Collective Art Property
September 29th 2020
Structure of a Scalable Collective Investment Scheme in Artistic Assets
1 Introduction
1.1 Context
Art property is a social matter. From a macro-level perspective, access to art constitutes an indicator of democratisation with respect to cultural and economic capital. From a micro/ individual perspective, art property is an indicator of education, wealth and/or social integration. Whereas embodied cultural capital enables awareness of art and artistic creativity, objectified cultural capital, i.e. tangible economic assets give access to art property. As a consequence, a democratised access to art property should be a goal for any modern socio-liberal democratic system.
Art property is an asset class, which can be as secure as gold and is an eligible target for scalable collective investment. Thus, it can be a vector of integration and massive wealth building. On the other hand, scalable art investment can be vector of prestige at any level (corporation, city, nation) as it can enable art collections, which can be general or targeting a specific focus in relation to a collective identity. Thus, art property is matter of asset and wealth management and collective art property can be a matter of public interest.
1.2 Collective art property
As of today, relevant public policies either focus on financial and fiscal support for qualified institutions and individuals or consist in funding publicly (state, city, region) held art collections, in the latter case, mostly limited to cultural heritage (e.g. Staatliche Kunstsammlungen Dresden, the French Institut national du Patrimoine). Private collective initiatives are mostly limited to foundations with respect to major corporations, for instance banks. These schemes constitute a modernised form of the artistic patronage and sponsorship by the monarch or a wealthy baron. Further, they cannot qualify as genuine collective wealth creation as they exclude individuals with middle-class income. In contrast, there is a social and democratic need of making art property available to as many individuals in the society as possible.
During the fifties, the German legislator started to be aware of the importance for a modern nations of collective wealth creation via collective investments, i.e. models consisting of the collection of capital from a number of investors for the purpose of risk-spread pooled investments. The legislator recognised the need for a transparent regulatory framework for collective investment schemes, allowing scalable models but also an effective protection of small investors. Consequently, the first German Capital Investment Companies Act (KAGG) was voted in 1957, which is today embodied, after being replaced by the former Investment Act (Investmentgesetz), in the German Capital Investment Act of 2013 (KAGB). This said, collective investment schemes subject to the German KAGB are investment models, the objective of which is to generate income for the sole account of the investors according to a defined investment strategy. Also, this framework applies to persons managing assets for the account of investors with a business purpose, thus with the aim to be remunerated for their management services.
Both from the perspective of a small individual investor and of public institutions, access to art property may not be aimed at the generation of income. Non-profit objectives can be summarised in three aspects: property rights over valuated artistic assets, supporting and sponsoring art upon specific criteria (eg. manifest, commitments, category of artists), support for and financial participation in local art (at communal, regional or even national level).
Against this background, modern financial models for collective investments and wealth creation in art may not be subject to the strict and complex regulation of the financial markets.
The purpose of this paper is to draft high-level overview of a potential model of collective investment in arts without unreasonable regulatory and fiscal burden.
2 Funding Structure
This proposal consists of a non-profit organism (the “Fund”) collecting funds from individuals and corporations (the “Owners” or “Shareholders”) for the acquisition and management of a collection or several collections of artistic assets (the “Assets”). In this regard, the Fund shall under no circumstances qualify as an investment fund within the meaning of the German KAGB and the German Investment Tax Act (Investmentsteuergesetz). The Owners shall keep either the legal entitlement or at least the beneficial ownership over the Assets. They must be to a certain extend empowered to influence the management of the Assets and be granted certain benefits from the assets, without making the structure profit oriented.
2.1 General Civil Law
2.1.1 The Fund
The Fund can have the legal form of a foundation (Stiftung), a German civil-law partnership (Gesellschaft bürgerlichen Rechts – GbR), a non-profit cooperative (Genossenschaft), a non-profit association (gemeinnütziger Verein) or a contractual fund managed as a trust (Treuhand).
2.1.2 Fund as a Stiftung
As the main goal should be the collective access to art property, a foundation (Stiftung) may not be a suitable legal form for the Fund. Assets of a Stiftung are the ownership of the sole Stiftung. In contrast to the donation-based structure of a Stiftung, a legal or economic ownership status of persons funding the acquisition of the Assets would constitute a new scalable, attractive and even disruptive financial model for art collections. Further, this is more susceptible to raise awareness and exposure of individuals to art and give them the possibility to proactively participate and have their say in the management. Not least, such an ownership status could be transferable or sold to third persons, which makes it more attractive.
2.1.3 Fund as a GbR
A GbR as fund structure might as well not be suitable as all members would be personally fully liable for the assets and the decision-making process would imply more complexity.
2.1.4 Fund as a Genossenschaft
The German cooperative has as well a complex decision process and can be complex when the membership becomes large and frequently changing. Furthermore, the structure of a Genossenschaft is based on a strict parity of voting rights, which does not take into consideration the amount of an individual’s participation.
2.1.5 Fund as a Verein (e.V.)
The German association is based on a parity of membership rights as well, which does not encourage investments as the amount funded at individual level is not reflected in the membership. Furthermore, the decision-making process is not adapted to a continuous management and change of membership.
2.1.6 Trust model
On a high-level basis, the trust structure turns out to be the most flexible and scalable model.
– An organism (GbR, Verein, Genossenschaft) shall act as a trustee (Treuhänder). The Treuhänder shall be represented by experts for the establishment and management of the Fund.
– The Funding Rules will be drafted for the purpose of defining the objectives, conditions and restrictions with respect to the activities of the Treuhänder, its liability, restrictions and empowerment towards the Owners. The Funding Rules are incorporated in the form of a multilateral contract to be signed by the Treuhänder and all Owners.
– Share Certificates issued by the Treuhänder will be held by the Owners upon subscription to the Funding Rules and payment of their funding share. Each Share Certificate represents a fractional share interest over the Assets. However, the Treuhänder holds the legal ownership over the Assets whereas the Shareholders remains beneficial owners of the Assets. The shareholder status of the Owners can be freely transferred to third persons, for instance through sale or disposed of as security or for encumbrance purposes. A shareholder can redeem the Share Certificate upon consent of the Treuhänder. The Funding Rules can provide for conditions under which the Treuhänder is obliged to grant their consent to the redemption of a Share Certificate. The Share Certificate can entitle to other benefits, for instance, membership status with regards to exhibitions and other events, including free entrance. The shareholders cannot be entitled to require the dissolution of the fund or to personally dispose of any of the Assets.
– Funding institutions and persons can, instead of having a shareholder status, participate in the Fund on a donation-basis. In this case, those donated funds are to be segregated in a fiduciary foundation (Stiftung) managed by the Treuhänder.
– A Supervisory Committee must be established: it is constituted of members elected among the Shareholders and may include external members, such as experts, funding institutions, artists, public authorities, museum administrators upon election by the Shareholders. The Supervisory Committee shall be vested with the discretionary right to validate or decline major decisions of the Treuhänder, e.g. the purchase of artistic assets, sale of the Assets, lease agreements with museums, organisation of or participation in exhibitions.
– Optionally, for a more effective protection of the Shareholders, a fiduciary bank can be appointed for the custody of the Assets. In this case the Funding Rules will define their duties with regards to the Assets.
– Not least, the Funding Rules may provide for the obligation to appoint a in independent expert or an independent group of expert for the valuation of artistic asset prior to any acquisition or for the valuation of the Assets prior to any sale.
2.2 Fiscal Law
With respect to the investment structure, the Fund will probably qualify as a dedicated private fund (Zweckvermögen des Privaten Rechts) within the meaning of Sec. 1 para. 1 n° 5 of the German Corporation Tax Act (Körperschaftsteuergesetz – KStG) and could be taxable for German corporate income tax (CIT) purposes. However, the Fund shall be structured as a non-profit fund. The collections shall not primarily generate any income, eventual lease agreement shall be aimed at covering management costs. Furthermore, there must be no speculative management of the Assets. To that extent, the Fund should be eligible for the exemption pursuant to Sec. 5 para. 1 n° 9 KStG. For trade tax purposes the Fund’s activities should constitute a mere passive holding of the Assets and thus not be taxable. In case the Fund should be subject to the German Trade Tax Act (Gewerbesteuer – GewStG), an exemption pursuant to Sec. 3 n° 6 GewStG with regard to the above non-profit character should apply. As long as non-profit activities are concerned, the Fund would benefit a reduced VAT-rate of 7 % pursuant to Sec. 12 para. 2 n° 8 lit. a) of the German VAT-Act (Umsatzsteuergesetz – UstG).
Against this background, it is critical and mandatory to structure the Fund as a non-profit organisation. However, the Fund does not have be established, to that aim, as foundation in the form of a Stiftung.
2.3 Investment Law
The Fund will be structured as a collective investment scheme which collects funds from a number of investors. To that extend, the Fund could potentially qualify as an Alternative Investment Fund (AIF) subject to the German capital investment Act (KAGB) and the EU Alternative Investment Fund Managers (EU-AIFM) Directive. An applicability of the KAGB and the AIFMD would have severe consequences for the Fund as it would have to comply with expensive prospectus, reporting requirements and the Treuhänder would have to meet i.a. minimum equity and legal form requirements and apply for a licence of the German capital markets regulator (BaFin).
However, a non-profit fundraising is not susceptible to qualify as an AIF. As far as the Treuhänder is not dedicated to commercial purposes, this requirement should not be fulfilled. Moreover, an AIF within the meaning of the KAGB and the AIFMD must be aimed at generating income for the investors. In the case at hand, art collections shall not be aimed at income generation. Consequently, the Fund can be structured without regulatory burdens in a scalable fashion.