York, New York 10013

Attn: Investor Relations

 

 

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 001” or the “Company,” refer to Masterworks 001, LLC, a Delaware limited liability company, and its wholly owned subsidiary, Masterworks 001 Cayman, LLC, a Cayman Islands limited liability company, which has not yet been formed but is planned to be formed prior to the completion of this offering. For purposes of this offering circular, the term “Masterworks” refers to Masterworks.io, LLC, and/or any of its wholly owned subsidiaries, which include Masterworks Administrative Services, LLC, referred to herein as the “Manager,” Masterworks Gallery, LLC and also includes Masterworks Brokerage, LLC, but does not include Masterworks 001, LLC and its subsidiary. All Masterworks entities are Delaware limited liability companies. For purposes of this offering circular, the term “Painting” refers to that certain painting by Andy Warhol, titled 1 Colored Marilyn (Reversal Series), 1979, Oil and silkscreen inks on canvas. Unless otherwise clear from the context, references throughout this offering circular to “our operating agreement” refers to the Masterworks 001, LLC’s amended and restated operating agreement 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. The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

Overview

 

We were formed as a Delaware limited liability company on March 28, 2018 to acquire the Painting. The 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 at a public auction held by Philips Auctioneers LLC, on November 16, 2017, for $1,815,000 by an agent acting on behalf of Masterworks. We are offering up to 99,825 Class A shares for aggregate consideration of up to $1,996,500. We will use $181,500 of the proceeds from this 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, for us to acquire the Painting from Masterworks. We do not expect to generate any revenues or cash flow unless and until we sell the Painting and no profits will be realized by investors unless they are able to sell their Class A 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 following description of Andy Warhol is derived from Biography.com, which is owned by A&E Television Networks, LLC. The discussions contained in this offering circular relating to Andy Warhol, the Painting and the art industry are taken from third-party sources that the Company believes to be reliable and the Company believes that the information from such sources contained herein regarding Andy Warhol, the Painting and the art industry is reasonable, and that the factual information therein is fair and accurate.

 

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

 

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

 

 

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

 

The Painting

 

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

 

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 market for high end art is highly concentrated, both in terms of buyers and top-selling artists. According to Artnet, only 25 artists were responsible for 4 4.6 % of all P ost W ar and C ontemporary art auction sales during the first six months of 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 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, t he 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.

 

One particularly important style within the broader Post War and Contemporary segment is Pop Art. Pop Art is an art movement that emerged in Britain and the United States during the mid- to late-1950s. Andy Warhol is among the most widely known and best-selling American Pop artists. The movement includes imagery from popular and mass culture, such as advertising, cinema and mundane cultural objects. One of its aims is to use images of popular culture in art, emphasizing the banal or kitschy elements of any culture, most often through the use of irony. It is also associated with the artists’ use of mechanical means of reproduction or rendering techniques. In Pop Art, material is sometimes visually removed from its known context, isolated, or combined with unrelated material.

 

We believe that Warhol was prolific by any measure. The Andy Warhol Catalogue Raisonné, the definitive record of the artist’s paintings, sculptures and drawings, is an ongoing effort by the Andy Warhol Foundation. Thus far, volumes I - IV have been released covering the period from 1961 through 1976, with volume V expected to be released in 2018. According to Artnet, Andy Warhol auction sales were $ 427 million in 2013, $ 653 million in 2014, $526 million in 2015 and , according to TEFAF , $16 8 million in 2016. According to Artnet, aggregate pre-sale auction estimates for Warhol works offered at May auctions by the leading auction houses over the eighteen year period from 2000 through 2017 were $2.1 billion, second only to Pablo Picasso at $2.5 billion and significantly above Claude Monet in third place at $1.3 billion. According to auction data published by Artnet, Warhol was ranked the highest grossing artist in 2014 worldwide across categories, the second highest grossing artist in 2015 and the eighth highest grossing artist in 2016. Also according to Artnet, the highest auction sale price paid for an Andy Warhol painting in 2017 was $60.8 million and the highest ever was $104.5 million in November 2013.

 

 

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

 

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 of $36,300 per annum. 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% payment consisting of fees and routine reimbursements to Masterworks will be paid 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.

 

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 platform s owned and operated by unaffiliated third part ies , 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 Brokerage, LLC 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. 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.

 

 

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.

 

Organizational Structure

 

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

 

 

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

 

(1)	“Masterworks.io” refers to our affiliate Masterworks.io, LLC, which owns the Masterworks Platform which will facilitate online investment in connection with this offering and will be used to facilitate similar offerings for other companies.
(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.
(3)	“Masterworks Gallery” refers to Masterworks Gallery, LLC, which owns 100% of our membership interests prior to giving effect to the offering. Masterworks Gallery will sell the Painting to us for aggregate consideration equal to $1,815,000, representing its cost, which will be funded from the proceeds of the offering, plus the issuance of any unsold Class A shares.  Masterworks Gallery will also own 24,956 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, such Class A shares will be issued to Masterworks Gallery, as partial consideration for the Painting and the respective ownership percentages of Masterworks Gallery and investors will adjust accordingly. 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, 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 001, 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 currently issued and outstanding will convert automatically into 24,956 Class B shares. 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.

 

 

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.

 

●

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 guaranteeing works,
	■	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 in cash for the first five years 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 class action lawsuits or seek remedies on a class basis.

 

Company Information

 

Our principal office is located at Spring Place, 6 St. Johns Lane, 7^th 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.

 

 

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. 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 001, 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 24,956 Class B shares. References throughout this offering circular to the Masterworks 001, LLC “operating agreement” and the “operating agreement” of Masterworks 001, LLC, refer to the Masterworks 001, LLC amended and restated operating agreement that will become effective upon qualification of this offering circular by the SEC and the form of which is filed herewith as Exhibit 2.3 and unless otherwise stated herein, all discussion throughout this offering circular assumes that the amended and restated operating agreement is in full force and effect. Purchasers of our Class A shares in this offering and subsequent purchasers will be deemed to become party to our operating agreement, a form of which is filed as Exhibit 2.3 hereto.

 

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.

 

 

THE OFFERING

 

Class A shares Offered	99,825 Class A shares, on a “best efforts” basis for up to $1,996,500 of gross proceeds. Purchasers of the Class A shares will become members of the Company.
Offering Price per Class A share by the Company	$20.00 per Class A share.
Number of Shares Outstanding Before the Offering	As of the date of this filing, there are 16,015 membership interests of Masterworks 001, LLC currently issued and outstanding, which are held by Masterworks.
Amended and Restated Operating Agreement	Upon qualification of this offering circular by the SEC, Masterworks 001, 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 16,015 membership interests of Masterworks 001, LLC will convert automatically into 24,956 Class B shares of Masterworks 001, LLC. References throughout this offering circular to the “Masterworks 001, LLC operating agreement,” the “operating agreement of Masterworks 001, LLC,” or “our operating agreement” refer to the Masterworks 001, LLC amended and restated operating agreement that will become effective upon qualification of this offering circular by the SEC and the form of which is filed herewith as Exhibit 2.3.
Number of Shares Outstanding After the Offering	99,825 Class A shares.   24,956 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 $20 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 relationships with licensed currency and crypto-currency exchange services providers and or payment processing entities to facilitate such transactions. We do not have any such relationship in place as of the date of this offering circular and we are therefore not currently able to accept those forms of payment. 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, if we accept Bitcoin, Ether or foreign currency, we would 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 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.

  

 

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 001, 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 001, LLC operating agreement) or another private sale transaction (i.e., non-auction sale) and the right to vote on certain amendments to the operating agreement and 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 $1,996,500. 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 $181,500 of the proceeds from this 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, for us to acquire 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.
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.

 

DETERMINATION OF OFFERING PRICE

 

The price per each Class A share was determined by dividing (1) the sum of (a) purchase price that Masterworks paid for the Painting, $1,815,000, plus (b) 10% of such amount which equals 5-years of prepaid administrative fees and non-extraordinary expense reimbursements at the rate of 2% per year by (2) 99,825, which is the total number of Class A shares offered hereby. Masterworks Gallery will own 24,956 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 not fully subscribed, since any unsold Class A shares will be paid to Masterworks as part of the purchase price for the Painting. Prior to this offering, no public market exists for the Class A 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. 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 March 28, 2018 and had no operating history. We cannot make any assurance that our business model can be successful. Since inception, the scope of our operations has been limited to our formation. Our business model includes novel and unique features that are untested. Our operations will be dedicated to acquiring and maintaining the Painting and facilitating the ultimate sale of the Painting. We do not expect to generate any revenues or cash flow until the Painting is sold and no profits will be realized by our investors unless the Painting is sold for more than we acquired it for and there are sufficient funds after all applicable costs, expenses and taxes in order to effectuate a distribution to holders of our Class A 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.

 

 

We do not expect to generate any revenues.

 

Our operations 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 are 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.

 

 

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 of $36,300 per year for the five-year period following the closing of the offering which will be derived from the proceeds of this 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 $3.0 million (hammer price, plus buyer’s premium), the net proceeds available to the Company as the Seller would be expected to be in the range of $2,760,000 to $2,550,000, however, the net result could fall outside of this range. The distribution to you upon dissolution of us following a sale will also be taxable to you depending on your tax basis in the Class A 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

 

 

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

 

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

 

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

 

	●	Qualitative Factors. Differences in perceived quality or condition between the subject work and the so-called “comparable” sale. Perceived differences in the physical quality and condition of the respective works require subjective judgements as to the valuation impact attributable to such differences.
	●	Lack of Reliable Data. Data from non-auction sales, comprising a majority of all sales, is largely unavailable and historical sales data may be inaccurate. Also, data may be stale or unavailable because comparable works may remain off market for extended periods of time, often for generations. Even for public auctions, sale prices may be incorrectly reported due to credits for guarantees entered into with buyers, 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.

 

 

	●	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 currently stored at a warehouse located at 111 Alan Drive, Newark DE 19711 in custody of Delaware Freeport LLC. Shareholders will be notified when the Painting is displayed. We plan to obtain and maintain insurance coverage for the Painting. However, the painting may be damaged while being displayed and our insurance may not be able to cover all of the damages resulting therefrom, and even if insurance does cover such damages, the damages may result in the Painting being unsaleable. Accordingly, damage or destruction of the Painting will have a material adverse impact on the value of the Painting and, consequently, the value of the Class A shares.

 

We may have overpaid for the Painting.

 

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

 

 

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

 

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

 

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

 

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

 

 

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 of the purchase of artwork, and the high values of artwork being sold. An art buyer may typically purchase art when discretionary income is abundant. When economic conditions preclude art collectors from purchasing the Painting, such a downturn in sales will affect our financial projections and could adversely affect results of operations. Additionally, the art market is fueled by leverage, and any changes which would cause art collectors to not access leverage 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.

 

 

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.

 

 

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. If such trading activities generate trading profits, our affiliates may be incentivized not to sell the Painting and liquidate us, even in situations in which a sale of the Painting is in the best interest of holders of our Class A 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.

 

 

Although Masterworks will own 24,956 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 24,956 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.

 

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.

 

 

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 001 , 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.

 

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

 

The initial public offering price for our Class A shares is based on based on a simple formula. The price per each Class A share is equal to the quotient of (1) the sum of (a) the purchase price that Masterworks paid for the painting ($1,815,000), plus (b) 10% of such amount which equals 5-years of prepaid routine administrative fees and expense reimbursements at the rate of 2% per year, divided by (2) 99,825, which is the total number of Class A shares offered in the offering (99,825). In addition, Masterworks will own 24,956 Class B shares representing a 20% profits interest in our Company. 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 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.

 

 

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.

 

 

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. 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 cause a halt, suspend or eliminate trading in our Class A shares for a period of time or indefinitely, thereby impairing the 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 24,956 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 24,956 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 paid in cash at a rate of $36,300 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.

 

 

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 80% of the pro forma net tangible book value per Class A share of our Class A shares outstanding immediately following this offering. However, 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.

 

 

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.

 

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 relating exclusively to compliance with the federal securities laws. Purchasers of shares in a secondary transaction would also be subject to the same arbitration provisions that are currently in our subscription agreement. Such arbitration provision limits the ability of investors to bring class action lawsuits or similarly seek remedies on a class basis for claims subject to the provision. If invoked, the arbitration is required to be conducted in New York, NY in accordance with New York law. The subscription agreement allows for either the Company or an investor to elect to enter into binding arbitration in the event of any covered claim in which the Company and the investor are adverse parties. While not mandatory, in the event that the Company were to invoke the arbitration clause, the rights of the adverse shareholder to seek redress in court would be severely limited. These restrictions on the ability to bring a class action lawsuit may result in increased costs and/or reduced remedies, to individual investors who wish to pursue claims against the Company.

 

DILUTION

 

As of the date of this filing, there are 16,015 membership interests of the Company currently issued and outstanding, which are held by Masterworks. The 16,015 membership interests currently are not convertible.

 

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 16,015 membership interests will convert automatically into 24,956 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 Class B 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 (24,956).
	“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		$	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				8,319				12,478				14,974				16,638
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	%

 

 

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, the value of the Class A shares will be $20 per share based on the offering price 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 16,015 membership interests which will into the Class B shares upon qualification of this offering circular by the SEC . The aggregate cash cost to Masterworks for the 24,956 Class B shares (once they are issued) will be $100.00 (representing the cash payment made in consideration of the issuance of 16,015 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 8,319 of 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 April 16, 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			8,319				0.08	%		$	100				0.0	%			0.01
New investors			99,825				99.92	%		$	1,996,500				100.0	%		$	20.00
Total			108,144				100.0	%		$	1,996,600				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 currently do not, but may decide in the future to also permit payment to be made in Bitcoin, Ether, foreign currency or by credit card if and to the extent we can establish relationships with licensed currency and crypto-currency exchange services providers and or payment processing entities to facilitate such transactions. We do not have any such relationship in place as of the date of this offering circular and we are therefore not currently able to accept those forms of payment. 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.

 

 

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.

 

 

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 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:

 

Up to 250 holder accounts		$	208.33 per month
From 251 to 1000 holder accounts		$	350.00 per month
From 1,001 to 5000 holder accounts (annual fee/monthly billing)		$	3.50 per account
From 5,001 to 15,000 holder accounts (annual fee/monthly billing)		$	3.25 per account
From 15,001 to 25,000 holder accounts (annual fee/monthly billing)		$	3.00 per account

 

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.

 

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

 

We use ERC20 tokens from the Ethereum blockchain to illustrate ownership of our Class A shares in a public ledger. “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 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.

 

Investment Amount Limitations

 

There is no minimum purchase requirement, other than the $20 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.

 

 

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 Andy Warhol. This offering circular as well as amendments to this offering circular after it has been publicly filed and prior to qualification by the SEC will be furnished to prospective investors for their review via download 24 hours per day, 7 days per week on the website as well.

 

 

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, if we chose to accept such payments, 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 subsequent purchasers will be deemed to become party to the Masterworks 001, LLC operating agreement, a form of which is filed as Exhibit 2.3 hereto.

 

	●	Right to Reject Subscriptions. After we receive your complete, executed subscription agreement and the funds required under the subscription agreement have been transferred to the non-interest bearing segregated bank account, we have the right to review and accept or reject your subscription in whole or in part, for any reason or for no reason. We will 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.

 

 

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.

 

 

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.

 

 

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 2001, or the Corporations Act, and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

 

Any offer in Australia of the Class A 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.

 

 

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;

 

 

(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 for the following purposes in the following order. We expect to receive gross proceeds from this offering of up to $1,996,500. The Manager will pay all expenses of the offering, including 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 $181,500 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 will be paid to Masterworks together with any remaining unsold Class A shares, if any, for us to acquire the Painting from Masterworks.

 

DESCRIPTION OF BUSINESS

 

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

 

Overview

 

We were formed as a Delaware limited liability company on March 28, 2018, by Masterworks in order to acquire the Painting. We are a manager-managed limited liability company. Upon our formation, Masterworks was issued 16,015 shares of membership interests of the Company representing 100% of our membership interests. Masterworks Gallery adopted our operating agreement 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.

 

The Painting was purchased by an agent of Masterworks at a public auction held by Phil l ips in November of 2017, for $1,815,000. We are offering up to 99,825 Class A shares for aggregate consideration of up to $1,996,500. We will use $181,500 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, to purchase the Painting. We do not expect to generate any revenues or cash flow unless and until the Painting is sold and no profits will be realized by investors unless the Painting is sold for more than we acquired it for and we have sufficient funds after payment of all associated costs and fees in connection with the sale of the Painting, or the investors are able sell their Class A 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. Following the closing of the offering, we intend to contribute title to the Painting to our wholly owned subsidiary, Masterworks 001 Cayman, LLC, a Cayman Islands limited liability company, which has not yet been formed, but which is planned to be formed prior to the completion of this offering.

 

Pursuant to an administrative services agreement between Masterworks and us to be entered into prior to the completion of the offering, Masterworks will manage all of our administrative services and will maintain the Painting. The Manager will be entitled to receive fees and expense reimbursement for ordinary and necessary administration of our operations, which will be paid in cash at a rate of $36,300 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.

 

Masterworks Experience in the Art Industry

 

Masterworks is a relatively new organization and the transaction reflected in this offering circular is the first such transaction of its kind. Scott W. Lynn, our Founder and Chief Executive Officer 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.

 

 

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 it’s 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 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.

 

 

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, including the following:

 

	●	Postwar and contemporary,
	●	Modern and impressionist,
	●	Chinese and Asian, and
	●	Old Masters.

 

According to the 2018 Art Basel Report, the Post War and Contemporary category, which is generally deemed to represent works created from 1945 through the present day, is the largest category in terms of total dollar value of transactions, representing 46% of global sales in 2017, followed by the Modern category with 27% and the Impressionist and Post-Impressionist category with 17%. The 2014 AXA survey found that 82% of respondents collect contemporary art.

 

Art sales are increasingly highly concentrated among a small group of top selling artists, a trend that has been ongoing over the last decade. According to Artnet, despite auction houses selling works by thousands of artists, only 25 artists were responsible for 37% and 4 5 % of all Post War and Contemporary art auction sales during 2016 and the first six months of 2017, respectively. During the first six months of 2017, the top 25 artists accounted for $1.2 billion of the $2.7 billion total generated by all auction sales in this category worldwide. Rankings among the top ten artists for the six months ended June 30, 2017 in the Post War and Contemporary category were as follows:

 

						Total Sales
Ranking				Artist		(In millions)
	1			Jean-Michel Basquiat		$	242
	2			Andy Warhol		$	123
	3			Roy Lich t enstein		$	84
	4			Gerhard Richter		$	81
	5			Cy Twombly		$	74
	6			Francis Bacon		$	52
	7			Peter Doig		$	47
	8			Cui Ruzhuo		$	46
	9			Yayoi Kusama		$	43
	10			Rudolf Stingel		$	41

 

Art Appraisals, Valuation, and Auction Estimates

 

 

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

 

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

 

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

 

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

 

Private and Gallery Sales

 

According to the Art Basel Report, the relative size of the private 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 2016 according to TEFAF. 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.

 

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.

 

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%.

 

 

The auction market is relatively transparent and more democratic than the gallery market in the sense that anyone willing to pay top dollar can acquire a piece, subject only to compliance with applicable laws. 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 seller typically sets a reserve floor price at which they would be unwilling to sell below. Estimated sales prices at auctions are set by the auction house, with seller’s input, based on a variety of factors, including prior sales, market factors supply considerations and the reserve price floor. If a seller does not agree with the estimate strategy proposed by the auction house, they can elect not to consign the work for sale. Auction estimates are often inaccurate and should not 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 seller or the price paid by a buyer. In addition to the hammer price, a successful bidder must pay the so-called “buyer’s premium,” which is effectively a commission on sale that ranges from between 14% and 25%% of the hammer price. Sotheby’s published buyer’s premiums are 25% for a hammer price up to $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 economics received by a seller in an auction can vary widely. For works of relatively low value, sellers may be required to pay selling commissions to the auctioneer and the auctioneer may retain the full buyer’s premium”. For higher value works, sellers pay no commissions and may be entitled to receive a portion of the buyer’s premium or the amount of the purchase price. If there is a third-party guarantee on the lot, which obligates the guarantor to bid when the auction begins, the net proceeds available to a seller may also be reduced.  In situations in which the auction house issues a guarantee, the seller will receive at least the guaranteed amount and in certain situations the auction house will accept a lower bid to avoid taking an item into inventory, in which instances the seller may receive more than the sale price.

 

Because of the public nature of auction sales, they pose certain risks for sellers.  If a work fails to sell at auction, it represents a public failure, which often makes the work much harder to sell.  The rate at which artworks fail to sell at public auction, referred to as the “buy-in rate,” averages over 30%, according to Artprice, and has averaged 31% for Andy Warhol 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 fail to sell at auction yield 30% less than other paintings.  

 

A practice has emerged in the auction market to obtain guarantees from the auctioneer, which are often backstopped by irrevocable pre-auction bids from unaffiliated third parties . These guarantees effectively provide certainty that the auction will be successful. The downside of obtaining guarantee from a seller’s perspective is that if the work sells in the auction at a hammer price above the guarantee price , the auctioneer will be entitled to receive a portion of the selling price above the guarantee price and the seller will receive less net proceeds from the sale than would have otherwise been the case had the seller not solicited the guarantee . 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 and Christie’s, 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 each of the major auction houses as of the date of this offering circular is as follows (percentages and dollar amounts relate to the hammer price):

 

Sotheby’s		Christie’s		Phillips
25% up to and including $300,000		25% up to and including $250,000		25% up to and including $300,000
20% from $300,001 to $3.0 million		20% from $250,001 to $4.0 million		20% from $300,001 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 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.  The percentage of the buyer’s premium received by the seller, if any, and the amount of any sales commission payable by the seller, if any, 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 high value items it is not unusual for the seller to pay no sales commission and receive a portion of the buyer’s premium, which is commonly referred to in the industry as an “enhanced hammer.”

 

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

 

Pop Art

 

Pop Art is an art movement that emerged in Britain and the United States during the mid- to late-1950s. The movement includes imagery from popular and mass culture, such as advertising, cinema and mundane cultural objects. One of its aims is to use images of popular culture in art, emphasizing the banal or kitschy elements of any culture, most often through the use of irony. It is also associated with the artists’ use of mechanical means of reproduction or rendering techniques. In Pop Art, material is sometimes visually removed from its known context, isolated, or combined with unrelated material (Livingstone, M., Pop Art: A Continuing History, New York: Harry N. Abrams, Inc., 1990).

 

Andy Warhol

 

We believe that Andy Warhol is among the most widely known and best-selling American pop artists. It is estimated that Warhol produced about 10,000 works between 1961, when he gave up graphic design until his death in 1987. The exact number is unknown, though the Warhol Foundation for the Visual Arts is in the process of cataloguing his work. Approximately 200 Andy Warhol paintings are auctioned each year on average. Andy Warhol works sold at auction were $ 427 million in 2013, $ 653 million in 2014, $526 million in 2015 and , according to TEFAF, $16 8 million in 2016. According to Artnet, aggregate pre-sale auction estimates for Warhol works offered at May auctions by the leading auction houses over the eighteen year period from 2000 through 2017 were $2.1 billion, second only to Pablo Picasso at $2.5 billion and significantly above Claude Monet in third place at $1.3 billion. According to auction data published by Artnet, Warhol was ranked the highest grossing artist in 2014 worldwide across categories, the second highest grossing artist in 2015 and the eighth highest grossing artist in 2016. The highest auction prices paid for Andy Warhol paintings were:

 

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

 

 

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

 

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

 

The Artist

 

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

 

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

 

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

 

 

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

 

The Painting

 

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

 

Proven a nce.

 

Bruno Bischofberger Gallery, Zurich

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

 

 

History of Prior Sales.

 

 

 

 

 

 

 

 

 

 

 

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

 

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 paid in cash at a rate of $36,300 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
	●	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 Brokerage 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. The operation of a trading market in the Class A shares by Masterworks Brokerage or the receipt of trading fees would create conflicts of interest. If such trading activities generate trading 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.
	●	Our affiliate, the Manager, will receive fees and expense reimbursement for administration of our operations, which will be paid in cash at a rate of $36,300 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.

 

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,

 

 

	○	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, any person can make an offer to purchase the Painting at any point in time. If such offer constitutes a “Bona Fide Offer” as defined in the Masterworks 001, LLC operating agreement, the 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.

 

 

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 March 28, 2018 by Masterworks in order to acquire the Painting. We are a manager-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, 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, 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 24,956 Class B shares.

 

 

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 July 31 , 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 March 28, 2018 by Masterworks to acquire the Painting. We have not conducted any operations prior to the date of this offering circular and will not conduct any business activities except for activities relating to the ownership, maintenance, promotion and the eventual sale of the Painting. Our strategy will be to display and promote the Painting in a manner designed to enhance its provenance and increase its exposure and its value. We are not aware of any trends, uncertainties, demands, commitments or events that will materially affect our operations or the liquidity or capital resources of the 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.

 

 

Investment in Artwork

 

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

 

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

 

If it is determined that measurement of an impairment loss is necessary, the impairment loss would be calculated based on the difference between the carrying amount of the Painting and the estimated amount realizable upon a sale. 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 April 16, 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 April 16, 2018, we had no federal and state income tax assets, liabilities or expense.

 

Liquidity and Capital Resources of the Manager

 

We will set aside the first $181,500 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. After such initial five-year period, 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 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 $36,300 of additional funds per annum pursuant to the administrative services agreement during the first five years following this offering and 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 equity, 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 $ 129,500 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.

 

 

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, 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 001, 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 24,956 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

 

 

(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 paid in cash at a rate of $36,300 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.

 

 

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.

 

 

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 001, 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.

 

 

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).

 

 

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 001, LLC operating agreement) and shall be fully protected and justified in any action or inaction which is taken or omitted in good faith, in reliance upon and in accordance with the opinion or advice of such counsel or accountants. In determining whether any of the foregoing persons acted with the requisite degree of care, such person shall be entitled to rely on written or oral reports, opinions, certificates and other statements of the 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);

 

 

	●	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 001, 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 share

 

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 001, 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 24,956 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, to purchase the Painting. In other words, if not all of the 99,825 Class A shares are sold in this offering, the remaining Class A shares shall be issued to Masterworks Gallery as part of the payment for the Painting. Further, Masterworks will own 24,956 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.

 

 

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 24,956 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.	$36,300 in cash for each of the first 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.

 

 

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 July 31 , 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 16,015 of our membership interests constituting as of today 100% of the interests in the Company, into 24,956 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, 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 001, 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 24,956 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, 7^th 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 99,825 Class A shares offered in this offering will be sold. If not all of the 99,825 Class A shares are sold in this offering, the remaining Class A shares shall be issued to Masterworks Gallery, LLC as part of the payment for the Painting. Accordingly, Masterworks, “the Trust” and Scott Lynn will be deemed to be the beneficial owners of such additional Class A 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 July 31 , 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)			16,015				100	%			8,139				7.69	%
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)			16,015				100	%			8,139				7.69	%
5% holders:
Masterworks Gallery, LLC(3)			16,015				100	%			8,139				7.69	%

 

	(1)	All named individuals are also members of the Board of Managers of the 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 001 (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.

  

 

	(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 paid in cash at a rate of $36,300 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				8,319				12,478				14,974				16,638
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 001, LLC “operating agreement” refer to the Masterworks 001, 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 March 28, 2018 (our inception) and each currently proposed transaction in which:

 

	●	We have been or will be a participant;
	●	The amount involved exceeds one percent of our total assets; and
	●	In which 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 paid in cash at a rate of $36,300 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.

 

 

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 platform s owned and operated by unaffiliated third part ies , 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, t hat 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.

 

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 intends to 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 purchase the Painting with the proceeds of this offering; and
	●	Other Masterworks entities.

  

 

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 24,956 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, 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 001, 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 24,956 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 to 99,825 of our Class A shares, for an aggregate amount of $1,996,500 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 001, 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 April 19, 2018, Masterworks Gallery was the sole holder of record of 100% of our membership interests consisting of 16,015 membership interest. Upon the execution of our operating agreement at the qualification of this offering, Masterworks ownership interest shall be automatically converted into 24,956 Class B shares representing a 20% profits interest.

 

 

Membership Interests

 

We were formed as a Delaware limited liability company on March 28, 2018 by Masterworks Gallery, our founder, in order to acquire the Painting. We are a manager-managed limited liability company. Upon our formation, Masterworks Gallery was issued 100% of our membership interests. 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, 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 001, 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 24,956 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 001, 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 001, 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 001, LLC. 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 001, 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 16,015 membership interests will convert automatically into 24,956 Class B shares. References throughout this offering circular to the Masterworks 001, LLC “operating agreement” and the “operating agreement” of Masterworks 001, LLC, refer to the Masterworks 001, LLC amended and restated operating agreement that 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 001, LLC operating agreement. This summary is qualified in its entirety by our operating agreement itself, the form of which is included as Exhibit 2.3.

 

Organization and Duration

 

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

 

Purpose and Powers

 

Under the Masterworks 001, LLC operating agreement, we are permitted to engage in such activities as determined by the 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.

 

 

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 001, 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 001, 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);

 

 

(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, there are 16,015 membership interests of the Company currently issued and outstanding, which are held 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 001, 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 24,956 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 99,825 Class A shares outstanding upon closing of the offering 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 24,956 Class B shares outstanding upon closing of the offering 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 (24,956).

 

“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		$	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				8,319				12,478				14,974				16,638
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.

 

 

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 001, LLC operating agreement. Pursuant to the Masterworks 001, 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 001, 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 001, 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 001, 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.

 

 

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 001, 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 purchase the Painting .

 

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 001, 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 001, 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 001, LLC operating agreement.

 

 

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 001, 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 001, 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 relating exclusively to compliance with 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.

 

 

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, 99,825 Class A shares will be outstanding and 24,956 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.

 

 

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 001, LLC and not its subsidiaries, including Masterworks 001 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 001, 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.

 

 

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 001, 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 001, 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 001 Cayman, LLC. Masterworks 001 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 001 Cayman, LLC’s shares, will not be taxed directly on the earnings of Masterworks 001 Cayman, LLC.

 

However, Holders may be required to report directly income earned by Masterworks 001 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 001 Cayman, LLC (other than certain distributions of Masterworks 001 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 001 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 001 Cayman, LLC’s shares and then as capital gain.

 

If, following receipt of a ruling from the IRS, we elected to treat Masterworks 001 Cayman, LLC as an entity disregarded as separate from us, we would directly report any income, gain, loss or deduction of Masterworks 001 Cayman, LLC, and any distributions from Masterworks 001 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.

 

 

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.

 

 

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 001 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 the non-U.S. corporation entitled to vote or 10% or more of the total value of such non-U.S. corporation’s stock. We expect that Masterworks 001 Cayman, LLC will be considered a CFC and that we will be considered a U.S. Shareholder of Masterworks 001 Cayman, LLC.

 

 

Because we expect to be treated as a U.S. Shareholder in a CFC, each Holder will generally be required to include in income for U.S. federal income tax purposes its allocable share of Masterworks 001 Cayman, LLC’s “Subpart F” income reported by us. Subpart F income generally includes passive income such as dividends, interest, net gain from the sale or disposition of securities and non-actively managed rents. The Subpart F income of a CFC is limited to the CFC’s earnings and profits for the taxable year. These inclusions are treated as ordinary income (whether or not such inclusions are attributable to net capital gains). Thus, a Holder may be required to report as ordinary income its allocable share of Masterworks 001 Cayman, LLC’s Subpart F income reported by us without corresponding receipts of cash and may not benefit from capital gain treatment with respect to the portion of our earnings (if any) attributable to net capital gains of Masterworks 001 Cayman, LLC. The tax basis of our shares in Masterworks 001 Cayman, LLC and a Holder’s tax basis in our Class A shares will be increased to reflect any required Subpart F income inclusions. Such income generally will constitute income from sources within the United States for U.S. foreign tax credit purposes. Amounts included as such income would generally not be taxable again when actually distributed. We do not expect that Masterworks 001 Cayman, LLC will earn any income in any taxable year other than gain from the sale of the Painting in the year in which the Painting is sold. Therefore, we do not expect that there will be any Subpart F income of Masterworks 001 Cayman, LLC to be reported by us on an annual basis prior to a sale of the Painting. However, we expect that gain from the sale of the Painting would be treated as Subpart F income.

 

Regardless of whether Masterworks 001 Cayman, LLC has Subpart F income, however, any gain allocated to a Holder from our disposition of Masterworks 001 Cayman, LLC (including any gain from a liquidating distribution by Masterworks 001 Cayman, LLC) will be treated as ordinary income to the extent of such Holder’s allocable share of the current and/or accumulated earnings and profits of Masterworks 001 Cayman, LLC. In this regard, earnings would not include any amounts previously taxed pursuant to the CFC rules, if any. Net losses of Masterworks 001 Cayman, LLC will not pass through to our Holders.

 

If, following receipt of a ruling from the IRS, we elected to treat Masterworks 001 Cayman, LLC as an entity disregarded as separate from us, the CFC rules discussed above would not apply. Instead, we would directly report any income, gain, loss or deduction of Masterworks 001 Cayman, LLC, and any distributions from Masterworks 001 Cayman, LLC would be disregarded for U.S. federal income tax purposes.

 

Passive Foreign Investment Companies.   In general, a corporation organized outside the United States is treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of its gross income is “passive income” or (ii) on average at least 50% of the value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents and gains from commodities transactions and from the sale or exchange of property that gives rise to passive income. In determining whether a non-U.S. corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) generally is taken into account.

 

If Masterworks 001 Cayman, LLC is a PFIC in any taxable year, gain on a disposition by us of shares in Masterworks 001 Cayman, LLC or gain on the disposition of our Class A shares by a Holder at a time when we own shares of Masterworks 001 Cayman, LLC, as well as certain other defined “excess distributions,” will be treated as if the gain or excess distribution were ordinary income earned ratably over the shorter of the period during which the Holder held its Class A shares or the period during which we held our shares in Masterworks 001 Cayman, LLC. However, for so long as Masterworks 001 Cayman, LLC is classified as both a CFC and a PFIC during the time we are a U.S. Shareholder of Masterworks 001 Cayman, LLC, a Holder would be required to include amounts in income with respect to Masterworks 001 Cayman, LLC, if any, pursuant to the subheading “Controlled Foreign Corporations”, and the consequences described under this subheading would not apply. If our ownership percentage in Masterworks 001 Cayman, LLC changes such that we are not a U.S. Shareholder with respect to Masterworks 001 Cayman, LLC, then Holders may be subject to the PFIC rules in the event Masterworks 001 Cayman, LLC is classified as a PFIC. The interaction of these rules is complex, and prospective Holders are urged to consult their tax advisors in this regard.

 

If, following receipt of a ruling from the IRS, we elected to treat Masterworks 001 Cayman, LLC as an entity disregarded as separate from us, neither the CFC nor the PFIC rules would apply to Masterworks 001 Cayman, LLC.

 

 

Taxation of Non-U.S. Holders of Class A Shares

 

Below is a discussion of material U.S. federal income tax considerations applicable to Non-U.S. Holders of our Class A shares and does not purport to address all of the U.S. federal income tax consequences that may be applicable to any particular Non-U.S. Holder. This discussion does not address the tax consequences of purchasing, holding or disposing of our Class A shares to Non-U.S. Holders subject to special rules under U.S. federal income tax laws, such as non-U.S. governments and their controlled entities, non-U.S. pension plans, trusts, former U.S. citizens or residents and individual Non-U.S. Holders that have a “tax home” in the United States. The discussion assumes that a Non-U.S. Holder is not and will not be engaged in a trade or business within the United States, has and will have no U.S. source income apart from its investment in our Class A shares, and, in the case of a Non-U.S. Holder that is an individual, has not been (and will not be) present in the United States for 183 days or more in any taxable year.

 

Interest, Dividends, Etc. A Non-U.S. Holder is subject to U.S. federal withholding tax at the rate of 30% (or at a lower rate if provided by an applicable tax treaty and the Non-U.S. Holder provides the documentation (generally, IRS Form W-8BEN or W-8BEN-E) required to claim benefits under such tax treaty to the applicable withholding agent) on its distributive share of any U.S. source interest (subject to certain exemptions), U.S. source dividends (including, in certain cases, dividend equivalent amounts) and certain other income received by us. We expect that distributions from Masterworks 001 Cayman, LLC will not be treated as U.S. source dividends for withholding purposes.

 

Effectively Connected Income. In general, a non-U.S. person that invests in an entity taxable as a partnership for U.S. federal income tax purposes that is (directly or through entities treated as disregarded from their owners or as partnerships for U.S. federal income tax purposes) “engaged in trade or business within the United States” is itself considered to be engaged in trade or business within the United States and is subject to U.S. federal income tax (including, possibly, in the case of a non-U.S. corporation, the “branch profits” tax), withholding and income tax return filing requirements with respect to its income effectively connected (or treated as effectively connected) with the U.S. trade or business (“ECI”). A non-U.S. person that fails to file a timely U.S. federal income tax return in respect of its ECI may subsequently be precluded from claiming deductions related to the ECI and may be subject to interest and penalties. We believe that our activities as currently contemplated generally will not involve being engaged in a trade or business within the United States, and as a result we expect that neither Masterworks 001 Cayman, LLC nor any Non-U.S. Holder will be treated as deriving ECI as a result of our activities.

 

U.S. Federal Estate Taxes for Non-U.S. Persons.   Individual Non-U.S. Holders will be subject to U.S. federal estate tax on the value of U.S.-situs property owned at the time of their death. Our Class A shares that are owned or treated as owned by an individual Non-U.S. Holder at the time of such Non-U.S. Holder’s death may be considered U.S.-situs property for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax unless an applicable estate tax treaty provides otherwise. Prospective individual holders who are non-U.S. persons are urged to consult their tax advisors concerning the potential U.S. federal estate tax consequences with regard to our Class A shares.

 

Administrative Matters

 

Tax Elections.    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 Code and other relevant tax laws as the Manager deems necessary or appropriate. Accordingly, our Manager can change our tax election to have our company taxed as a corporation in its sole and absolute discretion.

 

Nominee Reporting.    Persons who hold our Class A shares as nominees for another person are required to furnish to us (i) the name, address and taxpayer identification number of the beneficial owner and the nominee; (ii) whether the beneficial owner is (1) a person that is not a U.S. person, (2) a foreign government, an international organization or any wholly owned agency or instrumentality of either of the foregoing, or (3) a tax exempt entity; (iii) the amount and description of Class A shares held, acquired or transferred for the beneficial owner; and (iv) specific information including the dates of acquisitions and transfers, means of acquisitions and transfers, and acquisition costs for purchases, as well as the amount of net proceeds from sales. Brokers and financial institutions are required to furnish additional information, including whether they are U.S. persons and specific information on Class A shares they acquire, hold or transfer for their own account. A penalty is imposed by the Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the Class A shares with the information furnished to us.

 

 

Taxable Year.    We currently intend to use the calendar year as our taxable year for U.S. federal income tax purposes. Under certain circumstances which we currently believe are unlikely to apply, a taxable year other than the calendar year may be required for such purposes.

 

Partnership Audit Rules. We or the Holders may have potential tax liability in the event of an adjustment imposed as a result of a tax audit by the IRS. An audit resulting in an adjustment to any item of our income, gain, loss, deduction or credit (or adjustment of the allocation of any such items among the Holders), and any tax (including interest and penalties) attributable to such adjustment, may be determined and collected at the Company level in the year of such adjustment. In that event, under the operating agreement, the Manager will allocate such tax among the Holders as equitably determined by the Manager, and each Holder may be required to contribute to the Company the amount of such tax allocated to it. As a result, a Holder may bear liability for the adjustment in an amount that exceeds the taxes that the Holder (or its predecessor in interest) would have paid if the adjustment had been applied at the Holder level. Alternatively, the Manager may elect to send an adjusted Schedule K-1 to each person who was a Holder in the taxable year reviewed on audit (the “Push-Out Election”). In that event, each such person (whether a current or former Holder) may elect to pay any resulting tax (including interest and penalties) or, in the case of a person that is itself treated as a partnership or other flow-through vehicle for U.S. federal income tax purposes, such person may further push out the adjustment to the next tier of partners. Non-U.S. Holders may be required to file U.S. tax returns as a result of a Push-Out Election. There is some uncertainty regarding the interpretation and implementation of these partnership audit procedures.

 

Treatment of Withholding Taxes. We will withhold and pay over any U.S. withholding taxes required to be withheld with respect to any Holder and will treat such withholding as a payment to such Holder. Such payment will be treated as a distribution to the extent that the Holder is then entitled to receive a cash distribution. To the extent that such payment exceeds the amount of any cash distribution to which such Holder is then entitled, such Holder shall be required to make prompt payment to us. Similar provisions would apply in the case of taxes withheld from a distribution to us.

 

Information Reporting and Backup Withholding.    If we are required to withhold any U.S. tax on distributions made to any Holder of Class A shares, we will pay such withheld amount to the IRS. Amounts withheld generally will be reported annually to the IRS and to the Holders by the applicable withholding agent.  Distributions made to a U.S. Holder may be subject to backup withholding, unless such U.S. Holder provides the appropriate documentation certifying that, among other things, its taxpayer identification number (“TIN”) is correct, or otherwise establishes an exemption. Such U.S. Holder should use an IRS Form W-9 for this purpose. If such U.S. Holder does not provide its correct TIN and other required information or an adequate basis for exemption, payments made to such U.S. Holder will be subject to backup withholding (currently, at a rate of 24%) and such U.S. Holder may be subject to a penalty imposed by the IRS. Exempt U.S. Holders (including, among others, all corporations) are not subject to these information reporting and backup withholding requirements, provided that, if required, they properly demonstrate their eligibility for exemption. In order for a Non-U.S. Holder to avoid backup withholding, such Non-U.S. Holder should submit the appropriate version of IRS Form W-8, attesting to such Non-U.S. Holder’s foreign status. The failure of such a Non-U.S. Holder to provide the appropriate IRS Form W-8 may result in backup withholding on some or all of the payments made to such Non-U.S. Holder. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a Holder’s U.S. federal income tax liability if the required information is furnished by such Holder on a timely basis to the IRS.

 

If you do not timely provide us with IRS Form W-8 or IRS Form W-9, as applicable, or such form is not properly completed, we may become subject to U.S. backup withholding taxes in excess of what would have been imposed had we received certifications from all Holders. Such excess U.S. backup withholding taxes may be treated by us as an expense that will be borne by all Holders on a pro rata basis (where we are or may be unable to cost efficiently allocate any such excess withholding tax cost specifically to the Holders that failed to timely provide the proper U.S. tax certifications).

 

The proper application to us of rules for withholding under Section 1441 of the Code (applicable to certain dividends, interest and similar items) is unclear. Because the documentation we receive may not properly reflect the identities of Holders at any particular time (in light of possible sales of Class A shares), we may over-withhold or under-withhold with respect to a particular Holder. For example, we may impose withholding, remit that amount to the IRS and thus reduce the amount of a distribution paid to a Non-U.S. Holder. It may be determined, however, that the corresponding amount of our income was not properly allocable to such Non-U.S. Holder, and the withholding should have been less than the actual withholding. Such Non-U.S. Holder would be entitled to a credit against such Non-U.S. Holder’s U.S. tax liability for all withholding, including any such excess withholding, but if the withholding exceeded the Non-U.S. Holder’s U.S. tax liability, the Non-U.S. Holder would be required to apply for a refund to obtain the benefit of the excess withholding. Similarly, we may fail to withhold on a distribution, and it may be determined that the corresponding income was properly allocable to a Non-U.S. Holder and withholding should have been imposed. In that event, we may determine to pay the under-withheld amount to the IRS, and we may treat such under-withholding as an expense that will be borne by all partners on a pro rata basis (since we may be unable to allocate any such excess withholding tax cost to the relevant Non-U.S. Holder).

 

 

Reportable Transactions

 

If the U.S. federal tax rules relating to “reportable transactions” are applicable to us (or any of the transactions undertaken by us), Holders that are required to file U.S. federal income tax returns (and, in some cases, certain direct and indirect interest holders of certain Holders) would be required to disclose to the IRS information relating to the Company and our transactions, and to retain certain documents and other records related thereto. Although we do not believe that the purchase of our Class A shares is a reportable transaction, there can be no assurance that the IRS will not take a contrary position. In addition, an interest in the Company could become a reportable transaction for Holders in the future, for example if we generate certain types of losses that exceed prescribed thresholds or if certain other events occur. It is also possible that a transaction undertaken by us will be a reportable transaction for Holders. Substantial penalties may be imposed on taxpayers who fail to comply with these laws.

 

In addition, other tax laws impose substantial excise taxes and additional reporting requirements and penalties on certain tax-exempt investors (and, in some cases, the managers of tax-exempt investors) that are, directly or in some cases indirectly, parties to certain types of reportable transactions.

 

FATCA

 

Under the Foreign Account Tax Compliance Act provisions of the Code and related U.S. Treasury guidance (“FATCA”), a withholding tax of 30% will be imposed in certain circumstances on (i) payments of certain U.S. source income (including interest and dividends) and gross proceeds from the sale or other disposition after December 31, 2018, of property that can produce U.S. source interest or dividends (“withholdable payments”) and (ii) payments made after December 31, 2018 (or, if later, the date on which the final U.S. Treasury regulations that define “foreign passthru payments” are published) by certain foreign financial institutions (such as banks, brokers, investment funds or certain holding companies) (“FFIs”) that are “attributable” to withholdable payments (“foreign passthru payments”). It is uncertain at present when payments will be treated as “attributable” to withholdable payments.

 

FATCA may also apply to certain non-U.S. entities held by or affiliated with us, including Masterworks 001 Cayman, LLC.

 

Although the application of FATCA to a sale or other disposition of an interest in an entity treated as a partnership for U.S. federal income tax purposes is unclear, it is possible that the gross proceeds from the sale or other disposition of an interest in the Company may be subject to tax under FATCA.

 

Each Holder should consult its own tax advisor regarding the application of FATCA to an investment in the Company.

 

Certain State, Local and Non-U.S. Tax Considerations

 

The foregoing discussion does not address the U.S. state and local or non-U.S. tax consequences of the purchase, ownership and disposition of our Class A shares. Holders may be subject to certain U.S. state and local and non-U.S. taxation, and tax return filing requirements, in the jurisdictions of our activities or investments. Holders may not receive the relevant tax information prior to when their tax return reporting obligations become due and may need to file for extensions. Prospective Holders are urged to consult their own tax advisors regarding U.S. state and local and non-U.S. tax matters.

 

 

ADDITIONAL REQUIREMENTS AND RESTRICTIONS

 

State Securities – Blue Sky Laws

 

There is no established public market for our Class A shares, and there can be no assurance that any market will develop in the foreseeable future. Transfer of our Class A shares may also be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “Blue Sky” laws. Absent compliance with such individual state laws, our Class A shares may not be traded in such jurisdictions. Because the securities qualified hereunder have not been registered for resale under the blue sky laws of any state, the holders of such Class A shares and persons who desire to purchase them in any trading market that might develop in the future, should be aware that there may be significant state blue-sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. Accordingly, investors may not be able to liquidate their investments and should be prepared to hold the Class A shares for an indefinite period of time.

 

We will consider applying for listing in Mergent, Inc., a leading provider of business and financial information on publicly listed companies, which, once published, will provide us with “manual” exemptions in approximately 39 states as indicated in CCH Blue Sky Law Desk Reference at Section 6301 entitled “Standard Manuals Exemptions.”

 

Thirty-nine states have what is commonly referred to as a “manual exemption” for secondary trading of securities such as those to be resold by selling Class A shareholders. In these states, so long as we obtain and maintain a listing in a securities manual recognized by the state such as Mergent, Inc., Moody’s Investor Service or Standard and Poor’s Corporate Manual, secondary trading of our Class A shares can occur without any filing, review or approval by state regulatory authorities. These states are: Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. If we can secure this listing in such securities manuals, only then secondary trading can occur in these states without further action.

 

We currently do not intend to and may not be able to qualify securities for resale in other states which require Class A shares to be qualified before they can be resold by our Class A shareholders.

 

Restrictions Imposed by the USA PATRIOT Act and Related Acts

 

In accordance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, the securities offered hereby may not be offered, sold, transferred or delivered, directly or indirectly, to any “unacceptable investor,” which means anyone who is:

 

	●	A “designated national,” “specially designated national,” “specially designated terrorist,” “specially designated global terrorist,” “foreign terrorist organization,” or “blocked person” within the definitions set forth in the Foreign Assets Control Regulations of the United States, or U.S., Treasury Department;
	●	Acting on behalf of, or an entity owned or controlled by, any government against whom the U.S. maintains economic sanctions or embargoes under the Regulations of the U.S. Treasury Department;
	●	Within the scope of Executive Order 13224 — Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism, effective September 24, 2001;

 

 

	●	A person or entity subject to additional restrictions imposed by any of the following statutes or regulations and executive orders issued thereunder: the Trading with the Enemy Act, the National Emergencies Act, the Antiterrorism and Effective Death Penalty Act of 1996, the International Emergency Economic Powers Act, the United Nations Participation Act, the International Security and Development Cooperation Act, the Nuclear Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the Foreign Operations, Export Financing and Related Programs Appropriations Act or any other law of similar import as to any non-U.S. country, as each such act or law has been or may be amended, adjusted, modified or reviewed from time to time; or
	●	Designated or blocked, associated or involved in terrorism, or subject to restrictions under laws, regulations, or executive orders as may apply in the future similar to those set forth above.

 

ERISA CONSIDERATIONS

 

An investment in us by an employee benefit plan is subject to additional considerations because the investments of these plans are subject to the fiduciary responsibility and prohibited transaction provisions of ERISA and restrictions imposed by Section 4975 of the Code. For these purposes the term “employee benefit plan” includes, but is not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh plans, simplified employee pension plans and tax deferred annuities or IRAs established or maintained by an employer or employee organization. Among other things, consideration should be given to:

 

	●	Whether the investment is prudent under Section 404(a)(1)(B) of ERISA;
	●	Whether in making the investment, that plan will satisfy the diversification requirements of Section 404(a)(1)(C) of ERISA; and
	●	Whether the investment will result in recognition of unrelated business taxable income by the plan and, if so, the potential after-tax investment returns.

 

The person with investment discretion with respect to the assets of an employee benefit plan, often called a fiduciary, should determine whether an investment in us is authorized by the appropriate governing instrument and is a proper investment for the plan.

 

Section 406 of ERISA and Section 4975 of the Code prohibit employee benefit plans from engaging in specified transactions involving “plan assets” with parties that are “parties in interest” under ERISA or “disqualified persons” under the Code with respect to the plan.

 

In addition to considering whether the purchase of Class A shares is a prohibited transaction, a fiduciary of an employee benefit plan should consider whether the plan will, by investing in us, be deemed to own an undivided interest in our assets, with the result that our operations would be subject to the regulatory restrictions of ERISA, including its prohibited transaction rules, as well as the prohibited transaction rules of the Code.

 

The Department of Labor regulations provide guidance with respect to whether the assets of an entity in which employee benefit plans acquire equity interests would be deemed “plan assets” under some circumstances. Under these regulations, an entity’s assets would not be considered to be “plan assets” if, among other things:

 

(1) The equity interests acquired by employee benefit plans are publicly offered securities - i.e., the equity interests are widely held by 100 or more investors independent of the issuer and each other, freely transferable and registered under some provisions of the federal securities laws;

 

(2) The entity is an “operating company”—i.e., it is primarily engaged in the production or sale of a product or service other than the investment of capital either directly or through a majority-owned subsidiary or subsidiaries; or

 

 

(3) There is no significant investment by benefit plan investors, which is defined to mean that less than 25% of the value of each class of equity interest is held by the employee benefit plans referred to above.

 

We do not intend to limit investment by benefit plan investors in us because we anticipate that we will qualify as an “operating company”. If the Department of Labor were to take the position that we are not an operating company and we had significant investment by benefit plans, then we may become subject to the regulatory restrictions of ERISA which would likely have a material adverse effect on our business and the value of the Class A shares.

 

Plan fiduciaries contemplating a purchase of the Class A shares should consult with their own counsel regarding the consequences under ERISA and the Code in light of the serious penalties imposed on persons who engage in prohibited transactions or other violations.

 

 

ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF PLANS IS IN NO RESPECT A REPRESENTATION BY OUR COMPANY OR ANY OTHER PARTY RELATED TO THE COMPANY THAT THIS INVESTMENT MEETS THE RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY ANY PARTICULAR PLAN OR THAT THIS INVESTMENT IS APPROPRIATE FOR ANY PARTICULAR PLAN. THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN US IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN.

 

 

LEGAL MATTERS

 

The validity of the securities offered by this offering circular will be passed upon for us by Legal & Compliance, LLC, 330 Clematis Street, Suite 217, West Palm Beach, Florida 33401.

 

EXPERTS

 

Our balance sheet as of April 16, 2018 included in this offering circular has been audited by Mayer Hoffman McCann, P.C., an independent registered public accounting firm, as indicated in their report with respect thereto, and have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.

 

APPOINTMENT OF AUDITOR

 

On April 19, 2018, our Manager appointed Mayer Hoffman McCann, P.C. as our independent registered public accounting firm. Mayer Hoffman McCann, P.C. audited our balance sheet as of April 16, 2018 which has been included in this offering circular and Mayer Hoffman McCann, P.C. has been engaged as our independent registered public accounting firm for our fiscal year ended December 31, 2018. Prior to engaging Mayer Hoffman McCann, P.C. as our independent registered public accounting firm, we did not have an independent registered public accounting firm to audit our financial statements.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed an offering statement on Form 1-A with the SEC under Regulation A of the Securities Act with respect to the Class A shares offered by this offering circular. This offering circular, which constitutes a part of the offering statement, does not contain all of the information set forth in the offering statement or the exhibits and schedules filed therewith. Statements contained in this offering circular regarding the contents of any contract or any other document that is filed as an exhibit to the offering statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the offering statement. The offering statement, including its exhibits and schedules, may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the offering statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.

 

 

We also maintain a website at the website address of Masterworks.io located at www.masterworks.io. After the completion of this offering, you may access these materials at our website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on our website is not a part of this offering circular and the inclusion of our website address in this offering circular is an inactive textual reference only.

 

After the completion of this Tier II, Regulation A offering, we intend to become subject to the information and periodic reporting requirements of the Exchange Act. If we become subject to the reporting requirements of the Exchange Act, we will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and on the SEC’s website referred to above. Until we become or never become subject to the reporting requirements of the Exchange Act, we will furnish the following reports, statements, and tax information to each holder of Class A shares:

 

	1.	Reporting Requirements under Tier II of Regulation A. Following this Tier II, Regulation A offering, we will be required to comply with certain ongoing disclosure requirements under Rule 257 of Regulation A. We will be required to file: an annual report with the SEC on Form 1-K; a semi-annual report with the SEC on Form 1-SA; current reports with the SEC on Form 1-U; and a notice under cover of Form 1-Z. The necessity to file current reports will be triggered by certain corporate events, similar to the ongoing reporting obligation faced by issuers under the Exchange Act, however the requirement to file a Form 1-U is expected to be triggered by significantly fewer corporate events than that of the Form 8-K. Such reports and other information will be available for inspection and copying at the public reference room and on the SEC’s website referred to above. Parts I & II of Form 1-Z will be filed by us if and when we decide to and are no longer obligated to file and provide annual reports pursuant to the requirements of Regulation A.
	2.	Annual Reports. As soon as practicable, but in no event later than one hundred twenty (120) days after the close of our fiscal year, ending on the last Sunday of a calendar year, the Manager will cause to be mailed or made available, by any reasonable means, to each holder of Class A shares as of a date selected by the Manager, an annual report containing our financial statements for such fiscal year, presented in accordance with GAAP, including a balance sheet and statements of operations, company equity and cash flows, with such statements having been audited by an accountant selected by the Manager. The Manager shall be deemed to have made a report available to each holder of Class A shares as required if it has either (i) filed such report with the SEC via its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system and such report is publicly available on such system or (ii) made such report available on any website maintained by us and our affiliate and available for viewing by holder of Class A shares.
	3.	Tax Information. As soon as practicable following the end of our fiscal year, which is currently January 1st through December 31st, we will send to each holder of Class A shares such tax information as shall be reasonably required for federal and state income tax reporting purposes.

  

 

INDEX TO FINANCIAL STATEMENTS OF MASTERWORKS 001, LLC

 

		Page
Independent Auditors’ Report		F-1
Balance Sheet as of April 16, 2018		F-2
Notes to Balance Sheet		F-3

 

 

INDEPENDENT AUDITORS’ REPORT

 

To the Manager and Member

Masterworks 001, LLC

 

We have audited the accompanying balance sheet of Masterworks 001, LLC as of April 16, 2018, and the related notes to the balance sheet.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of this financial statement in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of this financial statement that is free from material misstatement, whether due to fraud or error.

 

Auditors’ Responsibility

 

Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statement. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statement in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statement.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Masterworks 001, LLC as of April 16, 2018 in accordance with accounting principles generally accepted in the United States of America.

 

/s/ Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Kansas City, Missouri

July 31, 2018

 

 

MASTERWORKS 001, LLC

 

Balance Sheet

 

April 16, 2018

 

ASSETS
Cash and Cash Equivalents		$	100
Total Assets		$	100
LIABILITIES AND MEMBER’S EQUITY
Member’s Equity		$	100
Total Liabilities and Member’s Equity		$	100

 

 

MASTERWORKS 001, LLC

 

NOTES TO BALANCE SHEET

 

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Organization – Masterworks 001, LLC (the “Company”) was formed as a manager-managed Delaware limited liability company to purchase, a painting by Andy Warhol, known as 1 Colored Marilyn (Reversal Series), 1979, Oil and silkscreen inks on canvas (the “Painting”). The Company intends to offer membership interests to enable investors to diversify their portfolios with a long-term investment in fine artwork. The Company’s manager is Masterworks Administrative Services, LLC (the “Manager”). 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.

 

Basis of Accounting – The preparation of the balance sheet and related notes of the Company are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States which requires management to make estimates and assumptions that affect the amounts reported in the balance sheet and accompanying notes. Actual results could materially differ from those estimates.

 

Cash and Cash Equivalents - As of April 16, 2018, our cash and cash equivalents consisted of cash held in an FDIC insured bank account. Cash equivalents are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

Concentration of Credit Risk – The Company maintains its cash in bank accounts in amounts that may exceed federally insured limits at times. The Company has not experienced any losses in these accounts in the past, and management believes the Company is not exposed to significant credit risks as they periodically evaluate the strength of the financial institutions in which it deposits funds.

 

Income Taxes – The Company is a limited partnership and generally is not subject to federal or state income taxes. Accordingly, our taxable income or loss, which may vary substantially from income or loss reported for financial reporting purposes, will be included in the federal and state income tax returns of the Company’s members based upon their respective share of the Company’s income and expenses as reported for income tax purposes. Accordingly, no provision for income taxes is reflected in the accompanying financial statements. For the current tax year and for all major taxing jurisdictions, the Manager has concluded that the Company is a pass-through entity and there are no uncertain tax positions that would require recognition in the financial statements. If the Company were to incur an income tax liability in the future, interest on any income tax liability would be reported as interest expense and penalties on any income tax liability would be reported as income taxes. The Manager does not expect that its assessment regarding unrecognized tax positions will materially change over the next 12 months. However, the Manager’s conclusions regarding uncertain tax positions may be subject to review and adjustment at a later date based upon ongoing analyses of tax laws, regulations and interpretations thereof as well as other factors including but not limited to, questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, compliance with U.S., State and foreign income tax laws, and changes in administrative practices and precedents of the relevant taxing authorities. Generally, Federal, State and Local authorities may examine the Company’s tax returns for three years from the date of filing.

 

 

MASTERWORKS 001, LLC

 

NOTES TO BALANCE SHEET

 

1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

Investment in Artwork – Investment in artwork will consist of the Painting. Once purchased, the Painting will be recorded at cost, which is the purchase price the Company pays for the Painting from its affiliate, Masterworks Gallery, LLC. Artwork is determined to have an indefinite life. The Company will review the artwork for impairment in accordance with the requirements of ASC 360-10, Impairment and Disposal of Long-Lived Assets (“ASC 360”). Those requirements will require the Company to perform an impairment analysis whenever events or changes in circumstances indicate that the carrying amount of the artwork might not be recoverable, i.e., information indicates that an impairment might exist. In accordance with ASC 360, the Company will:

 

●

Consider whether indicators of impairment are present. Indicators or triggers of impairment management considers are: deteriorating physical condition of the artworks, 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 artwork, to its carrying value; and
	●	If the amount realizable upon sale of the artwork is deemed to be less than its carrying value, the Company 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 artwork and its estimated fair value. An impairment loss would be reported as a component of income from continuing operations before income taxes in the Company’s financial statements.

 

Revenue Recognition – The Company does not plan to generate revenue until the artwork is sold at some undetermined future date. At the time of sale, revenue will be recognized upon the sale’s effective date.

 

Expenses – The Company’s expenses are covered under the annual administrative services fee, which covers all normal operating costs of the Company. The annual administrative services fee is paid to Masterworks Administrative Services, LLC in additional membership interest and will be accounted for as a management fee expense and, after the five-year anniversary of the offering, anequity issuance in the Company’s financial statements. Organization and offering costs of the Company are being paid by the Manager and its affiliates on behalf of the Company. These organization and offering costs include all expenses relating to the formation of the Company and the qualification of the Offering, and the marketing and distribution of Class A shares, including, without limitation, expenses for printing, and amending offering statements or supplementing offering circulars, mailing and distributing costs, telephones, Internet and other telecommunications costs, all advertising and marketing expenses, charges of experts and fees, expenses and taxes related to the filing, registration and qualification of the sale of Class A shares under federal and state laws, including taxes and fees and accountants’ and attorneys’ fees. The Company is not required to reimburse the Manager for any of these costs. 

 

2.	RISKS & UNCERTAINTIES

 

The Company is a new company and has no operating history to assess the future viability of its business model. The Company’s single asset is an investment in artwork which can decline in value or become worthless due to economic factors, trend in the art market, changes in the condition of the artwork among other factors.

 

Under various agreements, the Company has engaged or will engage the Manager to provide certain services that are essential to the Company such as storage, insurance, display, transport, SEC filings and compliance, transfer agent fees and other normal operating expenses. As a result of these relationships, the Company is dependent upon the Manager. In the event that the Manager is unable to provide the Company with the respective services, the Company would be required to find alternative providers of these services.

 

3.	SUBSEQUENT EVENTS

 

On June 8, 2018, the Company adopted an operating agreement which, among other things, memorializes the issuance to Masterworks Gallery, LLC, of 16,015 membership interests represented by common shares which represent 100% of the issued and outstanding membership interests in the Company, effective upon formation of the Company on March 28, 2018. During 2018, the Company anticipates filing Form 1-A with the SEC in order to qualify the offering and sale of 99,825 of its Class A shares, representing 80% of its membership interests, in a Tier 2 offering under Regulation A. The Company anticipates that the initial offering price per Class A share will be $20.00, thereby raising $1,996,500 of capital. With such capital, the Company intends to purchase the Painting from a related party at a purchase price of $1,815,000 and retain the balance of the proceeds to pay the Manager for administrative fees and expense reimbursements for the first five years following the closing of the offering. If the offering is not fully subscribed, the Company intends to issue Masterworks Gallery the unsold Class A shares as partial consideration for the Painting. Upon qualification of this offering circular by the SEC , the Company intends to adopt an amended and restated operating agreement and shall issue 24,956 Class B shares to Masterworks upon conversion in full of its then existing 100% ownership interest in the Company.

 

Upon issuance, the Class A shares will represent membership interests having economic rights to the Company, with certain voting and approval rights. The Class B shares shall have no voting rights, except as may be required by law, and shall represent a 20% “profits interest” in the Company’s fully diluted equity. The Class B shares will entitle the holder 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. Except for certain voting and approval rights of the Class A shares, the Manager will control all other matters in accordance with the amended and restated operating agreement.

 

Masterworks Gallery, LLC is the owner of the Painting and the owner holding the 100% membership interest of the Company as of the date of this balance sheet. Masterworks Administrative Services, LLC, is the company that will contractually provide administrative services to the Company. Masterworks Gallery, LLC and Masterworks Administrative Services, LLC are each wholly-owned and controlled by Masterworks.io, LLC and are thus considered to be related parties to the Company.

 

Upon issuance of the Class A shares, an administrative services agreement with the Manager will become effective. The expected annual administrative services fee will be will be funded from the proceeds of the offering for the first five years and via issuance of Class A shares to the Manager at a rate of 2% of the total Class A shares outstanding (excluding shares issuable upon conversion of Class B shares) per annum after the first five years and will be recorded as an administrative fee expense in the Company’s financial statements. The annual administrative services fee is anticipated to cover all normal operating costs of the Company, including storage, insurance, display, transport, SEC filings and compliance, transfer agent fees; other fees associated with the offering, and accounting. However, the Manager will charge the Company for any extraordinary costs and payments, which are expected to be defined as costs and payments associated with litigation, arbitration or judicial proceedings; material or extraordinary transactions related to a merger, third-party tender offer, or other similar transaction; selling the Painting. For any extraordinary costs incurred or payments made on behalf of the Company, the Company will show the expense on its statement of operations in the year of occurrence, as well as carry forward a due to related party liability on its balance sheet in perpetuity, until the Painting is sold and the resulting proceeds can be used to settle the liability to the Manager.

 

As part of the potential administrative services agreement, the Manager will be required to provide the Company with evidence and detail of the extraordinary costs for which it will be entitled to reimbursement. In addition, the Manager is required to obtain and maintain the necessary capital to fulfill its obligations under the administrative services agreement and to remain solvent. The Manager will report to the Company on a semi-annual basis its current and total assets, current and total liabilities, and total equity and the Company intends to include such amounts in its SEC reports.

 

 

MASTERWORKS 001, LLC

 

 

Best Efforts Offering of

$1,996,500 Maximum Offering Amount (99,825 Class A shares)

 

OFFERING CIRCULAR

 

 

PART III – EXHIBITS

 

Index to Exhibits

 

Exhibit
No.		Exhibit Description
2.1		Certificate of Formation of Masterworks 001, LLC filed with Delaware Secretary of State on March 28, 2018.*
2.2		Operating Agreement of Masterworks 001, LLC. *
2.3		Form of Amended and Restated Operating Agreement. *
4.1		Form of Subscription Agreement for Regulation A Offering. *
6.1		Form of Purchase Agreement, between Masterworks Gallery, LLC and Masterworks 001, LLC.*
6.2		Transfer Agency and Service Agreement, dated XXXX XX, 2018, among Computershare, Inc., Computershare Trust Company, N.A. and Masterworks 001, LLC. **
6.3		Form of Administrative Services Agreement, dated XXXX XX, 2018, among Masterworks Administrative Services, LLC and Masterworks 001, LLC.*
10.1		Power of attorney. (Included on signature page of Offering Circular).*
11.1		Consent of Mayer Hoffman McCann, P.C.*
11.2		Consent of Legal & Compliance, LLC (included in Exhibit 12.1)*.
12.1		Opinion of Legal & Compliance, LLC.*
13.1		Testing the Waters materials.*

 

 

* Filed herewith.

* * To be filed by amendment.

 

 

SIGNATURES

 

Pursuant to the requirements of Regulation A, the registrant has duly caused this Form 1-A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on July 31 , 2018.

 

	MASTERWORKS 001, LLC By: Masterworks Administrative Services, LLC, its manager
	By:	/s/ Joshua B. Goldstein
		Joshua B. Goldstein
		Interim Chief Financial Officer, General Counsel and Secretary

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joshua B. Goldstein as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including all pre-qualification and post-qualification amendments) to this Form 1-A offering statement and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact and agent or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of Regulation A, this Form 1-A has been signed by the following persons in the capacities indicated on July 31 , 2018.

 

Name		Title
/s/ Scott W. Lynn		Chief Executive Officer and Member of Board of Managers of Masterworks Administrative Services, LLC
Scott W. Lynn		(Principal Executive Officer)
/s/ Joshua B. Goldstein		Interim Chief Financial Officer, General Counsel, Secretary  and Member of the Board of Managers of Masterworks Administrative
Joshua B. Goldstein		Services, LLC (Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 

 

 

 

LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF

MASTERWORKS 001, LLC

 

This Limited Liability Company Operating Agreement (this “Agreement”) of Masterworks 001, LLC, a Delaware limited liability company (the “Company”), is executed this 8^th day of June 2018, effective as of March 28, 2018, and is entered into by Masterworks Galley, LLC as its sole initial Member (the “Member”).

 

R E C I T A L S:

 

WHEREAS, the Company has heretofore been formed as a limited liability company under the Delaware Act (as defined below) pursuant to a Certificate of Formation filed with the Secretary of State of the State of Delaware on March 28, 2018.

 

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Member hereby agrees, as follows:

 

1.	The Company shall be a member-managed company for all purposes of the Chapter 18 of Subtitle II of Title 6 of the Delaware Code, referred to as the Delaware Limited Liability Company Act, as amended from time to time, and any successor thereto (the “Delaware Act”). The Company was formed on March 28, 2018 and shall continue its regular business activities until the Company is dissolved. The Company shall possess and may exercise all the powers and privileges granted by the Delaware Act or by any other law or by this Agreement, together with any powers incidental thereto, which are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the Company.
2.	The name of the Company is “Masterworks 001, LLC.” All business of the Company shall be conducted under such name. The Member may elect to change the name of the Company at any time. The principal office of the Company shall be at a location as determined by the Member either within or outside of the United States.
3.	Upon the formation of the Company, the Member has been issued 16,015 membership interests of the Company represented by common shares, which constitute all of the membership interests of the Company, in exchange for a capital contribution to the Company in the amount of $100.
4.	At any time, the Member may appoint and replace individuals as officers or agents of the Company (“Officers”) with such titles as the Member may elect to act on behalf of the Company with such power and authority as the Member may delegate to such persons. The Officers, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Member not inconsistent with this Agreement, are agents of the Company for the purpose of the Company’s business and the actions of the Officers taken in accordance with such powers shall bind the Company. Scott Lynn is hereby designated as the Chief Executive Officer and Secretary of the Company, to serve in such capacity until his earlier death, resignation or removal from office.

 

 

5.	The liability of each Member shall be limited as provided in the Delaware Act and as set forth in this Agreement. No Members, Officer or other person or entity who serves at the request of the Member on behalf of the Company as an officer, director, partner, member, stockholder or employee of any other person (each a “Protected Person”) shall be liable to the Company or the Member or any other Member for any action taken or omitted to be taken by it or by other person with respect to the Company, 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 this Agreement or conduct that is subject of a criminal proceeding (where such Protected Person has reasonable cause to believe that such conduct was unlawful).
6.	To the fullest extent permitted by law, the Company shall 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 this Agreement, and any amounts expended in respect of settlements of any claims approved by the Member, 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 the Company; and (ii) by reason of the fact that it is or was acting in connection with the activities of the Company in any capacity or that it is or was serving at the request of the Company as a partner, shareholder, member, director, 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 this Agreement or conduct that is subject of a criminal proceeding (where such Protected Person has reasonable cause to believe that such conduct was unlawful). The covenants and agreements set forth in Section 6 and this Section 7 shall survive the termination of the Company.
7.	Any provision of this Agreement may be amended or waived only by an instrument in writing executed by the Member.
8.	In case any provision in this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired hereby. The headings in this Agreement are inserted for convenience of reference only and shall not affect the interpretation of this Agreement. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

 

[Signatures appear on following page]

 

 

IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date first written above.

 

	Masterworks Galley, LLC
	Sole Member
	Josh Goldstein
	General Counsel

 

 

 

 

AMENDED AND RESTATED

 

LIMITED LIABILITY COMPANY OPERATING AGREEMENT

 

OF

 

MASTERWORKS 001, LLC

 

________________________________

 

May [___], 2018
________________________________

 

 

 

Table of Contents

 

	Page
ARTICLE 1 GENERAL PROVISIONS	1
1.1 Definitions	1
1.2 Name	6
1.3 Principal Office	6
1.4 Registered Office and Registered Agent	6
1.5 Term	6
1.6 Purpose and Powers	6
1.7 Power of Attorney.	6
ARTICLE 2 MANAGEMENT; MEMBERS AND SHARES	8
2.1 Rights and Duties of the Manager.	8
2.2 Officers	9
2.3 Members.	9
2.4 Shares; Membership Interests	10
2.5 Certificates and Representations of Shares.	12
2.6 Record Holders.	12
2.7 Registration and Transfer of Shares.	13
2.8 Voting.	14
2.9 Removal or Replacement of the Manager	16
2.10 Withdrawal of the Manager	17
2.11 Ownership Limitation.	17
ARTICLE 3 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNT; DISTRIBUTIONS; ALLOCATIONS	17
3.1 Capital Contributions	17
3.2 Capital Account	17
3.3 Distributions	18
3.4 Tax Allocations.	19
ARTICLE 4 LIABILITY; INDEMNIFICATION	20
4.1 Liability of a Member	20
4.2 Exculpation and Indemnification	20
ARTICLE 5 ACCOUNTING; FINANCIAL AND TAX MATTERS	21
5.1 Accounting Basis	22
5.2 Tax Matters	22
ARTICLE 6 DISSOLUTION; WINDING UP; TERMINATION	23
6.1 Dissolution	24
6.2 Winding Up and Termination	24
6.3 Assets Reserved and Pending Claims	25

 

 

ARTICLE 7 MEMBER MEETINGS	25
7.1 Member Meetings.	25
7.2 Notice of Meetings of Members.	26
7.3 Record Date.	26
7.4 Adjournment.	26
7.5 Waiver of Notice; Approval of Meeting.	27
7.6 Quorum; Required Vote.	27
7.7 Conduct of a Meeting; Member Lists.	27
7.8 Action Without a Meeting.	28
7.9 Voting and Other Rights.	28
7.10 Proxies and Voting.	28
ARTICLE 8 MISCELLANEOUS	29
8.1 Addresses and Notices.	29
8.2 Amendments; Waiver.	30
8.3 Successors and Assigns	30
8.4 No Waiver	30
8.5 Survival of Certain Provisions	30
8.6 Corporate Treatment.	30
8.7 Section 7704(e) Relief.	30
8.8 Severability	30
8.9 Interpretation	31
8.10 No Third-Party Rights	31
8.11 Entire Agreement	31
8.12 Rule of Construction	31
8.13 Authority	31
8.14 Governing Law	31
8.15 Facsimile Signatures.	31
8.16 Counterparts.	31

 

	Exhibit A	Members, Capital Contributions, Shares
	Schedule 1	Painting

 

 

AMENDED AND RESTATED

LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF

MASTERWORKS 001, LLC

 

This Amended and Restated Limited Liability Company Operating Agreement (this “Agreement”) of Masterworks 001, LLC, a Delaware limited liability company (the “Company”), is dated as of May [___], 2018, and is entered into by Masterworks Galley, LLC as its sole initial Member (the “Initial Member”).

 

R E C I T A L S:

 

A. The Company has heretofore been formed as a limited liability company under the Delaware Act (as defined below) pursuant to a Certificate of Formation filed with the Secretary of State of the State of Delaware on March 28, 2018.

 

B. The Initial Member has entered into that certain Limited Liability Company Operating Agreement, dated as of May 30, 2018 (the Original Agreement”) and now desires to amend and restate the Original Agreement in its entirety as set forth herein;

 

C. The Company and the Initial Member acknowledge the status of the Company initially, prior to the admission of one or more additional Persons (defined hereinafter) as Members, as a disregarded entity for U.S. federal income tax purposes whose U.S. federal income taxable attributes, if any, would be deemed attributed solely to the Initial Member as its sole member; provided, however, owing to the contemplation of the imminent admission of one or more Persons as additional Members, upon such occurrence, the Company would be deemed to have become classified as a partnership for U.S. federal income tax purposes by default. Accordingly, this Agreement has been intentionally structured contemplating that eventuality, through its implementation of certain applicable concepts of U.S. federal partnership tax law, and prescription of certain processes and procedures incidental to such tax classification, that would become applicable only upon admission of such one or more Persons as additional Members.

 

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Original Agreement is hereby amended and restated in its entirety to provide as set forth herein, and the Initial Member hereby agrees as follows:

 

ARTICLE 1 GENERAL PROVISIONS

 

1.1 Definitions. For the purpose of this Agreement, the following terms shall have the following meanings:

 

(a) “Administrative Services Agreement” has the meaning set forth in Section 2.1(b).

 

(b) “Affiliate” means, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. For the purposes of this definition, the term “controls,” “is controlled by” or “under common control with” means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities, by contract or otherwise. No Member shall be deemed to be an “Affiliate” of the Company solely by reason of being a Member of the Company.

 

 

(c) “Agreement” has the meaning set forth in the preamble.

 

(d) “BBA” means the Bipartisan Budget Act of 2015 as amended by the Protecting American from Tax Hikes Act of 2015, Pub. L. No.114-113, div. Q (the “PATH Act”), Section 411, whose operational provisions are contained in Internal Revenue Code Sections 6221 through 6241.

 

(e) “Beneficial Owner” of a security is a Person who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of, such security and/or (ii) investment power, which includes the power to dispose, or to direct the disposition of, such security. The terms “Beneficially Own” and “Beneficial Ownership” shall have correlative meanings.

 

(f) “Bona Fide Offer” means an irrevocable offer for the Sale of the Painting to 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 Class A Members holding a majority of the Class A Shares as set forth herein) at a price that is at least 30% above the volume weighted average trading price of the Class A Shares on all trading platforms or trading systems on which the Class A Shares are being traded over the sixty (60) trading days immediately preceding the date of such offer, or, in the event that the Class A Shares are not actively trading at the time such offer is made, as determined by the Manager in its reasonable discretion, at a purchase price that at least 30% above the price paid by the Company to purchase the Painting, and the consummation of which transaction will not violate any local or international laws, including anti-money laundering laws.

 

(g) “Capital Contribution” means, with respect to each Member, the amount of cash or the Fair Value of any property contributed or deemed to be contributed by such Member, if any, to the capital of the Company from time to time pursuant to Section 3.1.

 

(h) “Cause” has the meaning set forth in Section 2.9.

 

(i) “Certificate” means a certificate (i) in global form in accordance with the rules and regulations of the Depositary or (ii) in such other form as may be adopted by the Manager, issued by the Company evidencing ownership of one or more Shares.

 

(j) “Class A Member” means a Member holding one or more Class A Shares.

 

(k) “Class A Share Value” shall have the meaning ascribed to it in Section 2.4(c)(iii).

 

 

(l) “Class A Shares” shall have the meaning ascribed to it in Section 2.4(a).

 

(m) “Class B Member” means a Member holding one or more Class B Shares.

 

(n) “Class B Shares” has the meaning set forth in Section 2.4(a).

 

(o) “Class B Shares” shall have the meaning ascribed to it in Section 2.4(a).

 

(p) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

 

(q) “Commission” means the United States Securities and Exchange Commission.

 

(r) “Company” has the meaning set forth in the preamble.

 

(s) “Conversion Percentage” shall have the meaning ascribed to it in Section 2.4(c)(i).

 

(t) “Delaware Act” means the Chapter 18 of Subtitle II of Title 6 of the Delaware Code, referred to as the Delaware Limited Liability Company Act, as amended from time to time, and any successor thereto.

 

(u) “Depositary” means, with respect to any Shares issued in global form, The Depository Trust Company and its successors and permitted assigns.

 

(v) “DGCL” means the General Corporation Law of the State of Delaware, 8 Del. C. Section 101, et seq., as amended, supplemented or restated from time to time, and any successor to such statute.

 

(w) “Dissolution Event” has the meaning set forth in Section 6.1.

 

(x) “Exchange Act” means the Securities Exchange Act of 1934, as amended, supplemented or restated from time to time and any successor to such statute, and the rules and regulations promulgated thereunder.

 

(y) “Fair Value” means, with respect to securities or any other assets, other than cash, the fair market value determined by the Manager.

 

(z) “Fiscal Year” means each fiscal year of the Company (or portion thereof), which shall end on December 31; provided, however, that, upon Termination of the Company, “Fiscal Year” means the period from the January 1 immediately preceding such Termination to the date of such Termination.

 

 

(aa) “Initial Member” has the meaning set forth in the introductory paragraph.

 

(bb) “Involuntary Transfer” shall mean any Transfer of Shares, or proposed Transfer of Shares, (i) in the case of a Member who is a natural person, upon such Member’s death or the entry by a court of competent jurisdiction adjudicating such Member incompetent to manage such Member’s person or such Member’s property; (ii) in the case of a Member that is a trust, the termination of the trust, (iii) in the case of a Member that is a partnership, the dissolution and commencement of winding up of the partnership; (iv) in the case of a Member that is an estate, the distribution by the fiduciary of the estate’s interest in the Company; and (v) in the case of a Member that is a corporation, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter.

 

(cc) “Liabilities” has the meaning set forth in Section 4.2(b).

 

(dd) “Liquidating Trustee” has the meaning set forth in Section 6.2(a).

 

(ee) “Manager Shares” has the meaning set forth in Section 2.8(c).

 

(ff) “Manager” has the meaning set forth in 2.1.

 

(gg) “Member” has the meaning set forth in the preamble and includes any Person later admitted to the Company as a Member.

 

(hh) “National Securities Exchange” means an exchange registered with the Commission under Section 6(a) of the Exchange Act or any successor thereto.

 

(ii) “Offering” means the offering by the Company of Class A Shares for sale to the public pursuant to Regulation A under the Securities Act of 1933, as amended, or any replacement offering of Class A Shares as determined by the Manager in the event such Regulation A Offering shall not proceed for any reason.

 

(jj) “Officers” has the meaning set forth in Section 2.2.

 

(kk) “Painting Profits” has the meaning set forth in Section 3.3(d).

 

(ll) “Painting” has the meaning set forth in Section 1.6(a).

 

(mm) “Person” means an individual, a corporation, a company, a voluntary association, a partnership, a joint venture, a limited liability company, a trust, an estate, an unincorporated organization, a governmental authority or other entity.

 

(nn) “Prior Interests” has the meaning set forth in Section 2.4(b).

 

(oo) “Protected Person” means: (i) the Manager and its Affiliates; (ii) any Members; (iii) any Officer; or (iv) any Person who serves at the request of the Manager on behalf of the Company as an officer, director, partner, member, stockholder or employee of any other Person.

 

 

(pp) “Record Date” means the date established by the Company for determining (a) the identity of the Record Holders entitled to notice of, or to vote at, any meeting of Members or entitled to exercise rights in respect of any lawful action of Members or (b) the identity of Record Holders entitled to receive any report or distribution or to participate in any offer.

 

(qq) “Record Holder” or “holder” means the Person in whose name such Shares are registered on the books of the Company or the Transfer Agent, as applicable, as of the opening of business on a particular Business Day.

 

(rr) “Reviewed Year” has the meaning ascribed to said phrase under BBA Section 6225(d)(1).

 

(ss) “Sale of the Painting” means the transfer of title and ownership of the Painting to an un-Affiliated third-party and receipt by the Company of value therefor as determined by the Manager.

 

(tt) “Share” has the meaning set forth in Section 2.4.

 

(uu) “Substitute Member” means a Person who is admitted as a Member of the Company pursuant to Section 2.7 as a result of a Transfer of Shares to such Person.

 

(vv) “Termination” means the date of the cancellation of the Certificate of Formation of the Company following the end of the Winding Up Period by the filing of a Certificate of Cancellation of the Company with the Secretary of State of the State of Delaware.

 

(ww) “Transfer Agent” means, with respect to any class of Shares, such bank, trust company or other Person (including the Company or one of its Affiliates) as shall be appointed from time to time by the Company to act as registrar and transfer agent for such class of Shares; provided that if no Transfer Agent is specifically designated for such class of Shares, the Manager shall act in such capacity.

 

(xx) “Transfer” means, with respect to a Share and the associated membership interest in the Company, a transaction by which the Record Holder of a Share assigns such Share to another Person who is or becomes a Member, and includes a sale, assignment, gift, exchange or any other disposition by law or otherwise, including any transfer upon foreclosure of any pledge, encumbrance, hypothecation or mortgage.

 

(yy) “Treasury Regulations” means the regulations of the U.S. Treasury Department issued pursuant to the Code.

 

(zz) “Value Increase” shall have the meaning ascribed to it in Section 2.4(c)(i).

 

(aaa) “Winding Up Period” means the period from the Dissolution Event to the Termination of the Company.

 

 

1.2 Name. The name of the Company is “Masterworks 001, LLC.” All business of the Company shall be conducted under such name. The Members may elect to change the name of the Company at any time.

 

1.3 Principal Office.The principal office of the Company shall be at a location as determined by the Manager either within or outside of the United States. The Company shall keep its books and records at its principal office.

 

1.4 Registered Office and Registered Agent. The street address of the registered office of the Company in the State of Delaware shall be as selected by the Manager. The Manager may elect to change the registered office and the registered agent of the Company at any time.

 

1.5 Term. The Company was formed on March 28, 2018 and shall continue its regular business activities until the Company is dissolved.

 

1.6 Purpose and Powers.

 

(a) The Company is organized for the purposes of undertaking such activities as determined by the Manager and, subject to the terms and conditions herein and of the Delaware Act, the Members, which are permitted by applicable law and engaging in activities incidental or ancillary thereto. Notwithstanding the forgoing, the Company has been organized to form a subsidiary which will acquire the artwork as identified on Schedule 1 (the “Painting”) and undertake certain actions with respect thereto.

 

(b) The Company shall possess and may exercise all the powers and privileges granted by the Delaware Act or by any other law or by this Agreement, together with any powers incidental thereto, which are necessary or convenient to the conduct, promotion or attainment of the business, purposes or activities of the Company.

 

1.7 Power of Attorney.  

 

(a) Each Member hereby constitutes and appoints each of the Chief Executive Officer, the Chief Financial Officer and the Secretary of the Company and, if a Liquidating Trustee shall have been selected pursuant to Section 6.2(a), the Liquidating Trustee (and any successor to the Liquidating Trustee by merger, transfer, assignment, election or otherwise) and each of their authorized officers and attorneys-in-fact, as the case may be, with full power of substitution, as his true and lawful agent and attorney-in-fact, with full power and authority in his name, place and stead, to:

 

(i) execute, swear to, acknowledge, deliver, file and record in the appropriate public offices:

 

(A) all certificates, documents and other instruments (including this Agreement and the Certificate of Formation and all amendments or restatements hereof or thereof) that the Chief Executive Officer, Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, determines to be necessary or appropriate to form, qualify or continue the existence or qualification of the Company as a limited liability company in the State of Delaware and in all other jurisdictions in which the Company may conduct business or own property;

 

 

(B) all certificates, documents and other instruments that the Chief Executive Officer, the Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, determines to be necessary or appropriate to reflect, in accordance with its terms, any amendment, change, modification or restatement of this Agreement;

 

(C) all certificates, documents and other instruments (including conveyances and a certificate of cancellation) that the Manager or the Liquidating Trustee determines to be necessary or appropriate to reflect the dissolution, liquidation and termination of the Company pursuant to the terms of this Agreement;

 

(D) all certificates, documents and other instruments relating to the admission, withdrawal, removal or substitution of any Member pursuant to, or other events described in, ARTICLE 2 or ARTICLE 3; and

 

(E) all certificates, documents and other instruments (including agreements and a certificate of merger) relating to a merger, consolidation or conversion of the Company; and

 

(ii) execute, swear to, acknowledge, deliver, file and record all ballots, consents, approvals, waivers, certificates, documents and other instruments that the Manager or the Liquidating Trustee determines to be necessary or appropriate to (i) make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action that is made or given by the Members hereunder or is consistent with the terms of this Agreement or (ii) effectuate the terms or intent of this Agreement; provided, that when required by any provision of this Agreement that establishes a percentage of the Members or of the Members of any class or series required to take any action, the Chief Executive Officer, Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, may exercise the power of attorney made in this Section 1.7(a)(ii) only after the necessary vote, consent, approval, agreement or other action of the Members or of the Members of such class or series, as applicable.

 

(b) Nothing contained in this Section 1.7 shall be construed as authorizing the Chief Executive Officer, Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, to amend, change or modify this Agreement except in accordance with Section 8.2 or as may be otherwise expressly provided for in this Agreement.

 

 

(c) The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, and it shall survive and, to the maximum extent permitted by law, not be affected by the subsequent death, incompetency, disability, incapacity, dissolution, bankruptcy or termination of any Member and the Transfer of all or any portion of such Member’s Shares and shall extend to such Member’s heirs, successors, assigns and personal representatives. Each such Member hereby agrees to be bound by any representation made by the Chief Executive Officer, Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, acting in good faith pursuant to such power of attorney; and each such Member, to the maximum extent permitted by law, hereby waives any and all defenses that may be available to contest, negate or disaffirm the action of the Chief Executive Officer, Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, taken in good faith under such power of attorney in accordance with Section 1.7. Each Member shall execute and deliver to the Chief Executive Officer, Chief Financial Officer or Secretary of the Company, or the Liquidating Trustee, within 15 days after receipt of the request therefor, such further designation, powers of attorney and other instruments as any of such Officers or the Liquidating Trustee determines to be necessary or appropriate to effectuate this Agreement and the purposes of the Company.

 

ARTICLE 2 MANAGEMENT; MEMBERS AND SHARES

 

2.1 Rights and Duties of the Manager.

 

(a) The Company shall be a manager-managed limited liability company as set forth in Section 401 and Section 101 of the Delaware Act, and as otherwise provided in the Delaware Act. The initial manager of the Company shall be Masterworks Administrative Services, LLC (the “Manager”).

 

(b) The Company shall enter into an administrative services agreement with the Manager in form and substance as reasonably determined by the Initial Member (the “Administrative Services Agreement”). Except as otherwise expressly provided in this Agreement or as required by the Delaware Act, the Manager shall have complete and exclusive discretion in the management and control of the affairs and business of the Company, and shall possess all powers necessary, convenient or appropriate to carrying out the purposes and business of the Company, including doing all things and taking all actions necessary to carry out the terms and provisions of this Agreement. Except as otherwise expressly provided in this Agreement, the Manager shall have, and shall have full authority in its discretion to exercise, on behalf of and in the name of the Company, all rights and powers of a “manager” of a limited liability company under the Delaware Act necessary or convenient to carry out the purposes of the Company, as further set forth in the Administrative Services Agreement. Any Person not a party to this Agreement dealing with the Company shall be entitled to rely conclusively upon the power and authority of the Manager to bind the Company in all respects, and to authorize the execution of any and all agreements, instruments and other writings on behalf of and in the name of the Company as and to the extent set forth in this Agreement.

 

(c) Subject to the terms and conditions herein, all decisions regarding the management and operations of the Company shall be made by the Manager, provided, however, that the Manager may designate any Officers of the Company to have control or authority with respect to one or more decisions or areas of operation, and may include such limitations or restrictions on such power as they may deem reasonable.

 

 

2.2 Officers.

 

(a) At any time, the Manager may appoint and replace individuals as officers or agents of the Company (“Officers”) with such titles as the Manager may elect to act on behalf of the Company with such power and authority as the Manager may delegate to such persons. Any number of offices may be held by the same person. Officers shall hold their offices for such terms as shall be determined from time to time by the Manager. Unless otherwise determined and set forth by the Manager and subject to the policies and procedures of the Company applicable to Officers and employees, each Officer shall have the powers, rights and obligations as are customarily held and exercised by other persons in similar positions in limited liability companies organized under the Delaware Act, subject to Section 2.1(c). The Officers shall hold office until their successors are chosen and qualified. Any Officer may be removed at any time, with or without cause, by the Manager. The Officers may also be officers or employees of other Persons. The Officers, to the extent of their powers set forth in this Agreement or otherwise vested in them by action of the Manager not inconsistent with this Agreement, are agents of the Company for the purpose of the Company’s business and the actions of the Officers taken in accordance with such powers shall bind the Company. Except to the extent otherwise provided herein, each Officer shall have a fiduciary duty of loyalty and care as set forth in the Delaware Act. No Officer shall at any time serve as trustee in bankruptcy for any Affiliate of the Company.

 

(b) Notwithstanding the foregoing, it shall be deemed not to be a breach of any duty (including any fiduciary duty) or any other obligation of any type whatsoever of the Manager or any officer or employee or any Affiliates of such Manager, officer or employee (other than any express obligation contained in any agreement to which such Person and the Company or any of its subsidiaries are parties) to engage in outside business interests and activities in preference to or to the exclusion of the Company or in direct competition with the Company; provided such Person does not engage in such business or activity as a result of or using confidential information provided by or on behalf of the Company to such Person; provided, further, that a Person shall not be deemed to be in direct competition with the Company solely because of such Person’s ownership, directly or indirectly, solely for investment purposes, of securities of any publicly traded entity if such Person does not, together with such Person’s Affiliates, collectively own 5% or more of any class or securities of such publicly traded entity, and such Person is not a director or officer (and does not hold an equivalent position) in such publicly traded entity. Neither the Manager, not any officer or employee shall have no obligation hereunder or as a result of any duty expressed or implied by law to present business opportunities to the Company that may become available to Affiliates of such Person. None of any Member or any other Person shall have any rights by virtue of the Manager’s or any officer’s or employee’s or any Affiliates of such Manager, officer or employee duties as the Manager, officer or employee or this Agreement in any business ventures of the Manager or any officer or employee or any Affiliates of such Manager, officer or employee.

 

(c) Scott Lynn is hereby designated as the Chief Executive Officer and Secretary of the Company, to serve in such capacity until his earlier death, resignation or removal from office.

 

2.3 Members.

 

(a) A Person shall be admitted as a Member and shall become bound by, and shall be deemed to have agreed to be bound by, the terms of this Agreement if such Person purchases or otherwise lawfully acquires any Share, and such Person shall become the Record Holder of such Share, in accordance with the provisions of this Agreement. A Member may be both a Class A Member and a Class B Member, and, in such case, shall have the rights and obligation accorded to the Class A Shares with respect to such Class A Shares and the rights and obligations accorded to the Class B Shares with respect to such Class B Shares. A Person may become a Record Holder without the consent or approval of any of the Members and without execution of this Agreement. A Person may not become a Member without acquiring a Share.

 

 

(b) The name and mailing address of each Member or such Member’s representative shall be listed on the books and records of the Company maintained for such purpose by the Company or the Transfer Agent.

 

(c) Except as otherwise provided in the Delaware Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and the Members shall not be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Member of the Company.

 

(d) Except to the extent expressly provided in this Agreement: (i) no Member shall be entitled to the withdrawal or return of any Capital Contribution, except to the extent, if any, that distributions made pursuant to this Agreement or upon dissolution of the Company may be considered as such by law and then only to the extent provided for in this Agreement; (ii) no Member shall have priority over any other Member either as to the return of Capital Contributions or as to profits, losses or distributions; (iii) no interest shall be paid by the Company on Capital Contributions; and (iv) no Member, in its capacity as such, shall participate in the operation or management of the Company’s business, transact any business in the Company’s name or have the power to sign documents for or otherwise bind the Company by reason of being a Member.

 

(e) Any Member shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Company, including business interests and activities in direct competition with the Company. Neither the Company nor any of the other Members shall have any rights by virtue of this Agreement in any such business interests or activities of any Member.

 

2.4 Shares; Membership Interests.

 

(a) The total of the membership interests in the Company shall be divided into (i) Class A shares having the rights and preferences as set forth herein (the “Class A Shares”) and (ii) Class B shares having the rights and preferences as set forth herein (the “Class B Shares” and, together with the Class A Shares, the “Shares” and each a “Share”) all of which shall have the same rights, powers and duties, except as otherwise set forth in this Agreement. The number of Class A Shares shall be limited to 99,825 plus (i) the number of Class A Shares which may be issued pursuant to the Administrative Services Agreement plus (ii) the number of Class A Shares which may be issued upon conversion of the Class B Shares. The number of Class B Shares shall be limited to 24,956. The Shares of the Members shall be as set forth on Exhibit A attached hereto, which may be updated as set forth herein. The Manager may issue or sell Shares for consideration as the Manager may deem adequate or necessary in its sole discretion. The Manager may issue Shares to the officers, employees, vendors and agents of the Company for compensatory purposes in the amounts and subject to the terms and conditions as determined by the Manager in its sole discretion. In addition, in the event that all of the Class A Shares are not sold to the public pursuant to the Offering, the Manager shall, upon the closing of the Offering, issue any remaining unsold Class A Shares to the Initial Member upon the sale of the Painting by the Initial Member to the Company, as partial consideration therefore. The name and mailing address of each Member or such Member’s representative shall be listed on the books and records of the Company maintained for such purpose by the Company or the Transfer Agent.

 

 

(b) Prior to the date hereof and as set forth in the Original Agreement, the Initial Member has been issued 16,015 membership interests in the Company in return for a capital contribution of $100 (the “Prior Interests”). Upon execution of this Agreement, the Prior Interests shall be automatically converted into 24,956 Class B Shares. As of the date of such conversion, the Class B Shares shall constitute all of the membership interests of the Company.

 

(c) The Class B Members may elect to convert their Class B Shares into Class A Shares, in whole or in part, at any time prior to the consummation of the Sale of the Painting, subject to the terms and conditions herein, for no additional consideration pursuant and to the following conversion formula: The number of Class A Shares issuable per Class B Share upon conversion shall equal (A) the Value Increase, multiplied by (B) the Conversion Percentage, multiplied by (C) 20%, divided by (D) the Class A Share Value. For purposes herein:

 

(i) “Value Increase” means, (A) the total number of Class A Shares 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.

 

(ii) “Conversion Percentage” means, (A) the number of Class B Shares being converted, divided by (B) 24,956.

 

(iii) “Class A Share Value” means, as of the close of business on the day preceding the conversion date, the volume weighted average trading price 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 value of the Class A Shares from one or more independent nationally-recognized third party appraisal companies and such appraisal shall constitute the Class A Share Value.

 

 

2.5 Certificates and Representations of Shares.

 

(a) 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. Notwithstanding anything to the contrary herein, unless the Manager shall determine otherwise in respect of one or more classes of Shares or as may be required by the Depository with respect to any specific class of Shares, Shares shall not be evidenced by physical Certificates. No Member shall have the right to require the Company to issue physical Certificates representing Shares for any reason, except as may be required by applicable law. If the Manager authorizes the issuance of Shares to any Person in the form of physical Certificates, the Company shall issue one or more Certificates in the name of such Person evidencing the number of such Shares being so issued. Certificates shall be executed on behalf of the Company by any the Manager. If and to the extent a Transfer Agent has been appointed with respect to any class or series of Shares, no Certificate representing such class or series of Shares shall be valid for any purpose until it has been countersigned by the Transfer Agent; provided, however, that if the Manager elects to issue Shares in global form, the Certificates representing Shares shall be valid upon receipt of a certificate from the Transfer Agent certifying that the Shares have been duly registered in accordance with the directions of the Company. Any or all of the signatures required on the Certificate may be by facsimile. If any officer or Transfer Agent who shall have signed or whose facsimile signature shall have been placed upon any such Certificate shall have ceased to be such officer or Transfer Agent before such Certificate is issued by the Company, such Certificate may nevertheless be issued by the Company with the same effect as if such Person were such officer or Transfer Agent at the date of issue. Certificates for any class or series of Shares shall be consecutively numbered and shall be entered on the books and records of the Company as they are issued and shall exhibit the holder’s name and number and type of Shares.

 

(b) If any mutilated Certificate is surrendered to the Company or the Transfer Agent, the appropriate officers on behalf of the Company shall execute, and the Transfer Agent shall countersign and deliver in exchange therefor, a new Certificate evidencing the same number and class or series of Shares as the Certificate so surrendered. The appropriate officers on behalf of the Company shall execute, and the Transfer Agent shall countersign and deliver, a new Certificate in place of any Certificate previously issued if the Record Holder of the Certificate: (i) makes proof by affidavit, in form and substance satisfactory to the Company, that a previously issued Certificate has been lost, destroyed or stolen; (ii) requests the issuance of a new Certificate before the Company has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) if requested by the Company, delivers to the Company a bond, in form and substance satisfactory to the Company, with surety or sureties and with fixed or open penalty as the Company may direct to indemnify the Company and the Transfer Agent against any claim that may be made on account of the alleged loss, destruction or theft of the Certificate; and (iv) satisfies any other reasonable requirements imposed by the Company. If a Member fails to notify the Company within a reasonable time after he has notice of the loss, destruction or theft of a Certificate, and a Transfer of the Shares represented by the Certificate is registered before the Company or the Transfer Agent receives such notification, the Member shall be precluded from making any claim against the Company or the Transfer Agent for such Transfer or for a new Certificate. As a condition to the issuance of any new Certificate under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent) reasonably connected therewith.

 

2.6 Record Holders. The Company shall be entitled to recognize the Record Holder as the owner of a Share and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Share on the part of any other Person, regardless of whether the Company shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline or requirement of any National Securities Exchange on which such Shares are listed for trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company or clearing corporation or an agent of any of the foregoing) is acting as nominee, agent or in some other representative capacity for another Person in acquiring and/or holding Shares, as between the Company on the one hand, and such other Persons on the other, such representative Person shall be the Record Holder of such Shares.

 

 

2.7 Registration and Transfer of Shares.

 

(a) Any Transfer of any Shares shall only be completed subject to the compliance by the Member and the proposed transferee with all applicable laws; and furthermore may only be completed in accordance with the provisions of this Agreement.

 

(b) Other than (i) any Transfer of Shares which is an Involuntary Transfer or (ii) any Transfer that occurs on an alternative trading system that has been approved by the Manager in writing, and Transfer of Shares shall be subject to the prior written approval of the Manager, which the Manager may give or withhold in its sole discretion.

 

(c) The Company shall keep or cause to be kept on behalf of the Company a register (which may be in electronic form) that will provide for the registration and Transfer of Shares. The Manager may appoint a Transfer Agent to act as registrar and transfer agent for the purpose of registering any class of Shares and Transfers of such class of Shares as herein provided. For Shares represented by Certificates, upon surrender of a Certificate for registration of Transfer of any Shares evidenced by a Certificate, the appropriate Officers of the Company shall execute and deliver, and in the case of Shares for which a Transfer Agent has been appointed, the Transfer Agent shall countersign and deliver, in the name of the holder or the designated transferee or transferees, as required pursuant to the Record Holder’s instructions, one or more new Certificates evidencing the same aggregate number and type of Shares as were evidenced by the Certificate so surrendered, provided that a transferor shall provide the address and facsimile number for each such transferee as set forth on Exhibit A at any time.

 

(d) The Company shall not recognize any Transfer of Shares evidenced by Certificates until the Certificates evidencing such Shares are surrendered for registration of Transfer. No charge shall be imposed by the Company for such Transfer; provided, that as a condition to the issuance of Shares, whether or not such Shares are evidenced by Certificates, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed with respect thereto.

 

(e) By acceptance of the Transfer of any Share, each transferee of a Share (including any nominee holder or an agent or representative acquiring such Shares for the account of another Person) (i) shall be admitted to the Company as a Substitute Member with respect to the Shares so Transferred to such transferee when any such Transfer or admission is reflected in the books and records of the Company or the Transfer Agent, as applicable, (ii) shall be deemed to agree to be bound by the terms of this Agreement, (iii) shall become the Record Holder of the Shares so transferred, (iv) grants powers of attorney to the Officers of the Company and any Liquidating Trustee, as specified herein, and (v) makes the consents and waivers contained in this Agreement. The Transfer of any Shares and the admission of any new Member shall not constitute an amendment to this Agreement.

 

(f) Nothing contained in this Agreement shall preclude electronic book-entry only Transfer of Shares or the settlement of any transactions involving Shares entered into through the facilities of the Depository or any National Securities Exchange on which such Shares are listed for trading.

 

 

(g) Prior to the one-year anniversary of the closing of the Offering, the Initial Member and its Affiliates shall not be permitted to Transfer any Shares that are Beneficially Owned by them except as otherwise required by law or in any bankruptcy or similar proceeding, provided, however, that notwithstanding the definition of the term “Transfer,” the Initial Member and its Affiliates shall be permitted, during such one-year period, to pledge any or all of such Shares to unaffiliated third-party lenders and, for the avoidance of doubt, such lenders shall not be subject to the provisions of this Section 2.7(g) if they obtain Beneficial Ownership of such Shares in connection with a default by the Initial Member and its Affiliates pursuant to the transactions in which such third party lenders obtained such Shares.

 

(h) Any Transfer or attempted Transfer of any Share(s) in contravention of this Agreement shall be absolutely null and void ab initio and of no force or effect, on or against the Company, any Member, any creditor of the Company or any claimant against the Company and may be enjoined, and shall not be recorded on the books and records of the Company. No distributions of cash or property of the Company shall be made to any transferee of any Share(s) which is/are Transferred in violation hereof, nor shall any such Transfer be registered on the books of the Company. The Transfer or attempted Transfer of any Share(s) in violation hereof shall not affect the Beneficial Ownership of such Share(s), and, notwithstanding such Transfer or attempted Transfer, the Member making such prohibited Transfer or attempted Transfer shall retain the right to vote, if any, and the right to receive liquidation proceeds and any other distributions with respect to the Shares.

 

2.8 Voting.

 

(a) Each Class A Shares shall be entitled to and shall constitute one (1) vote. Upon the issuance of the Class B Shares in exchange for the Prior Interests, the Class B Shares shall have the right to vote on any matter on which the Members are entitled to vote on hereunder or on which the Members are required to vote pursuant to the Delaware Act and shall be entitled to and shall constitute one (1) vote. Upon any issuance of any Class A Shares, the Class B Shares shall have no further voting rights except as specifically set forth herein, unless such right to vote is specifically required and mandated by the Delaware Act or as set forth herein.

 

(b) In determining any action or other matter to be undertaken by or on behalf of the Company, each Member shall be entitled to cast a number of votes equal to the number of Shares that such Member holds, with the power to vote, at the time of such vote unless otherwise set forth in this Agreement. Unless otherwise set forth in this Agreement, or otherwise required by the Delaware Act, the taking of any action by the Company which required a vote of the Members as set forth above shall be authorized by the affirmative vote of a majority of the Shares, subject to any approval of the Manager as required herein.

 

 

(c) Notwithstanding the forgoing, any Class A Shares issued to the Manager pursuant to the Administrative Services Agreement, as set forth in Section 2.4 or otherwise held by the Manager (the “Manager Shares”), shall not, while such Class A Shares are Beneficially Owned by the Manager or any Affiliate of the Manager, be entitled to vote on any matter on which the Class A Members are entitled or required to vote hereunder or pursuant to the Delaware Act, and shall not be considered in determining the total number of votes available or required hereunder or pursuant to the Delaware Act. Once the Manager Shares are Transferred to any Person who is not an Affiliate of the Manager, the Manager Shares shall thereafter have all voting rights that any other Class A Shares held by any Class A Member have hereunder or pursuant to the Delaware Act. In the event that the Delaware Act or any other law requires, at any time, that the Manager Shares vote on any matter notwithstanding the provisions herein, the Manager Shares shall be required to be, and shall be, voted in the same proportion as the Class A Shares that are not Manager Shares are voted by the Class A Members. Any Manager Shares shall bear a customary “restricted” legend, which may be a virtual legend, evidencing the restricted nature thereof.

 

(d) In addition to the other matters on which the Class A Members have the right to vote as set forth herein, the approval of Class A Members holding a majority of the Class A Shares shall be required for the Company to undertake any of the following actions, except as otherwise set forth herein:

 

(i) selling the Painting in a private (i.e. non-auction) sale, provided that a sale pursuant to a pre-action committed bid shall not constitute a private sale;

 

(ii) acquiring any additional material assets, other than those incidental to the direct or indirect ownership, maintenance and promotion of the Painting or the eventual Sale of the Painting and other than the ownership of any equity or membership interests of any subsidiary of the Company which owns or holds the Painting;

 

(iii) conducting any business activities, except for activities relating to the ownership, maintenance and promotion of the Painting or the eventual Sale of the Painting; and

 

(iv) incurring any material loans or material borrowing arrangements to be entered into by the Company as a debtor other than those incidental to the direct or indirect ownership, maintenance and promotion of the Painting or the eventual Sale of the Painting;

 

(v) amending, waiving or failing to comply with any material provision of this Agreement or the Administrative Services Agreement, including amending this Agreement to increase the number of Class A Shares that may be issued hereunder;

 

(vi) amending the Administrative Services Agreement; and

 

(vii) effecting any Sale of the Painting at a public auction, unless:

 

(A) at the time of such Sale of the Painting, the Company is subject to the reporting requirements of the Exchange Act;

 

(B) the Company settles or receives an adverse judgement in any material litigation, judicial proceeding or arbitration and the Sale of the Painting is required in order to satisfy or reimburse amounts owed or paid in connection therewith;

 

 

(C) an active trading market for the Class A Shares 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 does not have or ceases to have sufficient transaction volume to permit reasonable trading among holders of the Class A Shares; or

 

(D) the Manager notifies the Initial Member of its intent to withdraw as the manager of the Company, as set forth in Section 2.10.

 

(e) In the event that any Person makes a Bona Fide Offer to the Company with respect to the Sale of the Painting, the Manager shall, within a reasonable time thereafter, submit such potential Sale of the Painting to the Class A Members for their consideration. In the event that Class A Members holding a majority of the Class A Shares vote to undertake the Sale of the Painting pursuant to such Bona Fide Offer, the Manager shall utilize its commercially reasonable efforts to effect the Sale of the Painting pursuant to such Bona Fide Offer as soon as reasonably practicable, provided that the Members acknowledge that such transaction shall be subject to the agreement by the Company and prospective purchaser on definitive documentation for the Sale of the Painting and the satisfaction of the conditions to the closing of the transaction as set forth therein.

 

(f) In any vote of the Class A Members pursuant to Section 2.8(d) or Section 2.8(e), any Class A Shares that are Beneficially Owned by the Initial Member or any Affiliate of the Initial Member, shall not be entitled to vote of any such matter and shall not be considered in determining the total number of votes available or required hereunder or pursuant to the Delaware Act, provided, however, that, in the event that the Delaware Act or any other law requires that such Class A Shares that are Beneficially Owned by the Initial Member or any Affiliate of the Initial Member vote on any matter notwithstanding this Section 2.8(f), such Class A Shares shall be required to be, and shall be, voted in the same proportion as the Class A Shares that are Beneficially Owned by a Class A Member other than the Initial Member or any Affiliate of the Initial Member.

 

2.9 Removal or Replacement of the Manager. The Manager, as selected by the Initial Member, may only be removed or replaced for “Cause” and only upon the approval of Class A Members holdings at least two-thirds of the Class A Shares. For purposes herein, “Cause” shall mean:

 

(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);

 

 

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

 

(e) the bankruptcy or insolvency of the Manager.

 

2.10 Withdrawal of the Manager. Prior to the five-year anniversary of the closing of the Offering, the Manager may only withdraw from its role as Manager and its obligations under the Administrative Services Agreement in connection with a withdrawal by the Initial Member and its Affiliates from the business of operating an online investment platform that allows investors to acquire ownership of an interest in special purpose companies that invest in distinct artworks. At any time following five-year anniversary of the closing of the Offering, the Manager may withdraw for any reason upon notice to the Initial Member, provided that such withdrawal shall be effective only following a Sale of the Painting.

 

2.11 Ownership Limitation. Notwithstanding anything herein to the contrary, no Class A Member shall be permitted to own any Class A Shares in excess of 19.99% of the number of Class A Shares issued and outstanding as of such time, and any issuance or Transfer of any Class A Shares hereunder shall be subject to such limitations. The limitations set forth in this Section 2.11 shall not apply to the Initial Member or any of its Affiliates.

 

ARTICLE 3 CAPITAL CONTRIBUTIONS; CAPITAL ACCOUNT; DISTRIBUTIONS; ALLOCATIONS

 

3.1 Capital Contributions. Persons seeking to become a Member shall be required to purchase or acquire Shares and make capital contributions in such forms and in such amounts and at such times as the Manager may require, if any, in its sole discretion (any, a “Capital Contribution”) whereupon a capital account for a new Member will be established, and, if applicable, accreted, in the amount of such Member’s Capital Contribution or based upon the fair market value of property contributed, and the new Member shall be issued a number of Class A Shares as determined by the Manager, and the Manager shall update Exhibit A attached hereto accordingly. The provisions of this Section 3.1 are solely intended for the benefit of the Members and, to the fullest extent permitted by law, shall not be construed as conferring any benefit upon any creditor of the Company (and no such creditor shall be a third-party beneficiary of this Agreement). The Members shall have no duty or obligation to any creditor of the Company to make any contribution to the Company.

 

3.2 Capital Account

 

(a) There shall be established for each Member on the books of the Company a Capital Account in accordance with Section 704 of the Code and the Treasury Regulations promulgated thereunder.

 

(b) At the close of each Fiscal Year, and at certain other periods, as in the case of a withdrawal, there shall be determined for each Member, such Member’s closing Capital Account for such period which shall be determined by adjusting such Member’s opening Capital Account for such period, as the case may be, as follows: (i) by increasing such Member’s Capital Account by (A) such Member’s allocable share of each item of the Company’s income and gain for such period (allocated in accordance with Section 3.2(d)), and (B) the Capital Contributions, if any, made by such Member during such period and (ii) by decreasing such Member’s Capital Account by (A) the amount of cash or the Fair Value of any property distributed in kind to such Member by the Company during such period and (B) such Member’s allocable share of each item of the Company’s loss and deduction for such period (allocated in accordance with Section 3.2(d)). Each Member’s Capital Account shall be further adjusted with respect to any special allocations or adjustments pursuant to this Agreement.

 

 

(c) In the event the Company is terminated during any period in accordance with ARTICLE 6, the closing Capital Accounts of the Members for such Fiscal Year then completed will be determined as of the date of termination of the Company in the manner provided in this Section 3.2.

 

(d) For each Fiscal Period, as of the end of such Fiscal Period, each item of income, deduction, gain or loss of the Company (determined in accordance with U.S. tax principles as applied to the maintenance of capital accounts) shall be allocated among the Capital Accounts of the Members in such manner that as closely as possible gives economic effect to the provisions of Section 3.3 and Section 6.2(b).

 

(e) If all or a portion of a Member’s Shares are Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Shares so transferred.

 

3.3 Distributions

 

(a) The Company, in the sole discretion of the Manager, in the event there are Available Funds, may make distributions thereof (“Distributions”) to Members as set forth herein. “Available Funds” means the Company’s gross cash receipts from operations, less the sum of: (1) payments of principal, interest, charges and fees pertaining to any of the Company’s indebtedness; (2) costs and expenses incurred in the conduct of the Company’s business; and (3) amounts reserved to meet the reasonable needs of the Company’s business. Notwithstanding anything herein to the contrary, no Member may receive a Distribution to the extent that, after giving effect to the Distribution, all liabilities of the Company (other than to a Member on account of its Shares and liabilities for which the recourse of creditors is limited to specific property of the Company) exceed the fair market value of the assets of the Company (except that property that is subject to a liability for which the recourse of the creditors is limited to such property shall be included in the assets of the Company only to the extent the Fair Market Value of such property exceeds that liability). In the event of a Distribution to a Member that would be deemed violative of applicable law, the applicable Member may be required to return such Distribution to the Company. Each Distribution in respect of any Shares shall be paid by the Company, directly or through the Transfer Agent or through any other Person or agent, only to the Record Holder of such Shares as of the Record Date set for such Distribution. Such payment shall constitute full payment and satisfaction of the Company’s liability in respect of such payment, regardless of any claim of any Person who may have an interest in such payment by reason of an assignment or otherwise.

 

 

(b) Other than distributions pursuant to a Dissolution Event as set forth in ARTICLE 6, if the Manager declares and determines to make any Distribution of cash or other assets to the Members, all such Distributions shall be made to the Members as follows:

 

(i) Any Distributions which are funds other than Painting Profits (as defined below), shall be paid 100% to the Class A Members, pro rata in proportion to the number of Class A Shares held by each Class A Member.

 

(ii) Any Distributions which are funds which comprise Painting Profits shall be paid as follows:

 

(A) An amount equal to 20% of such Painting Profits multiplied by a percentage equal to (1) the number of Class B Shares issued and outstanding as of such time; divided by (2) 24,956, shall be paid to the Class B Members, pro rata in proportion to the number of Class B Shares held by each Class B Member; and

 

(B) The balance of any Distribution pursuant to this Section 3.3(b)(ii) shall be paid to the Class A Members, pro rata in proportion to the number of Class A Shares held by each Class A Member.

 

(c) By way of examples and not limitation, (i) in the event of a Distribution pursuant to Section 3.3(b)(ii) prior to the conversion of any Class B Shares, such Distribution shall be apportioned 20% to the Class B Shares and 80% to the Class A Shares, and (ii) in the event of a Distribution pursuant to Section 3.3(b)(ii) following the conversion of 6,239 Class B Shares, such Distribution shall be apportioned 15% to the Class B Shares and 85% to the Class A Shares.

 

(d) For purposes hereof, “Painting Profits” shall be the amount, if any, which the amount realized in any Sale of the Painting actually received by the Company exceeds the cost basis of the Company in the Painting, as determined for U.S. federal income tax purposes.

 

(e) Except as otherwise provided herein or as required by law, no Member shall be required to restore or repay to the Company any funds properly distributed to it pursuant to this Section 3.2(e).

 

3.4 Tax Allocations. Each item of income, gain, loss or deduction recognized by the Company shall be allocated among the Members for U.S. federal, state and local income tax purposes in the same manner that each such item is allocated to the Member’s Capital Accounts pursuant to Section 3.2(d) or as otherwise provided herein, provided that the Manager may adjust such allocations as long as such adjusted allocations have substantial economic effect or are in accordance with the interests of the Members in the Company, in each case within the meaning of the Code and the Treasury Regulations. Tax credits and tax credit recapture shall be allocated in accordance with the Members’ interests in the Company as provided in Treasury Regulations section 1.704-1(b)(4)(ii). Items of Company taxable income, gain, loss and deduction with respect to any property (other than cash) contributed to the capital of the Company or revalued shall, solely for tax purposes, be allocated among the Members, as determined by the Manager in accordance with Section 704(c) of the Code, so as to take account of any variation between the adjusted basis of such property to the Company for U.S. federal income tax purposes and its fair market value at the time of contribution or revaluation, as the case may be. All of the Members agree that the Manager is authorized to select the method or convention, or to treat an item as an extraordinary item, in relation to any variation of any Member’s interest in the Company described in section 1.706-4 of the Treasury Regulations in determining the Members’ distributive shares of Company items. All matters concerning allocations for U.S. federal, state and local and non-U.S. income tax purposes, including accounting procedures, not expressly provided for by the terms of this Agreement shall be determined by the Manager in its sole discretion. Each Class B Share is intended to be treated as a profits interest for U.S. federal income tax purposes, and all of the Members agree to report consistently with, and to take any action requested by the Manager to ensure, such treatment.

 

 

ARTICLE 4 LIABILITY; INDEMNIFICATION 

 

4.1 Liability of a Member. The liability of each Member shall be limited as provided in the Delaware Act and as set forth in this Agreement. No Member shall be obligated to restore by way of Capital Contribution or otherwise any deficits in its Capital Account (if such deficits occur).

 

4.2 Exculpation and Indemnification.

 

(a) No Protected Person shall be liable to the Company or the Manager or any other Member for any action taken or omitted to be taken by it or by other Person with respect to the Company, 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 this 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 Company affairs (including interpretations of this 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 directors, officers, employees, consultants, attorneys, accountants and professional advisors of the 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.

 

(b) To the fullest extent permitted by law, the Company shall 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 this Agreement, and any amounts expended in respect of settlements of any claims approved by the Manager (collectively, “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 the Company;

 

 

(ii) by reason of the fact that it is or was acting in connection with the activities of the Company in any capacity or that it is or was serving at the request of the Company as a partner, shareholder, member, director, 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 this Agreement or conduct that is subject of a criminal proceeding (where such Protected Person has reasonable cause to believe that such conduct was unlawful).

 

(c) The Manager may, on behalf of the Company, 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 this Section 4.2 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 this Section 4.2; provided, that such Protected Person executes a written undertaking to repay the Company 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 this Section 4.2. Upon any liquidation of the Company, such reimbursements or advancement of expenses shall be reimbursed by the Company to the Manager prior to any other distributions hereunder.

 

(d) The provisions of this Section 4.2 shall continue to afford protection to each Protected Person regardless of whether such Protected Person remains in the position or capacity pursuant to which such Protected Person became entitled to indemnification under this Section 4.2 and regardless of any subsequent amendment to this Agreement; provided, that, no such amendment shall reduce or restrict the extent to which these indemnification provisions apply to actions taken or omissions made prior to the date of such amendment.

 

(e) Any indemnification under this Section 4.2 or otherwise shall be paid out of and to the extent of the Company’s assets only.

 

ARTICLE 5 ACCOUNTING; FINANCIAL AND TAX MATTERS

 

5.1 Accounting Basis. The Company shall use such method of accounting as may be determined by the Manager that is consistent with United States generally accepted accounting principles or such other accounting methods and conventions as the Manager may from time to time determine to be used in the preparation of the Company’s tax returns.

 

 

5.2 Tax Matters.

 

(a) The Manager (or such other Person as designated by the Manager) is hereby designated the partnership representative of the Company for purposes of Section 6223 of the Code (“Partnership Representative”) and any similar provision under any state or local or non-U.S. tax laws, and is responsible for acting as the liaison between the Company and the Internal Revenue Service (“Service”). The Partnership Representative shall have the exclusive authority and discretion to determine all matters and shall be authorized to take any actions necessary with respect to preparing and filing any U.S. federal, state or local or non-U.S. tax returns of the Company, to make any elections required or permitted to be made by the Company under any provisions of the Code or any other applicable laws and has the sole authority under the Code to deal with the Internal Revenue Service regarding any audit of or assessment against the Company to the exclusion of all Members. At any time during an audit by the Internal Revenue Service of the Company, the Manager shall have the authority to remove, with or without cause, the Partnership Representative and appoint a replacement Partnership Representative.

 

(b) Each of the Members consents to and agrees to become bound by all actions of the Partnership Representative, including any contest, settlement or other action or position which the Partnership Representative may deem proper under the circumstances. The Members specifically acknowledge, without limiting the general applicability of this Section 5.2, that the Partnership Representative will not be liable, responsible or accountable in damages or otherwise to the Company or any Member with respect to any action taken by it in its capacity as a Partnership Representative, except for bad faith, fraud, gross negligence, willful misconduct or breach of fiduciary duty. All reasonable out-of-pocket expenses incurred by the Partnership Representative in such capacity will be considered expenses of the Company for which the Partnership Representative will be entitled to full reimbursement.

 

(c) In connection with any BBA audit of the Company, the Partnership Representative shall resolve each issue in the audit only in accordance with the affirmative accession of the Manager to the advice of the Partnership Representative made, either independently or in consultation with the Company’s tax preparer, after appropriately articulating to it the issues involved and the dynamics of the impact upon the Company and the Members respective to any such proposed posture.

 

(d) If, in connection with a BBA audit, the IRS assesses a tax against the Company, the Partnership Representative, acting under BBA Section 6225(c), may require all of the Members, or Persons who were previously Members as to an applicable Reviewed Year but not as of an applicable Adjustment Year, and the Persons signing this Agreement as a condition to becoming a Member hereby agree in such case, to file amended tax returns for the Reviewed Year and to pay their share of such assessed tax for such applicable period, in proportion to the share of partnership income or loss ascribed to each for such year, or, as necessary, upon such substantially similar allocation basis as the former basis of allocation may under then existing circumstances be required to be modified to address in a case in which the obligated Person would not as of such an applicable Adjustment Year then be a Member. This provision shall survive each Person’s cessation as a Member of the Company or any amendment or termination of this Agreement for so long as a return of a Reviewed Year of the Company as to which any Person was a Member would be open to audit, and each Person signing this Agreement as a Member hereby agrees to indemnify the Company and the other Members from and against any amounts of assessed taxes as they would be otherwise obligated to pay in accordance with this Section 5.2, in a case in which such Person would not do so, as well as against all reasonable attorneys’ fees and costs that would be incurred by the Company or such other one or more Members in the event undertakings, including legal proceedings, to enforce such obligation hereunder against such Person were commenced.

 

 

(e) The Members acknowledge that the Manager reserves the right to supplement or amend any applicable provisions of this Agreement, including as to this Section 5.2, to address such additional processes or procedures as may be indicated as such unresolved issues are prospectively addressed as to reasonably facilitate the Company’s compliance with the BBA.

 

(f) The Members shall provide the Company with such information, which may be necessary or desirable in connection with preparing and filing tax elections or otherwise in connection with the compliance with applicable tax laws, including providing information in connection with Section 743 of the Code and elections permitted thereunder. The Manager shall cause to be prepared and filed all tax returns of the Company that are required for U.S. federal, state or local or non-U.S. tax purposes and shall make all determinations as to tax elections by the Company. The Company shall use reasonable efforts to furnish to all Members tax information as is reasonably required for U.S. federal, state and local income tax reporting purposes as soon as practicable following the end of the fiscal year. Each Member shall be required to report for all tax purposes consistently with such information provided by the Company.

 

(g) Notwithstanding anything otherwise to the contrary herein, the Manager is authorized to take any action that may be required to cause the Company to comply with any withholding or other similar requirements established pursuant to the Code or any other provision of U.S. federal, state or local or non-U.S. tax law or otherwise. To the extent the Company is required to or elects to withhold and pay over or otherwise pay any withholding or other taxes payable, or required to be deducted, by the Company or any of its Affiliates pursuant to the Code or any provision of U.S. federal, state or local or non-U.S. tax law or otherwise, attributable to a Member (including taxes attributable to income or gain allocable to such Member) or resulting from such Member’s participation in the Company, the Manager may treat the amount withheld as a distribution of cash pursuant to Section 3.4 to the extent such Member would have received a cash distribution but for such withholding or other taxes. To the extent that such payment exceeds the cash distribution that such Member would have received but for such withholding or other taxes, the Manager shall notify such Member as to the amount of such excess and such Member shall make a prompt payment to the Company of such amount by wire transfer, which payment shall not constitute a Capital Contribution of such Member.

 

ARTICLE 6 DISSOLUTION; WINDING UP; TERMINATION

 

6.1 Dissolution. The Company shall commence its winding up upon the first to occur of the following (the “Dissolution Event”):

 

(a) upon the determination of the Class A Members with the approval of the Manager, at any time;

 

(b) the insolvency or bankruptcy of the Company;

 

(c) the sale of all or substantially all of the Company’s assets, which for the avoidance of doubt includes a sale of 100% of the equity interests of any subsidiary of the Company which owns the Painting or the Sale of the Painting by the Company or such subsidiary; or

 

 

(d) the entry of a decree of judicial dissolution under Section 18-802 of the Delaware Act.

 

The Dissolution Event shall be effective on the day on which such event occurs and immediately thereafter the Company shall commence the Winding Up Period during which its affairs shall be wound up in accordance with Section 6.2 and Section 6.3.

 

6.2 Winding Up and Termination.

 

(a) Upon the occurrence of a Dissolution Event, the property and business of the Company shall be wound up by the Manager or, in the event of the unavailability of the Manager, by a Person designated as a liquidating trustee by the Manager (the Manager or such liquidating trustee, the “Liquidating Trustee”). Subject to the requirements of applicable law and the further provisions of this Section 6.2, the Liquidating Trustee shall have discretion in determining whether to sell or otherwise dispose of Company assets or to distribute the same in kind and the timing and manner of such disposition or distribution. While the Company continues to hold assets, the Liquidating Trustee may in its discretion expend funds, acquire additional assets and borrow funds. The Liquidating Trustee may also authorize the payment of fees and expenses reasonably required in connection with the winding up of the Company.

 

(b) Within a reasonable period of time following the occurrence of a Dissolution Event, after allocating all items of income, gain, loss or deduction pursuant to Section 3.5, the Company’s assets (except for assets reserved pursuant to Section 6.3) shall be applied and distributed in the following manner and order of priority:

 

(i) the claims of all creditors of the Company (including Members except to the extent not permitted by law) shall be paid and discharged other than liabilities for which reasonable provision for payment has been made; and

 

(ii) to the Members in the same manner as Distributions under Section 3.2(e).

 

Notwithstanding anything to the contrary in this Agreement, liquidating distributions shall be made no later than the last to occur of (x) 90 days after the date of disposition (including pursuant to Section 6.3 of the last remaining asset of the Company and (y) the end of the Company’s taxable year in which the disposition referred to in clause (x) shall occur.

 

(c) The Liquidating Trustee shall allocate securities for distribution in kind to the Members. Notwithstanding any other provision of this Agreement, the amount by which the Fair Value of any property to be distributed in kind to the Members (including property distributed in liquidation and property distributed pursuant to Section 3.2(e)) exceeds or is less than the adjusted basis of such property shall, to the extent not otherwise recognized by the Company, be taken into account in computing income, gains and losses of the Company for purposes of crediting or charging the Capital Account of, and distributing proceeds to, the Members, pursuant to this Agreement.

 

(d) When the Liquidating Trustee has completed the winding up described in this Section 6.2, the Liquidating Trustee shall cause the Termination of the Company.

 

 

6.3 Assets Reserved and Pending Claims. 

 

(a) If, upon the occurrence of a Dissolution Event, there are any assets that, in the judgment of the Liquidating Trustee, cannot be sold or distributed in kind without sacrificing a significant portion of the value thereof or where such sale or distribution is otherwise impractical at the time of the Dissolution Event, such assets may be retained by the Company if the Liquidating Trustee determines that the retention of such assets is in the best interests of the Members. Upon the sale of such assets or a determination by the Liquidating Trustee that circumstances no longer require their retention, such assets (at their Fair Value) or the proceeds of their sale shall be taken into account in computing Capital Account on winding up and amounts distributable pursuant to Section 6.2(b), and distributed in accordance with such value.

 

(b) If there are any claims or potential claims (including potential Company expenses in connection therewith) against the Company (either directly or indirectly, including potential claims for which the Company might have an indemnification obligation) for which the possible loss cannot, in the judgment of the Liquidating Trustee, be definitively ascertained, then such claims shall initially be taken into account in computing The Capital Account upon winding up and distributions pursuant to Section 6.2(b) at an amount estimated by the Liquidating Trustee to be sufficient to cover any potential loss or liability on account of such claims (including such potential Company expenses), and the Company shall retain funds (or assets) determined by the Liquidating Trustee in its discretion as a reserve against such potential losses and liabilities, including expenses associated therewith, and for any other Company purpose. The Liquidating Trustee may in its discretion obtain insurance or create escrow accounts or make other similar arrangements with respect to such losses and liabilities. Upon final settlement of such claims (including such potential Company expenses) or a determination by the Liquidating Trustee that the probable loss therefrom can be definitively ascertained, such claims (including such potential Company expenses) shall be taken into account in the amount at which they were settled or in the amount of the probable loss therefrom in computing the Capital Account on winding up and amounts distributable pursuant to Section 6.2(b)), and any excess funds retained shall be distributed as such funds would be distributed under Section 6.2(b).

 

ARTICLE 7 MEMBER MEETINGS

 

7.1 Member Meetings.

 

(a) There shall be no meetings of the Members unless called by the Manager or as otherwise specifically required by the Delaware Act. No Members or group of Members, acting in its or their capacity as Members, shall have the right to call a meeting of the Members.

 

(b) All acts of Members to be taken hereunder shall be taken in the manner provided in this Agreement. If authorized by the Manager, and subject to such guidelines and procedures as the Manager may adopt, if a meeting of the Members is called Members and proxyholders not physically present at a meeting of Members may by means of remote communication participate in such meeting and be deemed present in person and vote at such meeting.

 

 

(c) A majority of the Shares present at such meeting, either in person or by proxy, and entitled to vote thereat, shall constitute a quorum for the purpose of such meeting. The Delaware Court of Chancery may issue such orders as may be appropriate, including orders designating the time and place of such meeting, the record date for determination of Members entitled to vote, and the form of notice of such meeting.

 

(d) No Members or group of Members, acting in its or their capacity as Members, shall have the right to call a meeting of the Members.

 

7.2 Notice of Meetings of Members.

 

(a) Notice, stating the place, day and hour of any meeting of the Members, as determined by the Manager, and the purpose or purposes for which the meeting is called, as determined by the Manager, shall be delivered by the Company not less than 10 calendar days nor more than 60 calendar days before the date of the meeting, in a manner and otherwise in accordance with the terms herein to each Record Holder who is entitled to vote at such meeting. Such further notice shall be given as may be required by Delaware or applicable federal law or any exchange on which any Shares are then listed. Only such business shall be conducted at a meeting of Members as shall have been brought before the meeting pursuant to the Company’s notice of meeting. Any previously scheduled meeting of the Members may be postponed, and any meeting of the Members may be canceled, by resolution of the Manager upon public notice given prior to the date previously scheduled for such meeting of the Members.

 

(b) The Manager shall designate the place of meeting for any meeting of the Members. If no designation is made, the place of meeting shall be the principal office of the Company.

 

7.3 Record Date. For purposes of determining the Members entitled to notice of or to vote at a meeting of the Members, the Manager may set a Record Date, which shall not be less than 10 nor more than 60 days before the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline or requirement of any National Securities Exchange on which the Shares are listed for trading, in which case the rule, regulation, guideline or requirement of such exchange shall govern). If no Record Date is fixed by the Manager, the Record Date for determining Members entitled to notice of or to vote at a meeting of Members shall be at the close of business on the day next preceding the day on which notice is given. A determination of Members of record entitled to notice of or to vote at a meeting of Members shall apply to any adjournment or postponement of the meeting; provided, however, that the Manager may fix a new Record Date for the adjourned or postponed meeting.

 

7.4 Adjournment. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken, unless such adjournment shall be for more than 30 days. At the adjourned meeting, the Company may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this ARTICLE 7.

 

 

7.5 Waiver of Notice; Approval of Meeting. Whenever notice to the Members is required to be given under this Agreement, a written waiver, signed by the Person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a Person at any such meeting of the Members shall constitute a waiver of notice of such meeting, except when the Person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Members need be specified in any written waiver of notice unless so required by resolution of the Manager. All waivers and approvals shall be filed with the Company records or made part of the minutes of the meeting.

 

7.6 Quorum; Required Vote. At any meeting of the Members, the holders of a majority of the Shares entitled to vote represented in person or by proxy shall constitute a quorum unless any such action by the Members requires approval by holders of a greater percentage of Shares entitled to vote, in which case the quorum shall be such greater percentage. The submission of matters to Members for approval shall occur only at a meeting of the Members duly called and held in accordance with this Agreement at which a quorum is present; provided, however, that the Members present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough Members to leave less than a quorum, if any action taken (other than adjournment) is approved by the required percentage of Shares entitled to vote specified in this Agreement. Any meeting of Members may be adjourned from time to time by the chairman of the meeting to another place or time, without regard to the presence of a quorum.

 

7.7 Conduct of a Meeting; Member Lists.

 

(a) The Manager shall have full power and authority concerning the manner of conducting any meeting of the Members, including the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of this ARTICLE 7, the conduct of voting, the validity and effect of any proxies and the determination of any controversies, votes or challenges arising in connection with or during the meeting or voting. The Manager shall designate a Person to serve as chairman of any meeting and shall further designate a Person to take the minutes of any meeting. All minutes shall be kept with the records of the Company maintained by the Manager. The Manager may make such other regulations consistent with applicable law and this Agreement as it may deem advisable concerning the conduct of any meeting of the Members, including regulations in regard to the appointment of proxies, the appointment and duties of inspectors of votes, the submission and examination of proxies and other evidence of the right to vote.

 

(b) A complete list of Members entitled to vote at any meeting of Members, arranged in alphabetical order and showing the address of each such Member and the number of Shares registered in the name of such Member, shall be open to the examination of any Member, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days before the meeting, at the principal place of business of the Company. The Member list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any Member who is present.

 

 

7.8 Action Without a Meeting. On any matter that is to be voted on, consented to or approved by Members, the Members may take such action without a meeting, without prior notice and without a vote if a consent or consents in writing, setting forth the action so taken, shall be signed by the Members having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all Members entitled to vote thereon were present and voted.

 

7.9 Voting and Other Rights.

 

(a) Only those Record Holders of Shares on the Record Date set pursuant to Section 7.3 shall be entitled to notice of, and to vote at, a meeting of Members or to act with respect to matters as to which the holders of the Shares have the right to vote or to act. All references in this Agreement to votes of, or other acts that may be taken by, the Shares shall be deemed to be references to the votes or acts of the Record Holders of such Shares on such Record Date.

 

(b) With respect to Shares that are held for a Person’s account by another Person (such as a broker, dealer, bank, trust company or clearing corporation, or an agent of any of the foregoing), in whose name such Shares are registered, such other Person shall, in exercising the voting rights in respect of such Shares on any matter, and unless the arrangement between such Persons provides otherwise, vote such Shares in favor of, and at the direction of, the Person who is the Beneficial Owner, and the Company shall be entitled to assume it is so acting without further inquiry.

 

(c) No Members shall have any cumulative voting rights.

 

7.10 Proxies and Voting.

 

(a) On any matter that is to be voted on by Members, the Members may vote in person or by proxy, and such vote may be made, or proxy may be granted in writing, by means of electronic transmission or as otherwise permitted by applicable law. Any such proxy shall be delivered in accordance with the procedure established for the relevant

 

(b) For purposes of this Agreement, the term “electronic transmission” means any form of communication not directly involving the physical transmission of paper that creates a record that may be retained, retrieved and reviewed by a recipient thereof and that may be directly reproduced in paper form by such a recipient through an automated process. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

 

(c) The Manager may, and to the extent required by law, shall, in advance of any meeting of Members, appoint one or more inspectors to act at the meeting and make a written report thereof. The Manager may designate one or more alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of Members, the chairman of the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. Every vote taken by ballots shall be counted by a duly appointed inspector or inspectors.

 

 

(d) With respect to the use of proxies at any meeting of Members, the Company shall be governed by paragraphs (b), (c), (d) and (e) of Section 212 of the DGCL and other applicable provisions of the DGCL, as though the Company were a Delaware corporation and as though the Members were shareholders of a Delaware corporation.

 

(e) In the event that the Company becomes subject to Regulation 14A under the Exchange Act, pursuant to and subject to the provisions of Rule 14a-16 under the Exchange Act, the Company may, but is not required to, utilize a Notice of Internet Availability of Proxy Materials, as described in such rule, in conjunction with proxy material posted to an Internet site, in order to furnish any proxy or related material to Members pursuant to Regulation 14A under the Exchange Act.

 

ARTICLE 8 MISCELLANEOUS

 

8.1 Addresses and Notices. Any notice, demand, request, report or proxy materials required or permitted to be given or made to a Member under this Agreement shall be in writing and shall be deemed given or made when delivered in person or when sent by first class United States mail or by other means of written communication to the Member at the address described below. Any notice, payment or report to be given or made to a Member hereunder shall be deemed conclusively to have been given or made, and the obligation to give such notice or report or to make such payment shall be deemed conclusively to have been fully satisfied, upon sending of such notice, payment or report to the Record Holder of such Shares at his address as shown on the records of the Transfer Agent or as otherwise shown on the records of the Company (including on Exhibit A attached hereto), regardless of any claim of any Person who may have an interest in such Shares by reason of any assignment or otherwise. An affidavit or certificate of making of any notice, payment or report in accordance with the provisions of this Section 8.1 executed by the Company, the Manager or the Transfer Agent or the mailing organization shall be prima facie evidence of the giving or making of such notice, payment or report. If any notice, payment or report addressed to a Record Holder at the address of such Record Holder appearing on the books and records of the Transfer Agent or the Company is returned by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver it, such notice, payment or report and any subsequent notices, payments and reports shall be deemed to have been duly given or made without further mailing (until such time as such Record Holder or another Person notifies the Transfer Agent or the Company of a change in his address) if they are available for the Member at the principal office of the Company for a period of one year from the date of the giving or making of such notice, payment or report to the other Members. Any notice to the Company shall be deemed given if received by the Secretary at the principal office of the Company designated pursuant to the terms and conditions herein. The Manager and the Officers may rely and shall be protected in relying on any notice or other document from a Member or other Person if believed by it to be genuine.

 

 

8.2 Amendments; Waiver. Except as otherwise expressly provided in this Agreement, any provision of this Agreement may be amended or waived only by an instrument in writing executed by the Manager and Class A Members holding a majority of the Class A Shares. Notwithstanding the foregoing, the Manager may amend this Agreement and the schedules and exhibits hereto, without the approval of the Members (i) to evidence the joinder to this Agreement of a new Member of the Company; (ii) in connection with the Transfer of Shares; (iii) in connection with any issuance of Shares to the Manager or to any existing members, whether as a result of issuances to the Manager pursuant to the Administrative Services Agreement, upon conversion of the Series B Shares pursuant to Section 2.4(c), or otherwise, (iv) as otherwise required to reflect Capital Contributions, distributions and similar actions hereunder; or (v) to reflect the naming of new officers or replacement of officers of the Company. Notwithstanding the forgoing the Manager is authorized to make such amendments to this Agreement as required in order to comply with any applicable law, including, without limitation, any securities law, whether currently in place or promulgated in the future.

 

8.3 Successors and Assigns. This Agreement shall inure to the benefit of, and shall be binding upon, the successors and permitted assigns of the Members.

 

8.4 No Waiver. No failure or delay by any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

 

8.5 Survival of Certain Provisions. The covenants and agreements set forth in Section 4.1, Section 4.2 and Section 5.2 shall survive the Termination of the Company.

 

8.6 Corporate Treatment. The Manager shall use its reasonable best efforts to take such actions as are necessary or appropriate to preserve the status of the Company as a partnership for U.S. federal (and applicable state and local) income tax purposes. If, however, the Manager determines, in its sole discretion, for any reason (including the proposal, formally or informally, of legislation that could affect the Company’s status as a partnership for U.S. federal and/or applicable state and local income tax purposes) that it is not in the best interests of the Company to be characterized as a partnership, the Manager may take whatever steps, if any, are needed to cause the Company to be or confirm that the Company will be treated as an association or as a publicly traded partnership taxable as a corporation for U.S. federal (and applicable state and local) income tax purposes. Notwithstanding anything in this Agreement to the contrary, in the event U.S. federal (and/or applicable state and local) income tax laws, rules or regulations are enacted, amended, modified or applied after the date hereof in such a manner as to require or necessitate that the Company no longer be treated as a partnership for U.S. federal (and/or applicable state and local) income tax purposes, then the first sentence of this Section 8.6 shall no longer apply.

 

8.7 Section 7704(e) Relief. In the event that the Manager determines the Company should seek relief pursuant to Section 7704(e) of the Code to preserve the status of the Company as a partnership for U.S. federal (and applicable state) income tax purposes, the Company and each Member shall agree to adjustments required by the tax authorities, and the Company shall pay such amounts as required by the tax authorities, to preserve the status of the Company as a partnership.

 

8.8 Severability. In case any provision in this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired hereby.

 

 

8.9 Interpretation The headings in this Agreement are inserted for convenience of reference only and shall not affect the interpretation of this Agreement. As used herein, masculine pronouns shall include the feminine and neuter, neuter pronouns shall include the masculine and the feminine, and the singular shall be deemed to include the plural. The use of the word “including” herein shall not be considered to limit the provision that it modifies but instead shall mean “including, without limitation.”

 

8.10 No Third-Party Rights. Except as expressly provided in this Agreement, this Agreement is intended solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any Person other than the parties hereto.

 

8.11 Entire Agreement. This Agreement constitutes the entire agreement of the Company, the Initial Member and any Person who becomes a Member hereafter with respect to the matters described herein and supersedes any prior agreement or understanding among them with respect to such subject matter.

 

8.12 Rule of Construction. The general rule of construction for interpreting a contract, which provides that the provisions of a contract should be construed against the party preparing the contract, is waived by the parties hereto. Each party acknowledges that such party was represented by separate legal counsel in this matter who participated in the preparation of this Agreement or such party had the opportunity to retain counsel to participate in the preparation of this Agreement but elected not to do so.

 

8.13 Authority. Whenever in this Agreement or elsewhere it is provided that consent is required of, or a demand shall be made by, or an act or thing shall be done by or at the direction of, the Company, or whenever any words of like import are used, all such consents, demands, acts and things are to be made, given or done by the consent of the Manager or Person acting under the authority of the Manager, unless a contrary intention is expressly indicated.

 

8.14 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the conflict of laws principles thereof.

 

8.15 Facsimile Signatures. The use of facsimile signatures affixed in the name and on behalf of the transfer agent and registrar of the Company on certificates representing Shares is expressly permitted by this Agreement.

 

8.16 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

 

[Signatures appear on following page]

 

 

IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the date first written above.

 

	Masterworks Galley, LLC
	Sole Member
	By:
	Name:
	Title:

 

	Members:
	All members now and hereafter admitted as Members of the Company, pursuant to powers of attorney now and hereafter executed in favor of, and granted and delivered to the Company or without execution hereof or thereof by purchasing or otherwise lawfully acquiring any Share, pursuant to Section 1.7.

 

 

Exhibit A

 

Members, Capital Contributions, Shares

 

Member Name		Address		Capital Contribution		Number of Class A Shares		Number of Class B Shares
Masterworks Gallery, LLC		524 Broadway 10th Floor New York, NY 10012		Services Rendered		0		24,956

 

 

Exhibit B

 

Form of Counterpart Signature Page

 

The undersigned hereby accepts, and becomes a party to, the Amended and Restated Limited Liability Company Agreement (the “Agreement”) of Masterworks 001, LLC, a Delaware limited liability company (the “Company”), in connection with the acquisition of Shares (as defined in the Agreement) of the Company, and by its signature below signifies its agreement to be bound by the terms and conditions of the Agreement.

 

Member Name:
By:
Name:
Title:
Number of Shares:
Agreed and Accepted:

 

	Masterworks 001, LLC
	By:	Masterworks Administrative Services, LLC
	Its:	Manager
	By:
	Name:
	Title:

 

 

Schedule 1

 

Painting

 

 

 

 

FORM OF SUBSCRIPTION AGREEMENT

 

 

 

MASTERWORKS 001, LLC

A DELAWARE LIMITED LIABILITY COMPANY

 

 

MASTERWORKS 001, LLC

A DELAWARE LIMITED LIABILITY COMPANY

 

This subscription agreement (“Agreement”) is made as of the date set forth below by and between the undersigned (“Subscriber” or “you”) and MASTERWORKS 001, LLC, a Delaware limited liability company (the “Company” or “we” or “us” or “our”), and is intended to set forth certain representations, covenants and agreements between Subscriber and the Company with respect to the offering (the “Offering”) for sale by the Company of its Class A membership interests (referred to herein as the “Shares”) as described in the Company’s Offering Circular dated as of [Date] (the “Offering Circular”).

 

1.	Subscription and Purchase of Shares.

 

a.

Maximum. The maximum investment amount per investor is $100,000 (5,000 Shares).

 

b.

Irrevocable Subscription. Subject to the terms and conditions hereof, you irrevocably subscribe for and agree to purchase from the Company the number of Shares set forth on the signature page to this Agreement at a purchase price of $20.00 per Share for the total amount set forth on the signature page (the “Purchase Price”).

 

c.

Rejection. We have the right to reject or cancel your subscription, in whole or in part, whether or not we consummate the Offering. If we reject or cancel your subscription, we will refund to you amounts paid relating to such portion of the subscription that is rejected or cancelled, without interest.

 

d.

Operating Agreement. You haves received and read a copy of the Company’s Operating Agreement (the “Operating Agreement”) and agree that your execution of this Agreement constitutes your consent to the Operating Agreement, and, that upon acceptance of this Agreement by the Company, you will become a member of the Company as a holder of Shares. When this Agreement is countersigned by the Company, the Operating Agreement shall be binding upon you as of the closing date.

 

e.

Masterworks Platform. The Offering is described in the Offering Circular, that is available through the online website platform www.masterworks.io (the “Masterworks Platform”), which is owned and operated by Masterworks.io, LLC (together with its subsidiaries, other than the Company and any subsidiary of the Company, “Masterworks”), an affiliated entity of the Company, as well as on the SEC’s EDGAR website at www.sec.gov. Please read this Agreement, the Offering Circular, and the Operating Agreement. While they are subject to change, as described below, we advise you to print and retain a copy of these documents for your records. By signing electronically below, you agree to the terms of this Agreement together with the Terms and Conditions and the Terms of Use, Masterworks’ Privacy Policy, and agree to transact business with us and to receive communications, including voting and proxy materials, relating to the Shares electronically.

 

2.	Payment and Delivery

 

a.

Payment. Contemporaneously with the electronic execution and delivery of this Agreement through the Masterworks Platform, you will pay the Purchase Price for the Shares in the form ACH debit transfer or wire transfer or an alternative payment method, if applicable, into a segregated non-interest-bearing account held by the Company until the closing date of the Offering. Your subscription is irrevocable. We will maintain all such funds for Subscriber’s benefit until the earliest to occur of: (i) the Closing, (ii) the rejection of such subscription or (iii) the termination of the Offering by us in our sole discretion.

 

 

	b.	Acceptance. This subscription shall be deemed to be accepted only when this Agreement has been signed by the Company’s manager, Masterworks Administrative Services, LLC, on behalf of the Company and delivered to you electronically. The deposit of the payment of the Purchase Price for clearance will not be deemed an acceptance of this Agreement.
	c.	Rejection or Termination. The payment of the Subscription Amount (or, in the case of rejection of a portion of the Subscriber’s subscription, the part of the payment relating to such rejected portion) will be returned promptly, without interest or deduction, if Subscriber’s subscription is rejected in whole or in part or if the Offering is terminated or canceled. If a subscription was made in a form of currency other than U.S. dollars, you will be able to make an election on the Masterworks Platform to receive such payment in the form of U.S. dollars or the currency in which the subscription was made. If no such election is made, the default will be to return such funds in U.S. dollars. If an election is made to receive such payment in a currency other than U.S. dollars, we will use the same process we used to convert the subscription into U.S. dollars to convert the U.S. dollars back into the original currency and such amounts will be refunded to you. You will bear the costs of effecting any such exchange.
	d.	Issuance of Shares. Upon the release of your Purchase Price to the Company at closing, you will receive notice and evidence of the digital book-entry (or other manner of record) of the number of the Shares owned by you reflected on the books and records of the Company and verified by Computershare Trust Company, N.A., acting in the capacity of transfer agent (the “Transfer Agent”), which books and records shall bear a notation that the Shares were sold in reliance upon Regulation A. The Company also intends to use ERC20 tokens from the Ethereum blockchain to track ownership of its shares in a public ledger.

 

3. Representations, Warranties and Agreements of Subscriber. By executing this Subscription Agreement, Subscriber represents, warrants and agrees as of the date of execution of this Agreement and as of the closing date of the Offering:

 

a.

Requisite Power and Authority and Related Matters. Subscriber has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement. All action on Subscriber’s part required for the lawful execution and delivery of this Agreement has been or will be effectively taken prior to the Closing. If Subscriber is a natural person, Subscriber is at least 21 years of age (or eighteen (18) years of age jurisdictions with such applicable age limit on contracting) and competent to enter into a contractual obligation. If an entity, Subscriber, represents that such entity was not formed for the specific purpose of acquiring the Shares, such entity is duly organized, validly existing and in good standing under the laws of the state of its organization, the consummation of the transactions contemplated hereby is authorized by, and will not result in a violation of state law or its charter or other organizational documents, such entity has full power and authority to execute and deliver this Agreement and all other related agreements or certificates and to carry out the provisions hereof and thereof and to purchase and hold the Shares, the execution and delivery of this Subscription Agreement has been duly authorized by all necessary action, this Subscription Agreement has been duly executed and delivered on behalf of such entity and is a legal, valid and binding obligation of such entity; or if executing this Agreement in a representative or fiduciary capacity, represents that it has full power and authority to execute and deliver this Agreement in such capacity and on behalf of the subscribing individual, ward, partnership, trust, estate, corporation, or limited liability company or partnership, or other entity for whom the Purchaser is executing this Agreement, and such individual, partnership, ward, trust, estate, corporation, or limited liability company or partnership, or other entity has full right and power to perform pursuant to this Subscription Agreement and make an investment in the Company, and represents that this Agreement constitutes a legal, valid and binding obligation of such entity. The execution and delivery of this Subscription Agreement will not violate or be in conflict with any order, judgment, injunction, agreement or controlling document to which the Subscriber is a party or by which it is bound. Upon execution and delivery, this Agreement will be a valid and binding obligation of Subscriber, enforceable in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights and (b) as limited by general principles of equity that restrict the availability of equitable remedies.

 

 

a.

Investment Representations. Subscriber understands that the Shares have not been registered under the Securities Act. Subscriber also understands that the Shares are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Subscriber’s representations contained in this Agreement. Subscriber is purchasing the Shares for Subscriber’s own account. Subscriber has received and reviewed this Agreement, the Offering Circular and the Operating Agreement. Subscriber and/or Subscriber’s advisors, who are not affiliated with and not compensated directly or indirectly by the Company or an affiliate thereof, have such knowledge and experience in business and financial matters as will enable them to utilize the information which they have received in connection with the Offering to evaluate the merits and risks of an investment, to make an informed investment decision and to protect Subscriber’s own interests in connection with an investment in the Shares.

 

b.

Illiquidity and Continued Economic Risk. Subscriber acknowledges and agrees that there is no ready public market for the Shares and that there is no guarantee that a market for their resale will ever exist. Subscriber must bear the economic risk of this investment indefinitely and the Company has no obligation to list the Shares on any market or take any steps (including registration under the Securities Act or the Securities Exchange Act of 1934, as amended) with respect to facilitating trading or resale of the Shares. Subscriber acknowledges that it is able to bear the economic risk of losing its entire investment in the Shares. Subscriber also understands that an investment in the Company involves significant risks and understand all of the risk factors relating to the purchase of Shares.

 

c.

Investor Status. Subscriber represents that either:

 

●

Subscriber is an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act; or

 

●

The Purchase Price set out in signature page to this Agreement, together with any other amounts previously used to purchase Shares in this Offering, does not exceed 10% of the greater of Subscriber’s annual income or net worth (excluding Subscriber’s primary residence and automobiles).

 

d.

Shareholder Information. Within five days after receipt of a request from the Company, you agree to provide such information with respect to your status as a shareholder (or potential shareholder) and to execute and deliver such documents as may reasonably be necessary to comply with any and all laws and regulations to which the Company is or may become subject, including, without limitation, the need to determine the accredited status of the Company’s shareholders. You further agree that in the event you transfer any Shares, you will require the transferee of such Shares to agree to provide such information to the Company as a condition of such transfer.

 

e.

Company Information. You have had the opportunity to review the Offering Circular filed with the SEC, including the section titled “Risk Factors.” You have had an opportunity to discuss the Company’s business, management and financial affairs with managers, officers and management of the Company and has had the opportunity to review the Company’s operations and facilities. Subscriber has also had the opportunity to ask questions of and receive answers from the Company and its management regarding the terms and conditions of this investment. Subscriber acknowledges that Subscriber is making an investment decision based on the information if the Offering Circular and except as set forth in the Offering Circular and herein, no representations or warranties have been made to Subscriber, or to Subscriber’s advisors or representative, by the Company or others with respect to the business or prospects of the Company or its financial condition.

 

 

f.

Additional Subscriber Information. Subscriber agrees to provide any additional documentation the Company may reasonably request, including documentation as may be required by the Company to form a reasonable basis that the Subscriber qualifies as an “accredited investor” as that term is defined in Rule 501 under Regulation D promulgated under the Act, or otherwise as a “qualified purchaser” as that term is defined in Regulation A promulgated under the Act, or as may be required by the securities administrators or regulators of any state, to confirm that the Subscriber meets any applicable minimum financial suitability standards and has satisfied any applicable maximum investment limits. Subscriber acknowledges that Subscriber’s responses to questions on the Masterworks Platform (as defined in the Offering Circular) are true, complete and accurate in all respects.

 

g.

Neither the Company nor Masterworks is an Investment Adviser. Subscriber understands that neither the Company nor Masterworks is registered under the Investment Company Act of 1940 or the Investment Advisers Act of 1940.

 

h.

Valuation; Use of Proceeds. Subscriber acknowledges that the price of the Shares was set by the Company on the basis of dividing the purchase price that a Masterworks affiliate paid for the Painting, by the number of shares offered in the Offering. The net proceeds of the Offering together with any unsold shares, if any, will be paid to Masterworks to purchase the Painting.

 

i.

Domicile. Subscriber maintains Subscriber’s domicile (and is not a transient or temporary resident) at the address shown on the signature page and provided on the Masterworks Platform.

 

j.

Power of Attorney. Any power of attorney of the Subscriber granted in favor of the Manager contained in the Operating Agreement has been executed by the Subscriber in compliance with the laws of the state, province or jurisdiction in which such agreements were executed.

 

k.

Placement Agent Fees. No fees or commissions will be payable by the Company to brokers, finders or investment bankers with respect to the Offering.

 

l.

Foreign Investors. If Subscriber is not a United States person (as defined by Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended), Subscriber hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Shares or any use of this Agreement, including (a) the legal requirements within its jurisdiction for the purchase of the Shares, (b) any foreign exchange restrictions applicable to such purchase, (c) any governmental or other consents that may need to be obtained, and (d) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale, or transfer of the Shares. Subscriber’s subscription and payment for and continued beneficial ownership of the Shares will not violate any applicable securities or other laws of the Subscriber’s jurisdiction.

 

 

m.

Patriot Act; Anti-Money Laundering; OFAC. The Subscriber should check the Office of Foreign Assets Control (“OFAC”) website at http://www.treas.gov/ofac before making the following representations. Subscriber hereby represents and warrants to the Company as follows:

 

●

Subscriber represents that (i) no part of the funds used by the Subscriber to acquire the Shares has been, or shall be, directly or indirectly derived from, or related to, any activity that may contravene United States federal or state or non-United States laws or regulations, including anti-money laundering laws and regulations, and (ii) no payment to the Company by the Subscriber and no distribution to the Subscriber shall cause the Company to be in violation of any applicable anti-money laundering laws or regulations including, without limitation, Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001 and the United States Department of the Treasury Office of Foreign Assets Control regulations. Subscriber acknowledges and agrees that, notwithstanding anything to the contrary contained in the Offering Circular or any other agreement, to the extent required by any anti-money laundering law or regulation, the Company may restrict distributions or take any other reasonably necessary or advisable action with respect to the Shares, and the Subscriber shall have no claim, and shall not pursue any claim, against the Company or any other person in connection therewith. U.S. federal regulations and executive orders administered by OFAC prohibit, among other things, the engagement in transactions with, and the provision of services to, certain foreign countries, territories, entities and individuals. The lists of OFAC prohibited countries, territories, persons and entities can be found on the OFAC website at http://www.treas.gov/ofac. In addition, the programs administered by OFAC (the “OFAC Programs”) prohibit dealing with individuals1 or entities in certain countries regardless of whether such individuals or entities appear on the OFAC lists.

 

●

To the best of the Subscriber’s knowledge, none of: (1) the Subscriber; (2) any person controlling or controlled by the Subscriber; (3) if the Subscriber is a privately-held entity, any person having a beneficial interest in the Subscriber; or (4) any person for whom the Subscriber is acting as agent or nominee in connection with this investment is a country, territory, individual or entity named on an OFAC list, or a person or entity prohibited under the OFAC Programs. Subscriber agrees to promptly notify the Company should the Subscriber become aware of any change in the information set forth in these representations. Subscriber understands and acknowledges that, by law, the Company may be obligated to “freeze the account” of the Subscriber, either by prohibiting additional subscriptions from the Subscriber, declining to make any distributions and/or segregating the assets in the account in compliance with governmental regulations, and any broker may also be required to report such action and to disclose the Subscriber’s identity to OFAC. Subscriber further acknowledges that the Company may, by written notice to the Subscriber, suspend the redemption rights, if any, of the Subscriber if the Company reasonably deems it necessary to do so to comply with anti-money laundering regulations applicable to the Company or any broker or any of the Company’s other service providers. These individuals include specially designated nationals, specially designated narcotics traffickers and other parties subject to OFAC sanctions and embargo programs.

 

●

To the best of the Subscriber’s knowledge, none of: (1) the Subscriber; (2) any person controlling or controlled by the Subscriber; (3) if the Subscriber is a privately-held entity, any person having a beneficial interest in the Subscriber; or (4) any person for whom the Subscriber is acting as agent or nominee in connection with this investment is a senior foreign political figure2, or any immediate family3 member or close associate4 of a senior foreign political figure, as such terms are defined in the footnotes below.

 

1	These individuals include specially designated nationals, specially designated narcotics traffickers and other parties subject to OFAC sanctions and embargo programs.
2	A “senior foreign political figure” is defined as a senior official in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned corporation. In addition, a “senior foreign political figure” includes any corporation, business or other entity that has been formed by, or for the benefit of, a senior foreign political figure.
3	“Immediate family” of a senior foreign political figure typically includes the figure’s parents, siblings, spouse, children and in-laws.
4	A “close associate” of a senior foreign political figure is a person who is widely and publicly known to maintain an unusually close relationship with the senior foreign political figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the senior foreign political figure.

 

 

●

If the Subscriber is affiliated with a non-U.S. banking institution (a “Foreign Bank”), or if the Subscriber receives deposits from, makes payments on behalf of, or handles other financial transactions related to a Foreign Bank, the Subscriber represents and warrants to the Company that: (1) the Foreign Bank has a fixed address, other than solely an electronic address, in a country in which the Foreign Bank is authorized to conduct banking activities; (2) the Foreign Bank maintains operating records related to its banking activities; (3) the Foreign Bank is subject to inspection by the banking authority that licensed the Foreign Bank to conduct banking activities; and (4) the Foreign Bank does not provide banking services to any other Foreign Bank that does not have a physical presence in any country and that is not a regulated affiliate.

 

●

Subscriber acknowledges that, to the extent applicable, the Company will seek to comply with the Foreign Account Tax Compliance Act provisions of the U.S. Internal Revenue Code and any rules, regulations, forms, instructions or other guidance issued in connection therewith (the “FATCA Provisions”). In furtherance of these efforts, the Subscriber agrees to promptly deliver any additional documentation or information, and updates thereto as applicable, which the Company may request in order to comply with the FATCA Provisions. The Subscriber acknowledges and agrees that, notwithstanding anything to the contrary contained in the Offering Circular, any side letter or any other agreement, the failure to promptly comply with such requests, or to provide such additional information, may result in the withholding of amounts with respect to, or other limitations on, distributions made to the Subscriber and such other reasonably necessary or advisable action by the Company with respect to the Shares (including, without limitation, required withdrawal), and the Subscriber shall have no claim, and shall not pursue any claim, against the Company or any other person in connection therewith.

 

4. Ownership Limitation. Subscriber acknowledges and agrees that, pursuant to the terms of the Company’s Operating Agreement, Subscriber generally cannot own, or be deemed to beneficially own, as “beneficial ownership” is determined pursuant to Section 13(d) and 13(g) of the Securities Act, more than 19.99% of the total number of Shares outstanding.

 

5. Survival; Indemnification. All representations, warranties and covenants contained in this Agreement and the indemnification contained herein shall survive (a) the acceptance of this Agreement by the Company, (b) changes in the transactions, documents and instruments described herein which are not material or which are to the benefit of Subscriber, and (c) the death or disability of Subscriber. Subscriber acknowledges the meaning and legal consequences of the representations, warranties and agreements in Section 2 hereof and that the Company has relied upon such representations, warranties and covenants in determining Subscriber’s qualification and suitability to purchase the Shares. Subscriber hereby agrees to indemnify, defend and hold harmless the Company, its officers, directors, employees, agents and controlling persons, from and against any and all losses, claims, damages, liabilities, expenses (including attorneys’ fees and disbursements), judgments or amounts paid in settlement of actions arising out of or resulting from the untruth of any representation of Subscriber herein or the breach of any warranty or covenant herein by Subscriber. Notwithstanding the foregoing, however, no representation, warranty, covenant or acknowledgment made herein by Subscriber shall in any manner be deemed to constitute a waiver of any rights granted to it under the Securities Act or state securities laws.

 

6. Tax Forms. Subscriber will also need to complete an IRS Form W-9 or the appropriate Form W-8, which should be returned directly to us via the Masterworks Platform. The Subscriber certifies that the information contained in the executed copy (or copies) of IRS Form W-9 or appropriate IRS Form W-8 (and any accompanying required documentation), as applicable, when submitted to the Company or Masterworks will be true, correct and complete. Subscriber shall (i) promptly inform the Company of any change in such information, and (ii) furnish to us a new properly completed and executed form, certificate or attachment, as applicable, as may be required under the Internal Revenue Service instructions to such forms, the Code or any applicable Treasury Regulations or as may be requested from time to time by us.

 

 

7. No Advisory Relationship. Subscriber acknowledges and agrees that the purchase and sale of the Shares pursuant to this Agreement is an arms-length transaction between you and the Company. In connection with the purchase and sale of the Shares, neither the Company nor Masterworks is acting as your agent or fiduciary. Neither the Company nor Masterworks assumes any advisory or fiduciary responsibility in your favor in connection with the Shares. Neither the Company nor Masterworks has provided you with any legal, accounting, regulatory or tax advice with respect to the Shares, and you have consulted your own respective legal, accounting, regulatory and tax advisors to the extent you have deemed appropriate.

 

8. Masterworks Platform. Subscriber acknowledges that it has read, understands and agrees to the terms and conditions, privacy policy and disclaimers on the Masterworks Platform.

 

9. Transfer Restrictions. Subscriber acknowledges and agrees that the Shares are subject to restrictions on transfer as described in the Offering Materials. The 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 Shares transferred and will vary with processing capacity, supply and demand conditions on the Ethereum blockchain at the time of the transfer. Transfers will also be subject to restrictions imposed under state and international securities laws.

 

10. Arbitration.

 

a.

Either party may, at its sole election, require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration pursuant to this Section 10 (this “Arbitration Provision”). The arbitration shall be conducted in New York, NY. As used in this Arbitration Provision, “Claim” shall include any past, present, or future claim, dispute, or controversy involving you (or persons claiming through or connected with you), on the one hand, and the Company and or Masterworks (or persons claiming through or connected with the Company or Masterworks), on the other hand, relating to or arising out of this Agreement, the Shares, the Masterworks Platform, and/or the activities or relationships that involve, lead to, or result from any of the foregoing, including (except to the extent provided otherwise in the last sentence of Section (e) below) the validity or enforceability of this Arbitration Provision, any part thereof, or the entire Agreement. Claims are subject to arbitration regardless of whether they arise from contract; tort (intentional or otherwise); a constitution, statute, common law, or principles of equity; or otherwise. Claims include (without limitation) matters arising as initial claims, counter-claims, cross-claims, third-party claims, or otherwise. The scope of this Arbitration Provision is to be given the broadest possible interpretation that is enforceable.

 

b.

The party initiating arbitration shall do so with the American Arbitration Association (the “AAA”) or JAMS. The arbitration shall be conducted according to, and the location of the arbitration shall be determined in accordance with, the rules and policies of the administrator selected, except to the extent the rules conflict with this Arbitration Provision or any countervailing law. In the case of a conflict between the rules and policies of the administrator and this Arbitration Provision, this Arbitration Provision shall control, subject to countervailing law, unless all parties to the arbitration consent to have the rules and policies of the administrator apply.

 

 

c.

If we elect arbitration, we shall pay all the administrator’s filing costs and administrative fees (other than hearing fees). If you elect arbitration, filing costs and administrative fees (other than hearing fees) shall be paid in accordance with the rules of the administrator selected, or in accordance with countervailing law if contrary to the administrator’s rules. We shall pay the administrator’s hearing fees for one full day of arbitration hearings. Fees for hearings that exceed one day will be paid by the party requesting the hearing, unless the administrator’s rules or applicable law require otherwise, or you request that we pay them and we agree to do so. Each party shall bear the expense of its own attorney’s fees, except as otherwise provided by law. If a statute gives you the right to recover any of these fees, these statutory rights shall apply in the arbitration notwithstanding anything to the contrary herein.

 

d.

Within 30 days of a final award by the arbitrator, a party may appeal the award for reconsideration by a three-arbitrator panel selected according to the rules of the arbitrator administrator. In the event of such an appeal, an opposing party may cross-appeal within 30 days after notice of the appeal. The panel will reconsider de novo all aspects of the initial award that are appealed. Costs and conduct of any appeal shall be governed by this Arbitration Provision and the administrator’s rules, in the same way as the initial arbitration proceeding. Any award by the individual arbitrator that is not subject to appeal, and any panel award on appeal, shall be final and binding, except for any appeal right under the Federal Arbitration Act (the “FAA”), and may be entered as a judgment in any court of competent jurisdiction.

 

e.

We agree not to invoke our right to arbitrate an individual Claim that you may bring in Small Claims Court or an equivalent court, if any, so long as the Claim is pending only in that court. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NO ARBITRATION SHALL PROCEED ON A CLASS, REPRESENTATIVE, OR COLLECTIVE BASIS (INCLUDING AS PRIVATE ATTORNEY GENERAL ON BEHALF OF OTHERS), EVEN IF THE CLAIM OR CLAIMS THAT ARE THE SUBJECT OF THE ARBITRATION HAD PREVIOUSLY BEEN ASSERTED (OR COULD HAVE BEEN ASSERTED) IN A COURT AS CLASS REPRESENTATIVE, OR COLLECTIVE ACTIONS IN A COURT.

 

f.

Unless otherwise provided in this Agreement or consented to in writing by all parties to the arbitration, no party to the arbitration may join, consolidate, or otherwise bring claims for or on behalf of two or more individuals or unrelated corporate entities in the same arbitration unless those persons are parties to a single transaction. Unless consented to in writing by all parties to the arbitration, an award in arbitration shall determine the rights and obligations of the named parties only, and only with respect to the claims in arbitration, and shall not (i) determine the rights, obligations, or interests of anyone other than a named party, or resolve any Claim of anyone other than a named party, or (ii) make an award for the benefit of, or against, anyone other than a named party. No administrator or arbitrator shall have the power or authority to waive, modify, or fail to enforce this sub-section (e), and any attempt to do so, whether by rule, policy, arbitration decision or otherwise, shall be invalid and unenforceable. Any challenge to the validity of this sub-section (e) shall be determined exclusively by a court and not by the administrator or any arbitrator.

 

g.

This Arbitration Provision is made pursuant to a transaction involving interstate commerce and shall be governed by and enforceable under the FAA. The arbitrator will apply substantive law consistent with the FAA and applicable statutes of limitations. The arbitrator may award damages or other types of relief permitted by applicable substantive law, subject to the limitations set forth in this Arbitration Provision. The arbitrator will not be bound by judicial rules of procedure and evidence that would apply in a court. The arbitrator shall take steps to reasonably protect confidential information.

 

h.

This Arbitration Provision shall survive (i) suspension, termination, revocation, closure, or amendments to this Agreement and the relationship of the parties; (ii) the bankruptcy or insolvency of any party hereto or other party; and (iii) any transfer of any loan or Common Share or any amounts owed on such loans or notes, to any other party. If any portion of this Arbitration Provision other than sub-section (e) is deemed invalid or unenforceable, the remaining portions of this Arbitration Provision shall nevertheless remain valid and in force. If arbitration is brought on a class, representative, or collective basis, and the limitations on such proceedings in sub-section (e) are finally adjudicated pursuant to the last sentence of sub-section (e) to be unenforceable, then no arbitration shall be had. In no event shall any invalidation be deemed to authorize an arbitrator to determine Claims or make awards beyond those authorized in this Arbitration Provision.

 

 

10. Waiver of Court & Jury Rights. THE PARTIES ACKNOWLEDGE THAT THEY HAVE A RIGHT TO LITIGATE CLAIMS THROUGH A COURT BEFORE A JUDGE, BUT WILL NOT HAVE THAT RIGHT IF ANY PARTY ELECTS ARBITRATION PURSUANT TO THIS ARBITRATION PROVISION. THE PARTIES HEREBY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RIGHTS TO LITIGATE SUCH CLAIMS IN A COURT UPON ELECTION OF ARBITRATION BY ANY PARTY. THE PARTIES HERETO WAIVE A TRIAL BY JURY IN ANY LITIGATION RELATING TO THIS AGREEMENT, THE SHARES OR ANY OTHER AGREEMENTS RELATED THERETO. THIS WAIVER OF THE RIGHT TO A JURY TRIAL DOES NOT APPLY TO ANY CLAIMS MADE UNDER THE FEDERAL SECURITIES LAWS.

 

11. Damage Limitation. IN NO EVENT SHALL THE COMPANY BE LIABLE TO THE SUBSCRIBER FOR ANY LOST PROFITS OR SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. THE FOREGOING SHALL BE INTERPRETED AND HAVE EFFECT TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, RULE OR REGULATION.

 

12. Miscellaneous.

 

a.

Captions and Headings. The Article and Section headings throughout this Agreement are for convenience of reference only and shall in no way be deemed to define, limit or add to any provision of this Agreement.

 

b.

Notification of Changes. Subscriber agrees and covenants to notify the Company immediately upon the occurrence of any event prior to the consummation of this Offering that would cause any representation, warranty, covenant or other statement contained in this Agreement to be false or incorrect or of any change in any statement made herein occurring prior to the consummation of this Offering.

 

c.

Assignability. This Agreement is not assignable by Subscriber, and may not be modified, waived or terminated except by an instrument in writing signed by the party against whom enforcement of such modification, waiver or termination is sought.

 

d.

Binding Effect. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their heirs, executors, administrators, successors, legal representatives and assigns, and the agreements, representations, warranties and acknowledgments contained herein shall be deemed to be made by and be binding upon such heirs, executors, administrators, successors, legal representatives and assigns.

 

e.

Obligations Irrevocable. The obligations of Subscriber shall be irrevocable, except with the consent of the Company, until the consummation or termination of the Offering.

 

f.

Entire Agreement; Amendment. This Agreement states the entire agreement and understanding of the parties relating to the matters contained herein, superseding all prior contracts or agreements, whether oral or written. No amendment of the Agreement shall be made without the express written consent of the parties.

 

g.

Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect any other provision hereof, which shall be construed in all respects as if such invalid or unenforceable provision were omitted.

 

h.

Hardware and Software Requirements. In order to access and retain documents electronically, you must satisfy the following computer hardware and software requirements: access to the Internet; an email account and related software capable of receiving email through the Internet; a web browser which is SSL-compliant and supports secure sessions; and hardware capable of running this software. You will also need a printer if you wish to print electronic documents on paper, and electronic storage if you wish to download and save documents to your computer.

 

i.

Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of Delaware, without regard to the conflicts of laws principles thereof. To the extent of any disagreement or matter relating to this Agreement, the Shares or the Masterworks Platform, including, without limitation, the enforceability of the arbitration provisions of this Agreement or the enforcement of any arbitration award, such disagreement or matter shall be exclusively submitted to the federal or state courts located in the City of New York.

 

 

j.

Notices. All notices and communications to be given or otherwise made to the Subscriber shall be deemed to be sufficient if sent by electronic mail to such address as set forth for the Subscriber at the records of the Company and or Masterworks (or that you submitted to us via the Masterworks Platform). You shall send all notices or other communications required to be given hereunder to the Company via email at [email protected] (with a copy to be sent concurrently via prepaid certified mail to: Masterworks Administrative Services, LLC, Spring Place, 6 St. John Lane, New York, New York, 10013, Attention: Investor Relations. Any such notice or communication shall be deemed to have been delivered and received on the first business day following that on which the electronic mail has been sent (assuming that there is no error in delivery). As used in this Section, “business day” shall mean any day other than a day on which banking institutions in the State of Delaware are legally closed for business.

 

k.

Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which together shall be deemed to be one and the same agreement.

 

l.

Digital Signatures. Digital (“electronic”) signatures, often referred to as an “e-signature”, enable paperless contracts and help speed up business transactions. The 2001 E-Sign Act was meant to ease the adoption of electronic signatures. The mechanics of this Subscription Agreement’s electronic signature include your signing this Agreement below by typing in your name, with the underlying software recording your IP address, your browser identification, the timestamp, and a securities hash within an SSL encrypted environment. This electronically signed Subscription Agreement will be available to both you and the Company, as well as any associated brokers, so they can store and access it at any time, and it will be stored and accessible on the Masterworks Platform and hosting provider, including backups. You and the Company each hereby consents and agrees that electronically signing this Agreement constitutes your signature, acceptance and agreement as if actually signed by you in writing. Further, all parties agree that no certification authority or other third-party verification is necessary to validate any electronic signature; and that the lack of such certification or third party verification will not in any way affect the enforceability of your signature or resulting contract between you and the Company. You understand and agree that your e-signature executed in conjunction with the electronic submission of this Subscription Agreement shall be legally binding and such transaction shall be considered authorized by you. You agree your electronic signature is the legal equivalent of your manual signature on this Subscription Agreement you consent to be legally bound by this Subscription Agreement’s terms and conditions.

 

m.

Consent to Electronic Delivery of Tax Documents. Please read this disclosure about how we will provide certain documents that we are required by the Internal Revenue Service (the “IRS”) to send to you (“Tax Documents”) in connection with your Shares. A Tax Document provides important information you need to complete your tax returns. Tax Documents include Form 1099 and/or Form K-1. Occasionally, we are required to send you CORRECTED Tax Documents. Additionally, we may include inserts with your Tax Documents. We are required to send Tax Documents to you in writing, which means in paper form. When you consent to electronic delivery of your Tax Documents, you will be consenting to delivery of Tax Documents, including these corrected Tax Documents and inserts, electronically instead of in paper form. By executing this Agreement on the Masterworks Platform, you are consenting in the affirmative that we may send Tax Documents to you electronically, and acknowledging that you are able to access Tax Documents from the site which are made available under “My Account.” If you subsequently withdraw consent to receive Tax Documents electronically, a paper copy will be provided. Your consent to receive the Tax Documents electronically continues for every tax year until you withdraw your consent. You can withdraw your consent before the Tax Document is furnished by mailing a letter including your name, mailing address, effective tax year, and indicating your intent to withdraw consent to the electronic delivery of Tax Documents to:

 

 

Masterworks Administrative Services, LLC

Attn: General Counsel

Spring Place

6 St. Johns Lane

7th Floor

New York, NY 10013

(203) 518-5172

 

If you withdraw consent to receive Tax Documents electronically, a paper copy will be provided. (g) You Must Keep Your E-mail Address Current With Us. You must promptly notify us of a change of your email address. If your mailing address, email address, telephone number or other contact information changes, you may also provide updated information by contacting us at [email protected].

 

n.

Electronic Delivery of Information. Subscriber and the Company each hereby agrees that all current and future notices, confirmations and other communications regarding this Agreement, the Operating Agreement and future communications in general between the parties, may be made by email, sent to the email address of record as set forth in this Agreement or as otherwise from time to time changed or updated and disclosed to the other party, without necessity of confirmation of receipt, delivery or reading, and such form of electronic communication is sufficient for all matters regarding the relationship between the parties. If any such electronically sent communication fails to be received for any reason, including but not limited to such communications being diverted to the recipients spam filters by the recipients email service provider, or due to a recipient’s change of address, or due to technology issues by the recipients service provider, the parties agree that the burden of such failure to receive is on the recipient and not the sender, and that the sender is under no obligation to resend communications via any other means, including but not limited to postal service or overnight courier, and that such communications shall for all purposes, including legal and regulatory, be deemed to have been delivered and received. No physical, paper documents will be sent to you, and if you desire physical documents then you agree to be satisfied by directly and personally printing, at your own expense, the electronically sent communication(s) and maintaining such physical records in any manner or form that you desire.

 

[SIGNATURE PAGE FOLLOWS]

 

 

MASTERWORKS 001, LLC

SUBSCRIPTION AGREEMENT SIGNATURE PAGE

 

IN WITNESS WHEREOF, Subscriber or its duly authorized representative has executed and delivered this Subscription Agreement and delivered the Purchase Price as of the date set forth above.

 

Name of Subscriber:
Date:
Number of Shares the Subscriber irrevocably subscribes for is:
		(enter number of Shares)

 

Aggregate Purchase Price (based on a price of $20.00 per Share):		$
		(enter total Purchase Price in USD)

 

	SIGNATURE:
	(Signature of subscriber)
	PRINT NAME:
	COMPANY NAME (IF APPLICABLE):
	TITLE OF SIGNER (IF APPLICABLE):

	ADDRESS:
	Street
	City	State	Zip
	Telephone
	Email

 

 

MASTERWORKS 001, LLC

SUBSCRIPTION AGREEMENT SIGNATURE PAGE (CONTINUED)

 

ACCEPTED AND AGREED TO:
MASTERWORKS 001, LLC By: Masterworks Administrative Services, LLC, its manager
By:
Name:	Scott Lynn
Title:	Chief Executive Officer

 

Masterworks 001, LLC

 

Masterworks 001, LLC

Attn: General Counsel

Spring Place

6 St. Johns Lane

7^th Floor

New York, NY 10013

(203) 518-5172

 

 

 

 

aRT purchase agreement

 

By and between:

 

MASTERWORKS GALLERY, LLC

 

and

 

MASTERWORKS 001, LLC

 

 

 

Table of Contents

Page

Article I.   INTERPRETATION	1
Section 1.01   Defined Terms.	1
Section 1.02   Interpretation.	4
Article II.   PURCHASE AND SALE OF ARTWORK	4
Section 2.01   Sale and Purchase of Painting.	4
Section 2.02   Purchase Price.	5
Section 2.03   Transfer Tax and Other Taxes.	5
Section 2.04   No Liabilities Being Assumed.	5
Section 2.05   The Closing.	5
Article III.   CLOSING AND CONDITIONS TO CLOSING	5
Section 3.01   Conditions to Closing in Favor of the Buyer.	5
Section 3.02   Conditions to Closing in Favor of Seller.	5
Section 3.03   Documents and Items to be Delivered by Seller at the Closing.	6
Section 3.04   Documents and Items to be Delivered by Buyer at the Closing.	6
Section 3.05   Method of Payment.	7
Article IV.   REPRESENTATIONS AND WARRANTIES OF SELLER	7
Section 4.01   Organization.	7
Section 4.02   Authorization.	7
Section 4.03   No Other Agreements to Purchase.	7
Section 4.04   No Violation.	7
Section 4.05   Painting Ownership.	7
Section 4.06   Insurance.	8
Section 4.07   No Expropriation.	8
Section 4.08   Compliance with Legal Requirements; Licenses.	8
Section 4.09   Consents and Approvals.	8
Section 4.10   Tax Matters.	8
Section 4.11   Litigation.	8
Section 4.12   No Liabilities.	8
Section 4.13   Brokerage.	9
Section 4.14   Full Disclosure.	9
Article V.   REPRESENTATIONS AND WARRANTIES OF THE BUYER	9
Section 5.01   Organization.	9
Section 5.02   Authorization.	9
Section 5.03   No Violation.	9
Section 5.04   Consents and Approvals.	9
Section 5.05   Brokerage.	9
Section 5.06   Full Disclosure.	10
Article VI.   COVENANTS AND AGREEMENTS	10
Section 6.01   Painting No-Shop	10
Section 6.02   Seller Affirmative Covenants.	11
Section 6.03   Seller Negative Covenants.	11
Section 6.04   Buyer Affirmative Covenants.	11

 

 

Section 6.05   Confidentiality.	12
Section 6.06   Tax Covenants.	12
Section 6.07   Further Assurances.	13
Article VII.   SURVIVAL AND INDEMNIFICATION	13
Section 7.01   Survival; Limitations	13
Section 7.02   Indemnification by Seller.	13
Section 7.03   Indemnification by the Buyer.	14
Section 7.04   Notice of Claim.	14
Section 7.05   Direct Claims.	14
Section 7.06   Third Party Claims.	14
Section 7.07   Settlement of Third Party Claims.	15
Section 7.08   Cooperation.	15
Section 7.09   Right of Set-Off.	15
Section 7.10   Effect of Investigation.	15
Section 7.11   Force Majeure.	15
Article VIII.   DEFAULT AND TERMINATION	16
Section 8.01   Default by Buyer.	16
Section 8.02   Default by Seller.	16
Section 8.03   Termination.	16
Section 8.04   Effect of Termination.	16
Article IX.   MISCELLANEOUS	16
Section 9.01   Notices.	16
Section 9.02   Consultation.	17
Section 9.03   Disclosure.	17
Section 9.04   Entire Agreement.	17
Section 9.05   Time of Essence.	17
Section 9.06   Applicable Law.	17
Section 9.07   Severability.	18
Section 9.08   Successors and Assigns.	18
Section 9.09   Amendment and Waivers.	18
Section 9.10   Waiver of Jury Trial.	18
Section 9.11   Dispute Resolution.	18
Section 9.12   Third-Party Beneficiaries.	19
Section 9.13   Specific Performance.	19
Section 9.14   Best Efforts.	19
Section 9.15   Interpretation.	19
Section 9.16   Sections and Headings.	19
Section 9.17   Severability.	19
Section 9.18   Expenses.	19
Section 9.19   Counterparts.	19

 

Exhibits and Schedules

 

Schedule 1A	Painting
Schedule 1B	Auction House Receipt
Schedule 1C	Condition Report
Exhibit 1	Form of Bill of Sale

 

 

ART PURCHASE AGREEMENT

 

Dated as of [_________], 2018

 

This Art Purchase Agreement is entered into as of the date first set forth above (the “Effective Date”) by and between Masterworks Gallery, LLC, a Delaware limited liability company (“Seller”) and Masterworks 001, LLC, a Delaware limited liability company (“Buyer”). Each of Buyer and Seller may be referred to herein as a “Party” and collectively as the “Parties.”

 

RECITALS

 

WHEREAS, Seller is the owner of the Painting (as defined below); and

 

WHEREAS, the Buyer wishes to purchase, and Seller wishes to sell, the Painting, on the terms and subject to the conditions set forth herein;

 

NOW, THEREFORE, in consideration of the respective covenants, agreements, representations, warranties and indemnities of the Parties herein contained and for other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each Party), the Parties agree as follows:

 

Article I. INTERPRETATION

 

Section 1.01 Defined Terms. For the purposes of this Agreement, unless the context otherwise requires, the following terms shall have the respective meanings set forth below and grammatical variations of such terms shall have corresponding meanings:

 

“Acquisition Inquiry” with respect to any Person means an inquiry, indication of interest or request for nonpublic information (other than an inquiry, indication of interest or request for nonpublic information made or submitted by or on behalf of the Buyer) that could reasonably be expected to lead to an Acquisition Proposal or an Acquisition Transaction with respect to that Person.

 

“Acquisition Proposal” with respect to any Person means any offer or proposal (other than an offer or proposal made or submitted by or on behalf of the Buyer) for any Acquisition Transaction or possible Acquisition Transaction with respect to that Person.

 

“Acquisition Transaction” means any transaction or series of related transactions with a Person or “group” (as defined in the Exchange Act) concerning any transaction that would result in the sale, lease, license or other disposition of the Painting.

 

“Action” means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.

 

“Affiliate” of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

 

“Bill of Sale” means the Bill of Sale substantially in the form as attached hereto as Exhibit 1.

 

“Business Day” means any day, other than a Saturday, Sunday or any statutory holiday in the State of Delaware.

 

 

“Buyer Default” as the meaning set forth in Section 8.01

 

“Buyer” has the meaning set forth in the Recitals.

 

“Cash Consideration” has the meaning set forth in Section 2.02.

 

“Claim” has the meaning set forth in Section 7.04.

 

“Closing Date” has the meaning set forth in Section 2.05.

 

“Closing” has the meaning set forth in Section 2.05.

 

“Contract” means any agreement, indenture, contract, lease, deed of trust, license, option, instrument or other commitment, whether written or oral.

 

“Direct Claim” has the meaning set forth in Section 7.04.

 

“Dispute” has the meaning set forth in Section 9.11(a).

 

“Encumbrance” means any encumbrance, lien, charge, hypothec, pledge, mortgage, title retention agreement, security interest of any nature, adverse claim, exception, reservation, easement, right of occupation, any matter capable of registration against title, option, right of pre-emption, privilege or any Contract to create any of the foregoing.

 

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules promulgated thereunder.

 

“Governmental Approvals” has the meaning set forth in Section 4.09.

 

“Governmental Authority” means any federal, state, local, municipal, domestic, foreign or multinational government, court, arbitrator, regulatory, administrative or other agency, commission or authority or other governmental entity, instrumentality, department, division, unity branch or authority.

 

“Indemnified Party” has the meaning set forth in Section 7.04.

 

“Indemnifying Party” has the meaning forth out in Section 7.04.

 

“Knowledge of” a Person and similar phrases means the knowledge of the Person or its Directors or officers, or any of them, after reasonable inquiry

 

“Legal Requirements” means any federal, state, local, municipal, domestic, foreign, multinational or other law, statute, constitution, resolution, ordinance, code, edict, decree, rule, regulation, ruling, order or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Authority.

 

“Liability” means any debt, liability or obligation, whether accrued or fixed, absolute or contingent, matured or unmatured, determined or undeterminable, known or unknown, and whether due or to be become due, including those arising under any Legal Requirement and those arising under any Contract.

 

“Losses,” in respect of any matter, means all claims, demands, proceedings, losses, damages, liabilities, deficiencies, costs and expenses (including, without limitation, all legal and other professional fees and disbursements, interest, penalties and amounts paid in settlement) arising directly or indirectly as a consequence of such matter.

 

 

“Material Adverse Effect” means any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the Painting or its condition (financial or otherwise), or (b) the ability of Seller to consummate the transactions contemplated herein on a timely basis; provided, however, that “Material Adverse Effect” shall not include any event, occurrence, fact, condition, or change, directly or indirectly, arising out of or attributable to: (i) any changes, conditions or effects in the United States economy or securities or financial markets in general; (ii) changes, conditions or effects that generally affect the art market; (iii) any change, effect or circumstance resulting from an action required or permitted by this Agreement; or (iv) conditions caused by acts of terrorism or war (whether or not declared); provided further, however, that any event, occurrence, fact, condition, or change referred to in clauses (i), (ii) or (iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred to the extent that such event, occurrence, fact, condition, or change has a disproportionate effect on Seller compared to other participants in the art market.

 

“Notice of Dispute” has the meaning set forth in Section 9.11(b).

 

“Offering” has the meaning set forth in Section 3.01(a).

 

“Painting” has the meaning set forth in Section 2.01(a).

 

“Permitted Encumbrances” means Liens for taxes, assessments and governmental charges due and being contested in good faith and diligently by appropriate proceedings (and for the payment of which adequate provision has been made and) and the Retained Rights.

 

“Person” means any individual, partnership, limited partnership, joint venture, syndicate, sole proprietorship, company or corporation with or without share capital, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, regulatory body or agency, government or governmental agency, authority or entity, however designated or constituted.

 

“Purchase Price” has the meaning set forth in Section 2.02.

 

“Related Party” means, (i) any Person that directly or indirectly controls, is directly or indirectly controlled by or is directly or indirectly under common control with such specified Person; (ii) any Person that holds a Material Interest in such specified Person; (iii) each Person that serves as a director, officer, partner, executor or trustee of such specified Person (or in a similar capacity); (iv) any Person in which such specified Person holds a Material Interest; and (v) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity); and, for purposes of this definition, (a) “control” (including “controlling,” “controlled by,” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and shall be construed as such term is used in the rules promulgated under the Securities Act of 1933, as amended; and (b) “Material Interest” means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of voting securities or other voting interests representing at least ten percent (10%) of the outstanding voting power of a Person or equity securities or other equity interests representing at least ten percent (10%) of the outstanding equity securities or equity interests in a Person.

 

“Representative” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.

 

“Retained Rights” has the meaning set forth in Section 2.01(b).

 

“Seller Default” has the meaning set forth in Section 8.02.

 

 

“Shares” has the meaning set forth in Section 3.01(a).

 

“Seller” has the meaning set forth in the Preamble.

 

“Taxes” has the meaning set forth in Section 4.10.

 

“Third Party Claim” has the meaning set forth in Section 7.04.

 

“Third Party” has the meaning set forth in Section 7.06.

 

“Time of Closing” means 2:00 p.m. (Eastern time) on the Closing Date, or such other time on the Closing Date as Seller and the Buyer may mutually determine.

 

“Transaction Documents” means, collectively, (i) this Agreement; (ii) the Bill of Sale; and (iii) the other agreements, instruments and documents required to be delivered at the Closing or otherwise required in connection the transactions contemplated herein.

 

Section 1.02 Interpretation.

 

	(a)	Currency. In this Agreement all amounts expressed using the symbol “$” or “dollar” refer to the lawful money of the United States.
	(b)	Number, Gender and Persons. In this Agreement, words importing the singular number only shall include the plural and vice versa, words importing gender shall include all genders and words importing persons shall include individuals, corporations, partnerships, associations, trusts, unincorporated organizations, governmental bodies and other legal or business entities of any kind whatsoever.

 

Article II. PURCHASE AND SALE OF ARTWORK

 

Section 2.01 Sale and Purchase of Painting.

 

	(a)	On the terms and subject to the conditions of this Agreement, Seller agrees to sell, assign and transfer to the Buyer, free and clear of all Encumbrances, other than Permitted Encumbrances, and the Buyer agrees to purchase from Seller, effective as of the Time of Closing, the artwork as described on Schedule 1B and all of Seller’s right, title and interest therein and thereto (collectively, the “Painting”). Seller represents and warrants that the receipt as attached hereto as Schedule 1B is a true and complete copy of the receipt from the auction house pursuant to which the Seller acquired the Painting. Seller represents and warrants that the condition report as attached hereto as Schedule 1C is a true and complete copy of the condition report received by the Seller from its agent, International Art Acquisitions, LLC when it purchased the Painting at a Phillips auction on November 16, 2017, as to the condition of the Painting.
	(b)	Notwithstanding Section 2.01(a) or anything herein to the contrary, the Parties acknowledge and agree that, both prior to an following the Closing (as defined below), the Seller shall retain the rights to offer the Painting for sale and to advertise the Painting for sale and to use any intellectual property rights relating to the Painting, whether owned by the Buyer or otherwise, to facilitate the offering and sale of the Painting following the Offering (the “Retained Rights”). The Parties further acknowledge and agree that the Seller may assign the Retained Rights to any Affiliate of Seller. Each of the Parties agree to execute such documents and undertake such actions as reasonably required to effect the intent of this Section 2.01(b).

 

Section 2.02 Purchase Price. The aggregate purchase price payable by the Buyer to Seller for the Painting shall be $1,815,000 (the “Purchase Price”), which shall be payable in cash or a combination of cash and shares of Buyer representing economic membership interests in Buyer as described below.

 

 

Section 2.03 Transfer Tax and Other Taxes. All sales, transfer and similar taxes payable in connection with the transfer and conveyance of the Painting shall be the responsibility of and shall be paid by Seller.

 

Section 2.04 No Liabilities Being Assumed. Nothing is this Agreement shall be interpreted as the Buyer assuming any Liability of Seller or any Related Party. Seller shall indemnify and save the Buyer harmless for any Liabilities of Seller or any Related Party.

 

Section 2.05 The Closing. On the terms and subject to the conditions set forth herein, the closing of the transactions contemplated by this Agreement, including the conveyance of the Painting (the “Closing”), shall take place at the offices of the Buyer following the satisfaction or waiver (by the Party for whose benefit the condition exists) of the conditions to Closing as set forth in Article III, or such other date as may be agreed to by the Parties, each in their sole discretion (such date, the “Closing Date”).

 

Article III. CLOSING AND CONDITIONS TO CLOSING

 

Section 3.01 Conditions to Closing in Favor of the Buyer. The occurrence of the Closing is subject to the following terms and conditions for the exclusive benefit of the Buyer, to be performed or fulfilled at or prior to the Time of Closing unless waived in writing by the Buyer:

 

	(a)	Buyer, a Delaware limited liability company shall have completed an offering (the “Offering”) of 99,825 of its Class A Shares (the “Shares”) for a total offering price of $1,996,500;
	(b)	Seller shall have delivered the documents and items as required by Section 3.03;
	(c)	Buyer shall have obtained all necessary approvals with respect to the transactions contemplated herein;
	(d)	The representations and warranties of Seller contained in this Agreement shall be true, complete and correct in all material respects at the Time of Closing, other than representations and warranties which are qualified as to materiality, which shall be true, complete and correct in all respects as the Time of Closing;
	(e)	All of the terms, covenants and conditions of this Agreement to be complied with or performed by Seller at or before the Time of Closing shall have been complied with or performed in all material respects;
	(f)	There shall have been obtained from all appropriate Governmental Authorities such licenses, permits, consents, approvals, certificates, registrations and authorizations as are required to be obtained by Seller to permit the change of ownership of the Painting contemplated hereby, in each case in form and substance to the reasonable satisfaction of the Buyer;
	(g)	No legal or regulatory action or proceeding shall be pending or threatened by any person to enjoin, restrict or prohibit the purchase and sale of the Painting contemplated hereby;
	(h)	No material damage by fire or other hazard to the whole or any material part of the Painting shall have occurred and no material part of the Painting shall be, or be under the threat of being, appropriated, expropriated or seized by any governmental or other lawful authority; and
	(i)	There shall have been no Material Adverse Effect;

 

Section 3.02 Conditions to Closing in Favor of Seller. The occurrence of the Closing is subject to the following terms and conditions for the exclusive benefit of Seller, to be performed or fulfilled at or prior to the Time of Closing, unless waived in writing by Seller:

 

 

	(a)	Buyer shall have delivered the documents and items as required by Section 3.04;
	(b)	Seller shall have obtained all necessary approvals of its managers, directors and members with respect to the transactions contemplated herein;
	(c)	The representations and warranties of the Buyer contained in this Agreement shall be true, complete and correct in all material respects at the Time of Closing, other than representations and warranties which are qualified as to materiality, which shall be true, complete and correct in all respects as the Time of Closing; and
	(d)	All of the terms, covenants and conditions of this Agreement to be complied with or performed by the Buyer at or before the Time of Closing shall have been complied with or performed in all material respects.

 

Section 3.03 Documents and Items to be Delivered by Seller at the Closing. At the Closing, Seller shall deliver to Buyer:

 

	(a)	A certificate, dated the Closing Date, signed by an authorized officer of Seller, in form and substance reasonably acceptable to Buyer, certifying that each of the conditions set forth in Section 3.01(d) and Section 3.01(e) have been satisfied;
	(b)	a certificate of the Secretary of Seller, dated as of the Closing Date, in form and substance satisfactory to Buyer attaching and certifying a certificate of good standing and legal existence of Seller issued by the Secretary of State of the State of Delaware and each jurisdiction in which Seller is licensed or qualified to conduct business as a foreign entity;
	(c)	the Bill of Sale, duly executed by an authorized officer of Seller;
	(d)	such other documents and items as may reasonably be requested by Buyer to effect the transactions contemplated hereunder.

 

Section 3.04 Documents and Items to be Delivered by Buyer at the Closing. At the Closing, Buyer shall deliver to Seller:

 

	(a)	The Purchase Price, pursuant to the procedures set forth in Section 3.05;
	(b)	A certificate, dated the Closing Date, signed by an authorized officer of Buyer, in form and substance reasonably acceptable to Seller, certifying that each of the conditions set forth in Section 3.02(c) and Section 3.02(d) have been satisfied;
	(c)	a certificate of the Secretary of Buyer, dated as of the Closing Date, in form and substance satisfactory to Seller attaching and certifying a certificate of good standing and legal existence of Buyer issued by the Secretary of State of the State of Delaware and each jurisdiction in which Buyer is licensed or qualified to conduct business as a foreign entity;
	(d)	the Bill of Sale, duly executed by an authorized officer of Buyer; and
	(e)	such other documents and items as may reasonably be requested by Seller to effect the transactions contemplated hereunder.

 

 

Section 3.05 Method of Payment.

 

	(a)	In the event that the Offering has resulted in net proceeds to Buyer equal to or in excess of 100% of the Purchase Price, the Purchase Price shall be paid to Seller via wire transfer of immediately available funds pursuant to instructions provided by Seller to Buyer at least three Business Days Prior to the Closing.
	(b)	In the event that the Offering has resulted in net proceeds to Buyer of less than 100% the Purchase Price, the Purchase Price shall be paid to Seller in a combination of cash and issuance to Seller of Shares. The Buyer shall pay to Seller an amount in cash, via wire transfer of immediately available funds pursuant to instructions provided by Seller to Buyer at least three Business Days Prior to the Closing, in the amount of the net proceeds from the Offering. In addition, the Buyer shall issue to Seller, as a portion of the Purchase Price, all of the Shares not sold in the Offering. Any such Shares delivered to Seller shall be duly and validly issued, fully paid and non-assessable, shall be valued for such purposes at the price at which shares are sold to investors in the Offering and shall bear the electronic equivalent of a securities legend indicating that such shares are restricted securities.

 

Article IV. REPRESENTATIONS AND WARRANTIES OF SELLER

 

Seller represents and warrants to the Buyer as follows and acknowledges that the Buyer is relying on such representations and warranties in connection with Buyer’s purchase of the Painting and the other transactions contemplated by this Agreement:

 

Section 4.01 Organization. Seller is a limited liability company, duly formed and organized and validly existing and in good standing under the laws of the State of Delaware. Seller has all requisite power to own or lease its property, to carry on its business as now being conducted by it and to enter into this Agreement and the Transaction Documents and to perform its obligations hereunder and thereunder. Seller is duly qualified as a foreign corporation to do business in each jurisdiction other than its state of incorporation in which the nature of its business makes such qualification necessary.

 

Section 4.02 Authorization. This Agreement and the Transactions Documents have been duly authorized, executed and delivered by Seller and are each a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency and other laws affecting the rights of creditors generally and except that equitable remedies may be granted only in the discretion of a court of competent jurisdiction.

 

Section 4.03 No Other Agreements to Purchase. No person other than the Buyer has any written or oral agreement or option or any right or privilege (whether by law, preemptive or contractual) capable of becoming an agreement or option for the purchase or acquisition from Seller of the Painting.

 

Section 4.04 No Violation. The execution and delivery of this Agreement and the Transaction Documents by Seller and the consummation of the transactions herein and therein provided for will not result in: (a) the breach or violation of any of the provisions of, or constitute a default under, or conflict with or cause the acceleration of any obligation of Seller under (whether after giving notice, lapsed time or otherwise): (i) any Contract to which Seller is a party or by which any of them or their properties are bound; (ii) any provision of the constituting documents or resolutions of Seller or its managers or members; (iii) any judgment, decree, order or award of any Governmental Authority having jurisdiction over Seller; (iv) any license, permit, approval, consent or authorization held by Seller or necessary to the ownership or control of the Painting; or (v) any applicable Legal Requirement; or (b) the creation or imposition of any Encumbrance on the Painting.

 

Section 4.05 Painting Ownership. The Painting is owned by Seller as the sole legal and beneficial owner thereof, with good and marketable title thereto, free and clear of all Encumbrances other than Permitted Encumbrances. From and after the Closing, Buyer will have the same good and marketable title to the Painting, free and clear of all Encumbrances other than Permitted Encumbrances, and will be entitled to and enjoy all the same rights and benefits of the Painting as enjoyed by Seller immediately prior to the Closing.

 

 

Section 4.06 Insurance. Seller has the Painting insured against loss or damage by all insurable hazards or risks on a replacement cost basis and such insurance coverage will be continued in full force and effect to and including the Time of Closing. Seller is not in default with respect to any of the provisions contained in any insurance policy and have not failed to give any notice or present any claim under any such insurance policy in a due and timely fashion.

 

Section 4.07 No Expropriation. No part of the Painting has been taken or expropriated by any federal, state, municipal or other authority, nor has any notice or proceeding in respect thereof been given or commenced, nor is Seller aware of any intent or proposal to give any such notice or commence any such proceedings.

 

Section 4.08 Compliance with Legal Requirements; Licenses. Seller has complied with all Legal Requirements applicable to the Painting or its ownership.

 

Section 4.09 Consents and Approvals. There is no requirement to make any filing with, give any notice to or to obtain any license, permit, certificate, registration, authorization, consent or approval (“Governmental Approvals”) of, any Governmental Authority as a condition to the lawful consummation of the transactions contemplated by this Agreement. There is no requirement under any Contract relating to the Painting to which Seller is a party or by which it is bound to give any notice to, or to obtain the consent or approval of, any party to such agreement, instrument or commitment relating to the consummation of the transactions contemplated by this Agreement.

 

Section 4.10 Tax Matters. All federal, state, county, local and foreign taxes, including without limitation, income, gross receipts, excise, import, ad valorem, property, franchise, license, sales, use, payroll, severance and windfall profits taxes, including any penalty, addition to tax, interest, assessment or other charge imposed thereon (collectively, “Taxes”), due and payable by Seller with respect to the Painting for any period ending prior to the Closing Date have been paid in ful1, except for those current taxes not yet due. There are no federal, state or local tax Encumbrances upon any of the Painting, and the Painting will be conveyed to the Buyer free and clear of all such Encumbrances. All Tax Returns required to be filed by or with respect to Seller prior to the Closing Date have been filed and all Taxes due as shown thereon have been paid. All such Tax Returns are true, correct and complete and accurately set forth all items to the extent required to be reflected or incurred in such Tax Returns by applicable Legal Requirements. No issues have been raised (or are currently pending) by any Governmental Authority the adverse determination of which could result in an Encumbrance upon the Painting. No waivers of statutes of limitations as to any tax matters have been given or requested with respect to Seller. Seller has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party and no person treated as an independent contractor has been reclassified as an employee by any governmental authority. Seller is not a party to any Tax allocation or Tax sharing agreement. There is no obligation to file Tax Returns in any jurisdiction in which Seller currently is not filing such Tax Returns. Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code.

 

Section 4.11 Litigation. There are no actions, suits or proceedings (whether or not purportedly on behalf of Seller) pending or, to the Knowledge of Seller, threatened against or affecting, the Painting, at law or in equity or before or by any Governmental Authority. Seller is not aware of any ground on which any such action, suit or proceeding might be commenced with any reasonable likelihood of success.

 

Section 4.12 No Liabilities. There are no liabilities of Seller or any Related Party, whether or not accrued and whether or not determined or determinable, in respect of which the Buyer may become liable on or after the consummation of the transactions herein provided for.

 

 

Section 4.13 Brokerage. Seller have not dealt with, and is not obligated to make any payment to, any finder, broker, investment banker or financial advisor in connection with any of the transactions contemplated by this Agreement or the negotiations looking toward the consummation of such transactions.

 

Section 4.14 Full Disclosure. Neither this Agreement nor any document to be delivered by Seller in connection with this Agreement or any certificate, report, statement or other document furnished by or on behalf of Seller in connection with the negotiation of this Agreement (i) contains or will contain any untrue statement of a material fact or (ii) omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading (in either case, a “misrepresentation”). To the Knowledge of Seller, there has been no event, transaction or information which has come to the attention of Seller that has not been disclosed to the Buyer in writing which could reasonably be expected to have a Material Adverse Effect.

 

Article V. REPRESENTATIONS AND WARRANTIES OF THE BUYER

 

Buyer represents and warrants to Seller as follows, and acknowledges and confirms that Seller is relying on such representations and warranties in connection with Seller’s sale of the Painting and the other transactions contemplated by this Agreement:

 

Section 5.01 Organization. Buyer is a corporation duly formed and organized and validly existing under the laws of the state of Delaware and has the corporate power to enter into this Agreement and the Transaction Documents to which it is a party and to perform its respective obligations hereunder and thereunder.

 

Section 5.02 Authorization. This Agreement and the Transaction Documents have been duly authorized, executed and delivered by Buyer and are each a legal, valid and binding obligation of each of them, enforceable against them by Seller in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency and other laws affecting the rights of creditors generally and except that equitable remedies may only be granted in the discretion of a court of competent jurisdiction.

 

Section 5.03 No Violation. The execution and delivery of this Agreement and the Transaction Documents to which they are party by Buyer and the consummation of the transactions herein provided for will not result in (a) the breach or violation of any of the provisions of, or constitute a default under, or conflict with or cause the acceleration of any obligation of Buyer (whether after giving notice, lapsed time or otherwise): (i) any Contract to which Buyer is a party or by which its properties are bound; (ii) any provision of the constituting documents or resolutions of the board of directors and stockholders of Buyer; (iii) any judgment, decree, order or award of any Governmental Authority having jurisdiction over Buyer; (iv) any license, permit, approval, consent or authorization held by Buyer or necessary to the ownership of the Painting; or (v) any applicable Legal Requirement; or (b) the creation or imposition of any Encumbrance on any of their respective assets.

 

Section 5.04 Consents and Approvals. There is no requirement for the Buyer to make any filing with, give any notice to or obtain any Governmental Approval of, any Governmental Authority as a condition to the lawful consummation of the transactions contemplated by this Agreement, other than filings required to be made with the SEC under the Exchange Act.

 

Section 5.05 Brokerage. Buyer has not dealt with, and is not obligated to make any payment to, any finder, broker, investment banker or financial advisor in connection with any of the transactions contemplated by this Agreement or the negotiations looking toward the consummation of such transactions.

 

 

Section 5.06 Full Disclosure. Neither this Agreement nor any document to be delivered by Buyer in connection with this Agreement or any certificate, report, statement or other document furnished by or on behalf of Buyer in connection with the negotiation of this Agreement (i) contains or will contain any untrue statement of a material fact or (ii) omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading (in either case, a “misrepresentation”). To the Knowledge of Buyer, there has been no event, transaction or information which has come to the attention of Buyer that has not been disclosed to the Seller in writing which could reasonably be expected to have a Material Adverse Effect.

 

Article VI. COVENANTS AND AGREEMENTS

 

Section 6.01 Painting No-Shop

 

(a)

Between the Effective Date and the Closing or the termination of this Agreement in accordance with its terms, Seller shall not, and shall cause its Representatives not to, directly or indirectly:

 

	(i)	solicit, initiate, knowingly encourage or knowingly facilitate the making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry;
	(ii)	furnish any non-public information regarding Seller to any Person who has made an Acquisition Proposal or an Acquisition Inquiry;
	(iii)	engage in discussions or negotiations with any Person who has made an Acquisition Proposal or Acquisition Inquiry (other than discussions in the ordinary course of business that are unrelated to an Acquisition Proposal or Acquisition Inquiry, which shall be permitted);
	(iv)	approve, endorse or recommend an Acquisition Proposal or Acquisition Inquiry;
	(v)	withdraw or propose to withdraw its approval and recommendation in favor of this Agreement and the transactions contemplated herein; or
	(vi)	enter into any letter of intent, agreement in principle, merger, acquisition, purchase or joint venture agreement or other similar agreement for any Acquisition Transaction.

 

	(b)	From the Effective Date until the termination of this Agreement in accordance with its terms, Seller shall ensure that Seller’s managers, directors or members shall not (i) approve or recommend, or propose publicly to approve or recommend, any Acquisition Proposal, or (ii) approve or recommend, or propose publicly to approve or recommend, or cause or authorize Seller to enter into, any letter of intent, agreement in principle, merger, acquisition, purchase or joint venture agreement or contract or other instrument in respect of or relating to an Acquisition Proposal.
	(c)	Seller shall promptly, within 36 hours, advise Buyer orally and in writing of any Acquisition Proposal or Acquisition Inquiry (including the identity of the Person making or submitting such Acquisition Proposal or Acquisition Inquiry and the terms thereof and all material modifications thereto) that is made or submitted by any Person during the period beginning on the Effective Date and ending upon the Closing or the termination of this Agreement in accordance with its terms. Seller shall keep Buyer reasonably informed on a current basis of any material developments in the status and terms of any such Acquisition Proposal or Acquisition Inquiry (including whether such Acquisition Proposal or Acquisition Inquiry has been withdrawn or rejected and any material change to the terms thereof).
	(d)	Seller shall immediately cease and cause to be terminated any discussions existing as of the Effective Date with any Person that relate to any Acquisition Proposal or Acquisition Inquiry proposed on or prior to the Effective Date. Seller acknowledges and agrees that any actions taken by or at the direction of a Representative of Seller that, if taken by Seller, would constitute a breach or violation of this Section 6.01 will be deemed to constitute a breach and violation of this Section 6.01 by Seller.

 

 

Section 6.02 Seller Affirmative Covenants. Between the Effective Date and the Closing or the termination of this Agreement in accordance with its terms, Seller shall:

 

	(a)	Use best efforts to maintain and preserve the Painting;
	(b)	provide Buyer and its Representatives and agents reasonable access to the books and financial records of Seller at any time during normal business hours prior to the Closing Date, at Buyer’s sole cost and expense, to perform any inspections or evaluations of the Painting or Seller;
	(c)	furnish to Buyer true, correct and complete copies of all records, documentation and other information in its possession as Buyer may reasonably request concerning Seller or the Painting;
	(d)	permit Buyer to, without any obligation to do so, contact any Governmental Authority about any governmental authorizations or requirements of law concerning Seller or the Painting;
	(e)	cooperate with Buyer with respect to all filings, permits or consents that Buyer elects to make or obtain or is required by requirements of law or other Persons to make or obtain in connection with the transactions contemplated herein; and
	(f)	provide notice to Buyer as promptly as reasonably practicable upon becoming aware of any event or occurrence capable of causing a material impact on the business of Seller; and
	(g)	between the Effective Date and the Closing Date or the earlier termination of this Agreement in accordance with its terms, use commercially reasonable efforts to cause the conditions precedent in Section 3.02 to be satisfied and to complete the actions in Section 3.03.

 

Section 6.03 Seller Negative Covenants. Between the Effective Date and the Closing or the termination of this Agreement in accordance with its terms, and except as otherwise contemplated by this Agreement or as Buyer shall otherwise consent in writing in advance, Seller will not, and Seller shall cause its Representatives not to, directly or indirectly:

 

	(a)	Amend existing insurance coverage applicable to the Painting so long as such insurance is available at commercially reasonable rates;
	(b)	take any action which could be reasonably expected to prevent or materially delay the consummation of the transactions contemplated herein;
	(c)	sell, lease or otherwise transfer, or create or incur any lien on the Painting;
	(d)	settle or compromise any material claims related to the Painting; or
	(e)	agree to take any of the foregoing actions, except as expressly contemplated by this Agreement and the other agreements expressly contemplated hereby.

 

Section 6.04 Buyer Affirmative Covenants. Between the Effective Date and the Closing or the termination of this Agreement in accordance with its terms, Buyer shall:

 

(a)

Use its commercially reasonable efforts to undertake and complete the Offering such that the condition in Section 3.01(a) is satisfied;

 

 

	(b)	provide Seller and its Representatives and agents reasonable access to the books and financial records of Buyer at any time during normal business hours prior to the Closing Date, at Seller’s sole cost and expense, to perform any inspections or evaluations of the Buyer and the Offering;
	(c)	cooperate with Seller with respect to all filings, permits or consents that Seller elects to make or obtain or is required by requirements of law or other Persons to make or obtain in connection with the transactions contemplated herein; and
	(d)	provide notice to Seller as promptly as reasonably practicable upon becoming aware of any event or occurrence capable of causing a material impact on the business of Buyer or the Offering; and
	(e)	between the Effective Date and the Closing Date or the earlier termination of this Agreement in accordance with its terms, use commercially reasonable efforts to cause the conditions precedent in Section 3.01 to be satisfied and to complete the actions in Section 3.04.

 

Section 6.05 Confidentiality.

 

	(a)	From and after the Closing, Seller shall, and shall cause its Affiliates to, hold, and shall use its reasonable best efforts to cause its or their respective Representatives to hold, in confidence any and all information, whether written or oral, concerning Seller, except to the extent that Seller can show that such information (a) is generally available to and known by the public through no fault of Seller, any of its Affiliates or their respective Representatives; (b) is lawfully acquired by Seller, any of its Affiliates or their respective Representatives from and after the Closing from sources which are not prohibited from disclosing such information by a legal, contractual or fiduciary obligation or (c) is disclosed without restriction by Buyer or its Affiliates. If Seller or any of its Affiliates or their respective Representatives are compelled to disclose any information referenced in this Section 6.05(a) by judicial or administrative process or by other requirements of law, Seller shall promptly notify Buyer in writing and shall disclose only that portion of such information which Seller is advised by its counsel in writing is legally required to be disclosed, provided that Seller shall use reasonable best efforts to obtain an appropriate protective order or other reasonable assurance that confidential treatment will be accorded such information.
	(b)	From and after the Closing, Buyer shall, and shall cause its Affiliates to, hold, and shall use their reasonable best efforts to cause its or their respective Representatives to hold, in confidence any and all information, whether written or oral, concerning Seller, except to the extent that Buyer can show that such information (a) is generally available to and known by the public through no fault of Buyer, or any of its Affiliates or Representatives; (b) is lawfully acquired by Buyer or any of its Affiliates or Representatives from and after the Closing from sources which are not prohibited from disclosing such information by a legal, contractual or fiduciary obligation or (c) is disclosed without restriction by Seller or its Affiliates. If Buyer or its Affiliates or Representatives are compelled to disclose any information referenced in this Section 6.05(b) by judicial or administrative process or by other requirements of law, Buyer shall promptly notify Seller in writing and shall disclose only that portion of such information which Buyer is advised by its counsel in writing is legally required to be disclosed, provided that Buyer shall use reasonable best efforts to obtain an appropriate protective order or other reasonable assurance that confidential treatment will be accorded such information.

 

Section 6.06 Tax Covenants. All transfer, documentary, sales, use, stamp, registration, value added and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement and the other Transaction Documents (including any real property transfer Tax and any other similar Tax) shall be borne and paid by Seller when due. Seller shall, at its own expense, timely file any Tax Return or other document with respect to such Taxes or fees (and Buyer shall cooperate with respect thereto as necessary).

 

 

 

Section 6.07 Further Assurances. Following the Effective Date and following the Closing, or until the earlier termination of this Agreement in accordance with its terms, each of the Parties shall, and shall cause their respective Affiliates to, execute and deliver such additional documents, instruments, conveyances and assurances and take such further actions as may be reasonably required to carry out the provisions hereof and give effect to the transactions contemplated herein.

 

Article VII. SURVIVAL AND INDEMNIFICATION

 

Section 7.01 Survival; Limitations

 

	(a)	Subject to the limitations and other provisions of this Agreement, the representations and warranties of Buyer and Seller contained herein shall survive the Closing and shall remain in full force and effect until the date that is two years after the Closing Date. Notwithstanding the preceding sentence, any indemnification claim commenced prior to any such expiration shall remain as a valid claim until finally resolved in accordance with the provisions herein. Any claim, for indemnification or otherwise, based upon or arising out of the breach or alleged breach of a representation or warranty must be brought before the expiration of the survival period, or it will be deemed waived.
	(b)	All covenants and agreements of the Parties contained herein shall survive the Closing for a period of five years or for the period specified therein. Notwithstanding the preceding sentence, any claim commenced prior to any such expiration shall remain as a valid claim until finally resolved in accordance with the provisions herein.
	(c)	Any claim arising out of or in connection with this Agreement must be brought, if at all, within years after the Closing Date, or within such shorter period as may be specified with respect to a particular claim, or it will be deemed waived and released.

 

Section 7.02 Indemnification by Seller. Seller agrees to indemnify and save harmless the Buyer from all Losses suffered or incurred by the Buyer as a result of or arising directly or indirectly out of or in connection with:

 

	(a)	any breach by Seller of or any inaccuracy of any representation or warranty of Seller contained in this Agreement or in any agreement, certificate or other document delivered pursuant hereto (provided that Seller shall not be required to indemnify or save harmless the Buyer in respect of any breach or inaccuracy of any representation or warranty unless the Buyer shall have provided notice to Seller in accordance with Section 7.07 on or prior to the expiration of the applicable time period related to such representation and warranty as set out in Article VI);
	(b)	any breach or non-performance by the Seller of any covenant to be performed by it which is contained in this Agreement or in any agreement, certificate or other document delivered pursuant hereto;
	(c)	any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding made, or alleged to have been made, by any such Person with Seller (or any Person acting on its behalf) in connection with any transactions contemplated herein; and
	(d)	the ownership of the Painting prior to the Time of Closing including, without limitation, any failure by the Seller to pay, satisfy, discharge, perform or fulfil any of the Liabilities related thereto.

 

 

Section 7.03 Indemnification by the Buyer. The Buyer agrees to indemnify and save harmless Seller from all Losses suffered or incurred by Seller as a result of or arising directly or indirectly out of or in connection with:

 

	(a)	any breach by the Buyer of or any inaccuracy of any representation or warranty contained in this Agreement or in any agreement, instrument, certificate or other document delivered pursuant hereto;
	(b)	any breach or non-performance by the Buyer of any covenant to be performed by it which is contained in this Agreement or in any agreement, certificate or other document delivered pursuant hereto;
	(c)	any claim by any Person for brokerage or finder’s fees or commissions or similar payments based upon any agreement or understanding made, or alleged to have been made, by any such Person with Buyer (or any Person acting on its behalf) in connection with any transactions contemplated herein; and
	(d)	the ownership of the Painting after the Time of Closing including, without limitation, any failure by the Buyer to pay, satisfy, discharge, perform or fulfil any of the Liabilities related thereto.

 

Section 7.04 Notice of Claim. In the event that a Party (the “Indemnified Party”) shall become aware of any claim, proceeding or other matter (a “Claim”) in respect of which another Party (the “Indemnifying Party”) agreed to indemnify the Indemnified Party pursuant to this Agreement, the Indemnified Party shall, as soon as is reasonable, give written notice thereof to the Indemnifying Party. Such notice shall specify whether the Claim arises as a result of a claim by a person against the Indemnified Party (a “Third Party Claim”) or whether the Claim does not so arise (a “Direct Claim”), and shall also specify with reasonable particularity (to the extent that the information is available) (i) the factual basis for the Claim; and (ii) the amount of the Claim, if known. If, through the fault of the Indemnified Party, the Indemnifying Party does not receive notice of any Claim in time to contest the determination of any liability susceptible of being contested, the Indemnifying Party shall be entitled to set off against the amount claimed by the Indemnified Party the amount of any Losses incurred by the Indemnifying Party resulting from the Indemnified Party’s failure to give such notice on a timely basis.

 

Section 7.05 Direct Claims. With respect to any Direct Claim, following receipt of notice from the Indemnified Party of the Claim, the Indemnifying Party shall have sixty (60) days to make such investigation of the Claim as is considered necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the Claim, together with all such other information as the Indemnifying Party may reasonably request. If all Parties agree at or prior to the expiration of such sixty (60) day period (or any mutually agreed upon extension thereof) to the validity and amount of such Claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the Claim, failing which the matter shall be referred to binding arbitration in such manner as the Parties may agree or shall be determined by a court of competent jurisdiction.

 

Section 7.06 Third Party Claims. With respect to any Third-Party Claim, the Indemnifying Party shall have the right, at its expense, to participate in the negotiation, settlement or defense of the Claim and, in such event, the Indemnifying Party shall reimburse the Indemnified Party for all the Indemnified Party’s out-of-pocket expenses as a result of such participation. The Indemnified Party has the right to require the Indemnifying Party to assume control of the negotiation, settlement or defense of the claim and if the Indemnified Party exercises this right, the Indemnified Party shall have the right to participate in the negotiation, settlement or defense of such Third Party Claim and to retain counsel to act on its behalf, provided that the fees and disbursements of such counsel shall be paid by the Indemnified Party unless the Indemnifying Party consents to the retention of such counsel or unless the named parties to any action or proceeding include both the Indemnifying Party and the Indemnified Party and the representation of both the Indemnifying Party and the Indemnified Party by the same counsel would be inappropriate due to the actual or potential differing interests between them (such as the availability of different defenses). If the Indemnifying Party, being required to assume such control, thereafter fails to defend the Third-Party Claim within a reasonable time, the Indemnified Party shall assume such control, and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third-Party Claim. If any Third Party Claim is of a nature such that: (a) the Indemnified Party is required by applicable law or the order of any court, tribunal or regulatory body having jurisdiction; or (b) it is necessary in the reasonable view of the Indemnified Party acting in good faith and in a manner consistent with reasonable commercial practices in respect of: (i) a Third Party Claim relating to the Painting; or (ii) a Third Party Claim relating to any Contract which is necessary to the ongoing operations of Seller in respect of the Painting or any material part thereof by a reasonable and prudent operator in substantially the manner in which it has heretofore operated by such Person, in order to avoid material damage to the relationship between the Indemnified Party and any of its major customers or to preserve the rights of the Indemnified Party under such an essential Contract, to make a payment to any Person (a “Third Party”) with respect to the Third Party Claim before the completion of settlement negotiations or related legal proceedings, as the case may be, the Indemnified Party may make such payment and the Indemnifying Party shall, forthwith after demand by the Indemnified Party, reimburse the Indemnified Party for such payment. If the amount of any liability of the Indemnified Party under the Third-Party Claim in respect of which such payment was made, as finally determined, is less than the amount which was paid by the Indemnifying Party to the Indemnified Party, the Indemnified Party shall, forthwith after receipt of the difference from the Third Party, pay the amount of such difference to the Indemnifying Party.

 

 

Section 7.07 Settlement of Third Party Claims. If the Indemnifying Party is not required to assume control of the defense of any Third-Party Claim, the Indemnified Party shall have the exclusive right to contest, settle or pay the amount claimed. Whether or not the Indemnifying Party assumes control of the negotiation, settlement or defense of any Third-Party Claim, the Indemnifying Party shall not settle any Third-Party Claim without the written consent of the Indemnified Party, which consent shall not be unreasonably withheld or delayed.

 

Section 7.08 Cooperation. The Indemnified Party and the Indemnifying Party shall co-operate fully with each other with respect to Third Party Claims, and shall keep each other fully advised with respect thereto (including supplying copies of all relevant documentation promptly as it becomes available).

 

Section 7.09 Right of Set-Off. The Buyer is authorized to the fullest extent permitted by law, to set-off and apply any amount owed to it from Seller hereunder or under any other agreement or arrangement, against any amount which it owes to any of Seller hereunder.

 

Section 7.10 Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and the Indemnified Party’s right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the Indemnified Party (including by any of its Representatives) or by reason of the fact that the Indemnified Party or any of its Representatives knew or should have known that any such representation or warranty is, was or might be inaccurate.

 

Section 7.11 Force Majeure. No Party shall be liable for any failure or delay in its performance under this Agreement due to causes or events beyond its reasonable control and without its fault or negligence, including, but not limited to, acts of God, acts of civil or military authority, fires, epidemics, floods, earthquakes, riots, wars, sabotage, international trade embargoes, labor shortages or disputes, and governmental actions, which are beyond its reasonable control; provided that the delayed Party: (i) gives the other Party written notice of such cause promptly, and in any event within fifteen (15) days of discovery thereof; (ii) uses its reasonable efforts to correct such failure or delay in its performance. The delayed Party’s time for performance or cure under this Section 7.11 shall be extended for a period equal to the duration of the cause or sixty (days), whichever is less.

 

 

Article VIII. DEFAULT AND TERMINATION

 

Section 8.01 Default by Buyer. If Buyer fails to perform any of its obligations under this Agreement, or is in breach in any material respect of any representation, warranty, covenant or agreement on the part of Buyer set forth in this Agreement, and, if such breach or failure is capable of being cured, such failure or breach has not been cured within 10 days after receipt of notice of such breach by Buyer, then Buyer shall be in default hereunder (such event, a “Buyer Default”). In the event of a Buyer Default, Seller shall be entitled to bring an action for specific performance of this Agreement or to terminate this Agreement pursuant to Section 8.03(d) and proceed against Buyer for payment for any damages actually incurred by Seller as a result of such Buyer Default.

 

Section 8.02 Default by Seller. If Seller fails to perform any of its obligations under this Agreement, or is in breach in any material respect of any representation, warranty, covenant or agreement on the part of Seller set forth in this Agreement, and, if such breach or failure is capable of being cured, such failure or breach has not been cured within 10 days after receipt of notice of such breach by Seller, then Seller shall be in default hereunder (such event, an “Seller Default”). In the event of an Seller Default, Buyer shall be entitled to bring an action for specific performance of this Agreement or to terminate this Agreement pursuant to Section 8.03(c) and proceed against Seller for payment for any damages actually incurred by Buyer as a result of such Seller Default.

 

Section 8.03 Termination. This Agreement may be terminated at any time before the Closing Date, as follows:

 

	(a)	by mutual written consent of Seller and Buyer;
	(b)	by any of the Buyer or Seller, upon written notice, if there shall be in effect a final nonappealable order, judgment, injunction or decree entered by or with any Governmental Authority restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated herein;
	(c)	by Buyer, upon written notice, if there shall have been a Seller Default;
	(d)	by Seller, upon written notice, if there shall have been Buyer Default;
	(e)	by Buyer, upon written notice, in the event that a Material Adverse Effect has occurred prior to the Closing;
	(f)	by either Seller or Buyer if the Closing has not occurred by [___________], provided, however, that the right to terminate this Agreement under this Section 8.03(f) shall not be available to (i) Seller if, as of such time, Buyer has the right to terminate this Agreement pursuant to Section 8.03(c) or in the event that the failure of the Closing to so occur was caused by Seller; or (ii) Buyer if, as of such time, Seller has the right to terminate this Agreement pursuant to Section 8.03(d) or in the event that the failure of the Closing to so occur was caused by Buyer.

 

Section 8.04 Effect of Termination. In the event of termination of this Agreement pursuant to this Article VIII, this Agreement (other than Article VII, this Article VIII and Article IX) shall become void and of no further force or effect with no liability on the part of any Party hereto; provided, however, that nothing shall relieve any Party hereto from liability for actual damages to the other Parties hereto resulting from a material breach of this Agreement by such Party.

 

Article IX. MISCELLANEOUS

 

Section 9.01 Notices. All notices, requests, consents, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been given (a) when delivered by hand (with written confirmation of receipt); (b) when received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by e-mail of a PDF document (with confirmation of transmission and receipt) if sent during normal business hours of the recipient, and on the next Business Day if sent after normal business hours of the recipient or (d) on the third day after the date mailed, by certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective Parties at the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section 9.01):

 

 

if to the Buyer:

 

Masterworks 00, LLC

Attn: General Counsel

524 Broadway

New York, NY 10012

 

If to Seller:

 

Masterworks Gallery, LLC

Attn: General Counsel

524Broadway

New York, NY 10013

 

with a copy, in each case, to:

 

Legal & Compliance, LLC

330 Clematis Street, Suite 217

West Palm Beach, Delaware 33401

Attention: John Cacomanolis

Email: [email protected]

 

Section 9.02 Consultation. Subject to applicable Legal Requirements, the Parties shall consult with each other before issuing any press release or making any other public announcement with respect to this Agreement or the transactions contemplated hereby and, except as required by any applicable law or regulatory requirement, neither of them shall issue any such press release or make any such public announcement without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed.

 

Section 9.03 Disclosure. Prior to any public announcement of the transactions contemplated hereby pursuant to Section 9.02, no Party shall disclose this Agreement or any aspects of such transaction except to its managers, directors, senior management, its legal, accounting, financial or other professional advisors, any financial institution contacted by it with respect to any financing required in connection with such transaction and counsel to such institution, or as may be required under by the SEC, or by any other applicable law or any other regulatory authority or stock exchange having jurisdiction.

 

Section 9.04 Entire Agreement. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether written or oral. There are no conditions, covenants, agreements, representations, warranties or other provisions, express or implied, collateral, statutory or otherwise, relating to the subject matter hereof except as herein provided.

 

Section 9.05 Time of Essence. Time shall be of the essence of this Agreement.

 

Section 9.06 Applicable Law. This Agreement shall be construed, interpreted and enforced in accordance with, and the respective rights and obligations of the Parties shall be governed by, the laws of the State of Delaware without giving effect to its conflict of law provisions and each Party irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of such state and all courts competent to hear appeals therefrom and agrees that all claims in respect of any Action may be heard and determined in any such court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any Action so brought and waives any bond, surety or other security that might be required of any Party to serve legal process in any other matter permitted by law.

 

 

Section 9.07 Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such determination shall not impair or affect the validity, legality or enforceability of the remaining provisions hereof, and each provision is hereby declared to be separate, severable and distinct.

 

Section 9.08 Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding on and enforceable by the Parties and, where the context so permits, their respective successors and permitted assigns. Other than as set forth in Section 2.01(b), Seller may not assign, transfer or otherwise dispose of all or any part of its rights or obligations hereunder or interest herein without the prior written consent of the Buyer. The Buyer may assign its rights under this Agreement in whole or in part to any other person; provided, however, that any such assignment shall not relieve the Buyer from any of its obligations hereunder.

 

Section 9.09 Amendment and Waivers. No amendment of this Agreement shall be effective unless signed by all of the Parties. No waiver of any provision of this Agreement shall be binding on any Party unless consented to in writing by such Party. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, nor shall any waiver constitute a continuing waiver unless otherwise provided.

 

Section 9.10 Waiver of Jury Trial. AS A SPECIFICALLY BARGAINED INDUCEMENT FOR EACH OF THE PARTIES TO ENTER INTO THIS AGREEMENT AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, THE BUYER AND SELLER (AFTER HAVING HAD THE OPPORTUNITY TO CONSULT COUNSEL) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LEGAL REQUIREMENTS, HEREBY IRREVOCALLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING OR OTHER ACTION AS TO ANY ISSUE RELATING HERETO IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF CORRELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

 

Section 9.11 Dispute Resolution.

 

	(a)	If there is any dispute or controversy relating to this Agreement or any of the Contemplated Transactions (each, a “Dispute”), such Dispute shall be resolved in accordance with this this Section 9.11.
	(b)	The Party claiming a Dispute shall deliver to each of the other Parties a written notice (a “Notice of Dispute”) that will specify in reasonable detail the dispute that the claiming Party wishes to have resolved. If Seller and the Buyer are not able to resolve the dispute within five (5) Business Days of a Party’s receipt of an applicable Notice of Dispute, then such Dispute shall be submitted to binding arbitration in accordance with this Section 9.11.
	(c)	Any arbitration hereunder shall be conducted in accordance with the rules of the American Arbitration Association then in effect. Seller and the Buyer shall each select one arbitrator, and the two arbitrators so selected shall select a third arbitrator, and the three arbitrators shall resolve the Dispute. The arbitrators will be instructed to prepare in writing as promptly as practicable, and provide to the Buyer and Seller, such arbitrators’ determination, including factual findings and the reasons on which the determination was based. The decision of the arbitrators will be final, binding and conclusive and will not be subject to review or appeal and may be enforced in any court having jurisdiction over the Parties. Each Party shall initially pay its own costs, fees and expenses (including, without limitation, for counsel, experts and presentation of proof) in connection with any arbitration or other action or proceeding brought under this Section 9.11, and the fees of the arbitrators shall be share equally, provided, however, that the arbitrators shall have the power to award costs and expenses in a different proportion.

 

 

(d)

The arbitration shall be conducted in New York, NY.

 

Section 9.12 Third-Party Beneficiaries. Except as otherwise specifically set forth herein, this Agreement is for the sole benefit of the Parties and their permitted assigns and nothing herein expressed or implied shall give or be construed to give any Person (other than the Parties and their permitted assigns) any legal or equitable rights hereunder.

 

Section 9.13 Specific Performance. The Parties agree that irreparable damage would occur if any provision of this Agreement were not performed in accordance with the terms hereof and that the Parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy to which they are entitled at law or in equity.

 

Section 9.14 Best Efforts. The Parties acknowledge and agree that, for all purposes of this Agreement, an obligation on the part of any Party to use its best efforts or commercially reasonable efforts to obtain any waiver, consent, approval, permit, license or other document shall not require such Party to make any payment to any person for the purpose of procuring the same, other than payments for amounts due and payable to such person, payments for incidental expenses incurred by such person and payments required by any applicable law or regulation.

 

Section 9.15 Interpretation. For purposes of this Agreement, (a) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation”; (b) the word “or” is not exclusive; and (c) the words “herein,” “hereof,” “hereby,” “hereto” and “hereunder” refer to this Agreement as a whole. Unless the context otherwise requires, references herein: (x) to Articles, Sections, Disclosure Schedules and Exhibits mean the Articles and Sections of, and Disclosure Schedules and Exhibits attached to, this Agreement; (y) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and (z) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder. This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the Party drafting an instrument or causing any instrument to be drafted. The Disclosure Schedules and Exhibits referred to herein shall be construed with, and as an integral part of, this Agreement to the same extent as if they were set forth verbatim herein.

 

Section 9.16 Sections and Headings. The division of this Agreement into Articles, Sections and subsections and the insertion of headings are for convenience of reference only and shall not affect the interpretation of this Agreement.

 

Section 9.17 Severability. If any term or provision of this Agreement is invalid, illegal or unenforceable in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other provision is invalid, illegal or unenforceable, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated herein may be consummated as originally contemplated to the greatest extent possible.

 

Section 9.18 Expenses. Except as otherwise specifically set forth herein, the Parties shall bear their own respective expenses (including, but not limited to, all compensation and expenses of counsel, financial advisors, consultants, actuaries and independent accountants) incurred in connection with this Agreement and the consummation of the transactions contemplated hereby.

 

Section 9.19 Counterparts. This Agreement may be executed in counterparts and delivered via facsimile transmission or via email with scan attachment and any such counterpart executed and delivered via facsimile transmission or via email with scan attachment will be deemed an original for all intents and purposes.

 

[Signature pages follow]

 

 

IN WITNESS WHEREOF, this Agreement has been executed by the Parties as of the date first above written.

 

	Masterworks Gallery , LLC
	By:
	Name:
	Title:
	Masterworks 001, LLC
	By:
	Name:
	Title:

 

 

Schedule 1A

 

Painting

 

[Description and photo of Painting to be inserted]

 

 

Schedule 1B

 

Auction House Receipt

 

 

 

Schedule 1C

 

Condition Report

 

 

 

Exhibit 1

 

Form of Bill of Sale

 

THIS BILL OF SALE made as of ______________, 2018 (this “Bill of Sale”), by Masterworks Gallery, LLC, a Delaware limited liability company (“Seller”), in favor of Masterworks 001, LLC, a Delaware limited liability company (“Buyer”).

 

For value received, Seller hereby irrevocably and without condition or reservation of any kind, sells, assigns, transfers and conveys to Buyer Andy Warhol, 1 Colored Marilyn (Reversal Series), 1979, oil and silkscreen ink on canvas that was acquired by International Art Acquisitions, Inc., a New York corporation (“Agent”) on Seller’s behalf at a Phillips auction on November 16, 2017 (the “Painting”) and all right to possession and all legal and equitable ownership of the Painting, to have and to hold the Painting unto Buyer, its successors and assigns.

 

The Painting is being transferred subject to each and all of the provisions, terms, conditions, covenants, representations and warranties contained in the Purchase Agreement by and between Seller and Buyer dated as of __________________, 2018, and all such provisions, terms, conditions, covenants, representations and warranties of the parties thereunder are incorporated herein by this reference as if fully set forth herein in their entirety.

 

	SELLER
	Masterworks Gallery, LLC
	By:
	Name:
	Title:

 

 

 

 

 

 

FORM OF ADMINISTRATIVE SERVICES AGREEMENT

 

Dated as of [DATE], 2018

 

This Administrative Services Agreement (this “Agreement”), dated as of the date first set forth above (the “Effective Date”) is entered into by and between Masterworks Administrative Services, LLC, a Delaware limited liability company (the “Manager”) and Masterworks 001, LLC, a Delaware limited liability company (the “Issuer”). The Manager and the Issuer may be referred to herein individually as a “Party” and collectively as the “Parties.”

 

R E C I T A L S :

 

Whereas, as of the Effective Date, Issuer will acquire a painting (the “Painting”) from Masterworks Gallery, LLC, a Delaware limited liability company and an affiliate of Issuer as described in an Offering Circular filed by the Issuer with the Securities and Exchange Commission (the “SEC”) relating to an offering of shares of the Issuer (the “Offering”); and

 

Whereas, the Issuer desires that the Manager provide the Issuer with operational, administrative, management, advisory, consulting and other services with respect to the Painting and Issuer’s operations, and the Manager desires to render such services to the Issuer, on the terms and conditions set forth in this Agreement;

 

Now, therefore, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. Services.

 

(a) Provision of Services by the Manager. The Manager shall directly, or indirectly through one or more Affiliates (as defined below) or third parties as described in Section 1(b), engage and maintain personnel for the purpose of providing the following services (collectively, the “Services”) to the Issuer and SPV:

 

(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;

 

 

(D)

research, conservation, restoration (as deemed necessary by the Manager), framing services;

 

(E)

other services deemed necessary or appropriate by the Manager it its discretion to maintain the Painting;

 

(ii) entity-level services for the Issuer, 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 Issuer;

 

(D)

record-keeping, shareholder registrar and regulatory compliance;

 

(E)

providing listing services, subject to the applicable law;

 

(F)

tax reporting services;

 

(G)

bill payment;

 

(H)

selecting and negotiating insurance coverage for the Issuer, including operational errors and omissions coverage and directors’ and officers’ coverage;

 

(I)

maintain the Issuer’s stock ledger and coordinating activities of the Issuer’s transfer agent, escrow agent and related parties;

 

(J)

software services; and

 

(iii) transactional, extraordinary or non-routine services, including:

 

	(A)	legal and professional transactional services;
	(B)	negotiation of terms of potential sale of the Painting or the Issuer 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, cost, payments and expenditures relating to the Painting or the Issuer;

 

(E)

administrative services in connection with liquidation or winding up of the Issuer;

 

 

(F)

managing litigation, judicial proceedings or arbitration, including the defense and or settlement of any claims;

 

(G)

other non-routine or extraordinary services; and

 

(H)

additional services as contemplated in Section 1(f).

 

(b) Provision of Services by Third Parties. The Manager shall, to the extent it determines that it would be advisable in connection with or incidental to the activities contemplated hereby, arrange for and coordinate the services of other professionals, experts and consultants to provide any or all of the Services, in which case, the costs and expenses of such third parties for providing such services shall be borne by the Manager other than as set forth in Section 3; it being understood that the Manager shall not charge to the Issuer any fees in addition thereto with respect to such outsourced Services that are described in Section 1(a)(i) and Section 1(a)(ii), but the Manager shall be entitled to reimbursement for third party costs incurred in connection with Services described in Section 1(a)(iii) as set forth in Section 3(b).

 

(c) Independent Contractor; Authority. Notwithstanding the Services provided by the Manager pursuant to this Agreement and the fact that the Manager is the manager of the Issuer, the Manager shall be deemed to be an independent contractor with respect to the Services. The management, policies and operations of the Issuer (including the ultimate approval of the making or disposition of any Painting by the Issuer, and the terms and conditions thereof) shall be the responsibility of the Issuer and its members and manager (including the Manager acting in its capacity as manager of the Issuer).

(d) Obligations of Manager Not Exclusive. The obligations of the Manager to the Issuer are not exclusive. The Manager may, in its discretion, render the same or similar services as rendered to the Issuer to any Person or Persons whose business may be in direct or indirect competition with the Issuer, including other Affiliates of the Manager.

 

(e) Definitions. For purposes hereof:

 

(i) “Affiliate” means, with respect to any Person, any other Person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person and, for the purposes of this definition, the term “controls,” “is controlled by” or “under common control with” means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

 

(ii) “Person” means an individual, a corporation, and a company, a voluntary association, a partnership, a joint venture, a limited liability company, a trust, an estate, an unincorporated organization, a Governmental Authority or other entity.

 

(iii) “Governmental Authority” means the government of any nation, state, territory, city, locality or other political subdivision thereof, any entity or body exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any court, quasi-governmental authority, self-regulatory organization, commission, tribunal, agency or any political or other subdivision, department, board, bureau, or branch or official of any of the foregoing.

 

 

(f) Additional Services. Nothing herein shall prevent the Manager from providing additional services not otherwise set forth herein, and any such additional Services shall be deemed to be included in Section 1(a)(iii).

 

2. Other Related Activities.

 

(a) The Manager and Affiliates thereof shall have the right to engage in the following activities (subject to compliance with laws and intellectual property rights of third parties):

 

(i) Rights to commercialize the Painting for the duration of the operations of the Issuer;

 

(ii) display and exhibition rights;

 

(iii) the right to lend the Painting to museums, galleries, private entities, individuals and the like; and

 

(iv) The right to offer perks to owners of Shares, subject to compliance with applicable laws, and the costs of which will be paid by the Manager.

 

(b) The Manager shall bear any incremental third-party costs associated with such activities related to the activities set forth in this Section 2 and in the event that any revenues are generated from such other activities, the Manager may retain such revenues to the extent they offset actual incremental third-party costs associated with such activities and any excess revenues above such incremental third-party costs, if any, shall belong to the Issuer.

 

3. Compensation and Expenses; Covenant.

 

(a) In return for the Services described in Section 1(a), the Issuer shall pay to the Manager annual administration fees and expense reimbursements in cash equal to 2% of the purchase price of the Painting, payable quarterly in arrears, for the first five 12-month periods (i.e. 60 months) following the Effective Date. After the five-year anniversary of the Effective Date, the Issuer will issue to the Manager shares representing 2% of the total Class A Shares of the Company outstanding (based on the number of Class A Shares outstanding on the first day of each such 12-month period, but excluding, for purposes of this calculation, any Class A Shares that were issued as a result of any conversion of the Class B Shares of the Company) for each ensuing 12-month period for as long as this Agreement is in effect, which shares shall be issued on a quarterly basis in arrears. (collectively, such payments of cash and shares, the “Services Fee”). If and when the Painting is sold, the Services Fee for the period from and including the date of the last payment or issuance of the Services Fee, as applicable, to and excluding the date of consummation of the sale of the Painting (i.e. the date 100% of the consideration has been received) shall be pro-rated and shall be payable in cash at the rate set forth in the first sentence of this Section 3(a).

 

(b) In addition to the Services Fee, in connection with the provision of the Services described in Section 1(a)(iii), the Issuer shall reimburse the Manager for all out-of-pocket costs, expenses and payments incurred or made by the Manager in connection with such Services, provided, the reimbursement obligation shall be suspended (without interest or penalty) until the Painting is sold.

 

 

(c) For so long as this Agreement remains in effect, Manager covenants to maintain on hand cash reserves sufficient to pay at least one year of estimated expenses to satisfy its obligations under this Agreement and the commitment from the Manager to fund the operations of the Issuer until the sale of the Painting.

 

4. Indemnification.

 

(a) Indemnification of Protected Persons. To the fullest extent permitted by law, the Issuer shall indemnify, hold harmless, protect and defend the Manager, its Affiliates, any officer, manager, 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 the Issuer as an officer, director, partner, member, manager, board member, shareholder or employee of any other Person, and any Person who was, at the time of the act or omission in question, such a Person (each, a “Protected Person”) 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 Protected Person’s right to indemnification under this Agreement (collectively, “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 the Issuer; or (ii) by reason of the fact that it is or was acting in connection with the activities of the Issuer in any capacity or that it is or was serving at the request of the Issuer as a partner, member, shareholder, director, officer, employee or agent of any Person, unless, in each case, 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 any material breach of this Agreement or conduct that is subject of a criminal proceeding (where such Protected Person has reasonable cause to believe that such conduct was unlawful). The termination of any proceeding by settlement, judgment, order, conviction, or upon a plea of nolo contendere or its equivalent shall not, by itself, create a presumption that such Protected Person’s conduct constituted actual fraud, gross negligence, willful misconduct, bad faith, breach of fiduciary duty, reckless disregard of duty or any material breach of this Agreement or the commission of a crime, except a judgment, order or conviction that expressly provides that such Protected Person’s conduct constituted actual fraud, gross negligence, willful misconduct, bad faith, breach of fiduciary duty, reckless disregard of duty or any material breach of this Agreement or the commission of a crime.

 

(b) Reimbursement of Expenses. The Issuer shall promptly reimburse (and/or advance to the extent reasonably required) each Protected Person for reasonable legal or other 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 this Section 4; provided, that such Protected Person executes a written undertaking to repay the Issuer for such reimbursed or advanced expenses if it is finally judicially determined that such Protected Person is not entitled to the indemnification provided by this Section 4. In any action, suit or proceeding against Protected Persons, such Protected Persons shall jointly employ, at the expense of the Issuer, counsel of the Protected Persons’ choice, which counsel shall be reasonably satisfactory to the Issuer, in such action, suit or proceeding; provided that if retention of joint counsel by such Protected Persons would create a conflict of interest, each Protected Person whose participation in such joint representation would cause such a conflict shall have the right to employ, at the expense of the Issuer, separate counsel of the respective Protected Person’s choice, which counsel shall be reasonably satisfactory to the Issuer in such action, suit or proceeding; provided, however, that if any indemnitor shall acknowledge in writing its liability to the Protected Person for any action, suit or proceeding brought by a third party in connection with which any Protected Person is seeking indemnification, then such indemnitor shall be entitled to select the counsel to defend such action, suit or proceeding, subject to the approval of the Protected Person, which approval shall not be unreasonably withheld.

 

 

(c) Survival of Protection. The provisions of this Section 4 shall continue to afford protection to each Protected Person regardless of whether such Protected Person remains in the position or capacity pursuant to which such Protected Person became entitled to indemnification under this Section 4 and regardless of any subsequent amendment to this Agreement; provided, that no such amendment shall reduce or restrict the extent to which these indemnification provisions apply to actions taken or omissions made prior to the date of such amendment.

 

(d) Recovery. Each Protected Person shall use its reasonable efforts to pursue other third-party sources of indemnification in respect of any Liabilities for which it or any Protected Person may require indemnification in accordance with this Section 4. If any Protected Person recovers any amounts in respect of any Liabilities from insurance coverage or any third-party source, then such Protected Person shall, to the extent that such recovery is duplicative, reimburse the Issuer for any amounts previously paid to it by the Issuer in respect of such Liabilities.

 

(e) Survival. The rights of indemnification provided in this Section 4 will be in addition to any rights to which a Protected Person might otherwise be entitled by contract or as a matter of law, and shall extend to each of such Protected Person’s heirs, successors and assigns. The provisions of this Section 4 shall survive the termination of this Agreement.

 

(f) Exceptions to Indemnification. Notwithstanding anything to the contrary contained herein, the Issuer’s obligations under Section 4(a) (Indemnification of Protected Persons) and Section 4(b) (Reimbursement of Expenses) shall not apply to any actions, suits or proceedings in which (i) one or more officers, directors, partners, members or employees of the Manager are making claims against the Manager or one or more other officers, directors, partners, members or employees of the Manager; or (ii) the Issuer is 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.

 

5. Assignment. Any assignment of this Agreement by a Party shall require the approval of the other Party.

 

6. Term and Termination.

 

(a) This Agreement shall terminate upon the first to occur of (i) the dissolution of the Issuer; (ii) upon notice of termination from the Manager that the Manager desires to withdraw as the manager of the Company, which the Manager may give at any time in the event that the Manager determines that it desires to cease providing services of the type as set forth herein to any Person, and provided that the Manager does so cease providing such services thereunder and (iii) on the joint agreement of the Parties.

 

 

(b) In addition to the termination provisions as set forth in Section 6(a), the Issuer may terminate this Agreement at any time upon a vote of members of the Issuer holding at least two-thirds (2/3) of equity interests of the Issuer pursuant to the limited liability company operating agreement of the Issuer (the “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 this Agreement which breach is not cured within 30 days after receipt by the Manager of a notice of such breach from any member of the Issuer (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 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 the business of the Issuer; or

 

(v) the bankruptcy or insolvency of the Manager.

 

(c) The Issuer shall, on the date of such termination or if it does not have the available funds on such date, as soon as practicable after it does have the available funds, pay any accrued but costs subject to reimbursement through to such date.

 

7. Notices.

 

(a) All notices, requests, demands and other communications provided for by this Agreement shall be in writing and shall be given by personal delivery, mailed by internationally recognized courier service or airmail, or sent by email with return receipt requested to the following addresses of the Parties or to such other address as such Party may have specified for notice:

 

	(i)	If to the Manager:
			Masterworks Administrative Services, LLC
			Attn: General Counsel
			Spring Place
			6 St. John Lane
			7th Floor
			New York, NY 10013
	(ii)	If to the Issuer:
			Masterworks Administrative Services, LLC
			Attn: General Counsel
			Spring Place
			6 St. John Lane
			7th Floor
			New York, NY 10013

 

 

(b) Any notice shall be deemed received, unless earlier received, (i) if sent by courier service, on the second Business Day after delivery to the courier service, (ii) if sent by certified or registered airmail, return receipt requested, when actually received, (iii) if sent by standard airmail, five Business Days after posting in the mail, and (iv) if sent by email transmission or delivered by hand, on the date of receipt as evidenced by a return receipt in the case of email transmission.

 

8. Arbitration.

 

(a) Either Party may, at its sole election, require that the sole and exclusive forum and remedy for resolution of a Claim be final and binding arbitration pursuant to this Section 8 (this “Arbitration Provision”). The arbitration shall be conducted in New York, NY. As used in this Arbitration Provision, “Claim” shall include any past, present, or future claim, dispute, or controversy involving the Parties or any Protected Person relating to or arising out of this Agreement, including (except to the extent provided otherwise in the last sentence of Section 8(e) the validity or enforceability of this Arbitration Provision, any part thereof, or the entire Agreement. Claims are subject to arbitration regardless of whether they arise from contract; tort (intentional or otherwise); a constitution, statute, common law, or principles of equity; or otherwise. Claims include (without limitation) matters arising as initial claims, counter-claims, cross-claims, third-party claims, or otherwise. The scope of this Arbitration Provision is to be given the broadest possible interpretation that is enforceable.

 

(b) The party initiating arbitration shall do so with the American Arbitration Association (the “AAA”) or JAMS. The arbitration shall be conducted according to, and the location of the arbitration shall be determined in accordance with, the rules and policies of the Manager selected, except to the extent the rules conflict with this Arbitration Provision or any countervailing law. In the case of a conflict between the rules and policies of the Manager and this Arbitration Provision, this Arbitration Provision shall control, subject to countervailing law, unless all parties to the arbitration consent to have the rules and policies of the Manager apply.

 

(c) If a party elects arbitration, such party shall pay all the Manager’s filing costs and administrative fees (other than hearing fees). Each party shall bear the expense of its own attorney’s fees, except as otherwise provided by law.

 

(d) Within 30 days of a final award by the arbitrator, a party may appeal the award for reconsideration by a three-arbitrator panel selected according to the rules of the arbitrator Manager. In the event of such an appeal, an opposing party may cross-appeal within 30 days after notice of the appeal. The panel will reconsider de novo all aspects of the initial award that are appealed. Costs and conduct of any appeal shall be governed by this Arbitration Provision and the Manager’s rules, in the same way as the initial arbitration proceeding. Any award by the individual arbitrator that is not subject to appeal, and any panel award on appeal, shall be final and binding, except for any appeal right under the Federal Arbitration Act (the “FAA”), and may be entered as a judgment in any court of competent jurisdiction.

 

 

(e) Each party agrees not to invoke its right to arbitrate an individual Claim that a party may bring in Small Claims Court or an equivalent court, if any, so long as the Claim is pending only in that court. EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, NO ARBITRATION SHALL PROCEED ON A CLASS, REPRESENTATIVE, OR COLLECTIVE BASIS (INCLUDING AS PRIVATE ATTORNEY GENERAL ON BEHALF OF OTHERS), EVEN IF THE CLAIM OR CLAIMS THAT ARE THE SUBJECT OF THE ARBITRATION HAD PREVIOUSLY BEEN ASSERTED (OR COULD HAVE BEEN ASSERTED) IN A COURT AS CLASS REPRESENTATIVE, OR COLLECTIVE ACTIONS IN A COURT.

 

(f) Unless otherwise provided in this Agreement or consented to in writing by all parties to the arbitration, no party to the arbitration may join, consolidate, or otherwise bring claims for or on behalf of two or more individuals or unrelated corporate entities in the same arbitration unless those persons are parties to a single transaction. Unless consented to in writing by all parties to the arbitration, an award in arbitration shall determine the rights and obligations of the named parties only, and only with respect to the claims in arbitration, and shall not (i) determine the rights, obligations, or interests of anyone other than a named party, or resolve any Claim of anyone other than a named party, or (ii) make an award for the benefit of, or against, anyone other than a named party. No Manager or arbitrator shall have the power or authority to waive, modify, or fail to enforce this Section 8(f), and any attempt to do so, whether by rule, policy, arbitration decision or otherwise, shall be invalid and unenforceable. Any challenge to the validity of this Section 8(f) shall be determined exclusively by a court and not by the Manager or any arbitrator.

 

(g) This Arbitration Provision is made pursuant to a transaction involving interstate commerce and shall be governed by and enforceable under the FAA. The arbitrator will apply substantive law consistent with the FAA and applicable statutes of limitations. The arbitrator may award damages or other types of relief permitted by applicable substantive law, subject to the limitations set forth in this Arbitration Provision. The arbitrator will not be bound by judicial rules of procedure and evidence that would apply in a court. The arbitrator shall take steps to reasonably protect confidential information.

 

(h) This Arbitration Provision shall survive (i) suspension, termination, revocation, closure, or amendments to this Agreement and the relationship of the Parties; and (ii) the bankruptcy or insolvency of any Party or other party. If any portion of this Arbitration Provision other than sub-section (e) is deemed invalid or unenforceable, the remaining portions of this Arbitration Provision shall nevertheless remain valid and in force. If arbitration is brought on a class, representative, or collective basis, and the limitations on such proceedings in Section 8(e) are finally adjudicated pursuant to the last sentence of Section 8(e) to be unenforceable, then no arbitration shall be had. In no event shall any invalidation be deemed to authorize an arbitrator to determine Claims or make awards beyond those authorized in this Arbitration Provision.

 

 

9. Miscellaneous.

 

(a) Amendment. This Agreement may not be modified or amended in any manner other than by an instrument in writing signed by the Parties or their respective successors or permitted assigns.

 

(b) Waivers. No provision of this Agreement shall be deemed to have been waived unless such waiver is in writing and signed by or on behalf of the Party granting the waiver.

 

(c) Entire Agreement. Other than as specifically set forth herein, this Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes any prior agreement or understanding between them with respect to such subject matter.

 

(d) Severability. In case any provision in this Agreement shall be deemed to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby.

 

(e) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of Delaware, without regard to the conflicts of laws principles thereof. To the extent of any disagreement or matter relating to this Agreement, including, without limitation, the enforceability of the arbitration provisions of this Agreement or the enforcement of any arbitration award, such disagreement or matter shall be exclusively submitted to the federal or state courts located in the City of New York.

 

(f) Limitation on Damages. IN NO EVENT SHALL ANY PARTY BE LIABLE TO ANY OTHER PARTY FOR ANY LOST PROFITS OR SPECIAL, CONSEQUENTIAL OR PUNITIVE DAMAGES, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES. THE FOREGOING SHALL BE INTERPRETED AND HAVE EFFECT TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, RULE OR REGULATION.

 

(g) WAIVER OF JURY TRIAL. THE PARTIES ACKNOWLEDGE THAT THEY HAVE A RIGHT TO LITIGATE CLAIMS THROUGH A COURT BEFORE A JUDGE, BUT WILL NOT HAVE THAT RIGHT IF ANY PARTY ELECTS ARBITRATION PURSUANT TO THIS ARBITRATION PROVISION. THE PARTIES HEREBY KNOWINGLY AND VOLUNTARILY WAIVE THEIR RIGHTS TO LITIGATE SUCH CLAIMS IN A COURT UPON ELECTION OF ARBITRATION BY ANY PARTY. THE PARTIES HERETO WAIVE A TRIAL BY JURY IN ANY LITIGATION RELATING TO THIS AGREEMENT OR ANY OTHER AGREEMENTS RELATED THERETO.

 

(h) Successors and Assigns. Except as herein otherwise specifically provided, this Agreement shall be binding upon and inure to the benefit of the Parties and their successors and permitted assigns.

 

(i) Third Party Beneficiaries. Each Protected Person is an intended third-party beneficiary of this Agreement and shall have the right to enforce its rights under this Agreement as if it were a direct Party. Other than as set forth herein, this Agreement is between the Parties and there are no other third-party beneficiaries hereto, and no other party shall have the right to enforce this Agreement.

 

 

(j) Headings. Captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope or intent of this Agreement or any provision hereof.

 

(k) Interpretation. Wherever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in the masculine, the feminine or neuter gender shall include the masculine, the feminine and the neuter.

 

(l) Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

 

[remainder of page left intentionally blank]

 

 

IN WITNESS WHEREOF, the Parties hereto have entered into this Agreement as of the Effective Date.

 

	Masterworks Administrative Services, LLC
	By:
	Name:
	Title:
	Masterworks 001, LLC
	By:
	Name:
	Title:

 

 

CONSENT OF INDEPENDENT ACCOUNTANT

 

We hereby provide our consent to the incorporation by reference in this Report on the Form 1-A registration of Masterworks 001, LLC of our report dated July 31, 2018 relating to the balance sheet as of April 16, 2018, listed in the accompanying index.

 

/s/ Mayer Hoffman McCann P.C.

Mayer Hoffman McCann P.C.

Kansas City, Missouri

July 31, 2018

 

 

 

 

 

EXHIBIT 12.1

 

legal & compliance, llc

 

laura aNTHONy, esq. JOHN CACOMANOLIS, ESQ* CHAD FRIEND, ESQ., LLM LAZARUS ROTHSTEIN, ESQ. SVETLANA ROVENSKAYA, ESQ**	www.legalandcompliance.com WWW.SECURITIESLAWBLOG.COM WWW.LAWCAST.COM
OF COUNSEL: CRAIG D. LINDER, ESQ.*** PETER P. LINDLEY, ESQ., CPA, MBA KIMBERLY L. RUDGE, ESQ. STUART REED, ESQ. MARC S. WOOLF, ESQ.	DIRECT E-MAIL [email protected]

 

^* licensed in FL and NY

^**licensed in NY and NJ

^***licensed in FL, CA and NY

 

July 31 , 2018

 

Masterworks 001, LLC

6 St. Johns Lane

7^th Floor

New York, New York 10013

 

Re: Masterworks 001, LLC Offering Statement on Form 1-A

 

Ladies and Gentlemen:

 

We have acted as securities counsel to Masterworks 001, LLC (the “Company”), in connection with the preparation and filing with the Securities and Exchange Commission of a Regulation A offering statement on Form 1-A (the “Offering Statement”) relating to the offer by the Company of up to 99,825 of the Company’s membership interests in the form of Class A Shares, for a purchase price of $20.00 per share (the “Shares”).

 

This opinion letter is being delivered in accordance with the requirements of Item 17(12) of Form 1-A under the Securities Act of 1933, as amended.

 

In connection with rendering this opinion, we have examined the originals, or certified, conformed or reproduction copies, of all such records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinion hereinafter expressed. In all such examinations, we have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to us as conformed or reproduction copies.

 

We have reviewed: (a) the certificate of formation of the Company; (b) the operating agreement of the Company; (c) the offering circular; (d) form of Subscription Agreement; and (e) such other corporate documents, records, papers and certificates as we have deemed necessary for the purposes of the opinions expressed herein.

 

Based upon and subject to the foregoing and to the other qualifications and limitations set forth herein, we are of the opinion that the Shares, when issued and delivered in the manner and/or the terms described in the Offering Statement as filed (after it is declared qualified), will be validly issued, fully paid and non-assessable.

 

We express no opinion with regard to the applicability or effect of the law of any jurisdiction other than, as in effect on the date of this letter, (a) the internal laws of the State of Delaware and (b) the federal laws of the United States. We express no opinion as to laws of any other jurisdiction. We assume no obligation to revise or supplement this opinion should the laws be changed after the effective date of the Offering Statement by legislative action, judicial decision or otherwise.

 

We hereby consent to the filing of this opinion as an exhibit to the Offering Statement and to the reference to our firm under the caption “Legal Matters” in the Offering Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act.

 

Sincerely yours,

 

/s/ Laura E. Anthony
Laura E. Anthony,
For the Firm

 

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