 Welcome to Digital Asset News or Dan for short. My name is Rob and today what I want to do is bring back Alan Sokolitsky. He's the Chief Financial Officer for Masterworks and we're here to talk about just the nuts and bolts of Masterworks. Alan, thanks for coming back again to answer some questions. Thanks for having me. Happy to be here. All right. So there's been a little bit of grumblings, especially with the issue with trust, especially in our markets, which spills over to other parts. So they're going to go over just the basics. First of all, what's Masterworks and why diversification? Second of all, we go through proof of reserves. We have some kind of proof of art, meaning that the things that you have bought as far as our pieces, how do we know such things? Also, 20% fee upon sale seems kind of cheap or kind of steep. And then lastly, how does the secondary markets work? So the first things first, Alan, just basically people have never heard of you or what's gone on. What is Masterworks? Yep. So Masterworks is it's basically the first company to make multi-million dollar works of art, so paintings, available to invest in on a fractional basis. So you can buy shares in a Banksy, a Bosquiat, a Warhol, all the major artists. You can come to our website, you sign up for an account. And ultimately, you can become a partial owner in one of these multi-million dollar paintings, somewhat along the lines of how if you buy shares of stock on the stock market, you're kind of a partial owner of a company to somewhat along those lines. There are a lot of differences, but nevertheless, the idea of being a partial owner is pretty much the same. You know, the art market, it's a nearly $2 trillion asset class. So we're not talking about something small. We're talking about something pretty gigantic. You see it around us in museums everywhere, and it's a really great diversifier for portfolio uncorrelated, and we think a lot of investors should consider it. Yeah, it's something to consider. And this is just to get everybody's head perfectly, is that it's not about getting into Masterworks and putting your entire life savings. It is a small diversification. This is mine right here. I got mostly in cash and real estate. But Masterworks, I've allocated a little bit to it. I think that's kind of how I would like to do things. It might be different for everybody else, but in this day and age, I mean, look, the S&P 500 today is December 22nd, 2022. And we're looking at almost a 20% drop this year alone in S&P 500. So if you're investing in S&P 500 and just saying, set it and forget it, it's kind of hurting right now. Same thing with the NASDAQ down 32%. And let's not forget our market itself. We're down market cap-wise 63% year over date. And that is not to include, or that actually includes everything, but if you're in a specific altcoin, you're hurting even more so. So again, Masterworks, how it worked for me, I called them up and I said, hey, I'm looking to invest in this. Tell me what it's all about. It took them between 30 and 45 minutes to get it through my head. What it actually was, they answered all my questions and they told me very specifically, Rob, the things that you want to do does not equal to what I just talked to the last person and the person before that. And they made it very crystal clear of what my goals could be, what I told them, and what they should or could do with Masterworks. So again, if you're just thinking about this or this is the first time you heard it, this is not the only place you can get answers before you can even invest. You have to talk to these guys and just to make sure if it's right for you. And I'll be honest with you, I've had other subscribers say, hey, they told me it wasn't for me. And that's fine. And I would I would really emphasize that we're basically, I'm not necessarily going to say we're the only platform that does this, but I'm pretty sure most platforms do not do this, which is to say, you can't actually just sign up on our website and automatically make an art investment. We actually don't allow any investors to invest in art until they've actually spoken to someone from our membership team, because we actually take risk management and our clients wealth very seriously. So we ultimately work with all of our clients to determine what is the appropriate allocation to art for your portfolio. And to be honest with you, in a lot of cases, we actually guide investors to have smaller allocations relative to what they might have thought they should invest. So we're probably one of the only platforms, if not the only platform that actually is willing to do something like that, guiding you to invest less than you might have thought you should. Yeah, sounds good. So let's let's do this, let's get into the whole trust aspect. So the first thing is this, we've got an issue here in crypto world, which is people say, I've got Bitcoin, I got a three on my exchanges, and all of a sudden poof, it's not there. That's called proof of reserves, proof of liabilities. How do we know Alan for everything with Mashworks that you guys have purchased the art? You haven't just like said, hey, we've got a Banksy, and here it is. How do we know? Yeah, so you know, this actually in some ways takes us back to early days in masterworks history, because when we were first trying to figure out what is the best way for us to even fractionalize the paintings in the first place, meaning how should we go about making them available on a fractional basis. The route that we took, which is to have every offering qualified by the SEC and have all the documentation on the SEC, that wasn't the only option. We had actually considered using blockchain, but what we quickly realized is because a lot of investors were sort of learning about art for the first time, the way that we wanted to make information available about all of our offerings was a way that would be as public and as transparent as humanly possible to give investors a lot of confidence in what we were doing. So that's a lot of the reason why we actually decided we are going to securitize these paintings. We're going to make them public vehicles with the Securities and Exchange Commission. So you can either go to our website where you'll see a link for every single painting. There's a link that will take you directly to the SEC's website, and you will get an extraordinarily lengthy document that is going to talk about everything related to that particular painting. It's going to give you a history of the artist, a history of the painting, who owned the painting before and who owned the painting before. That person, it's literally going to lay out in exhaustive detail anything and everything that you would want to know. And again, the reason why we wanted to do this through the Securities and Exchange Commission is because we knew that because this is an investment that a lot of investors have not thought about before, we need to do it in a way that is most likely to give investors the maximum amount of trust, and that's why we decided to do it this way. Gotcha. Okay, so that helps out a little bit with the transparency part. Let's talk about this one. 20% fees. Now, when I heard about this and I talked to the guys over there, just so you know on a very upfront, like this would be 20% fees, they laid it all out for me, but it's been over a year. I purchased a Banksy and a Bastiat, and I can't remember exactly how this all works. So Alan, could you break it down for us? Because some people would say, why don't I just invest into something like just put it all on the crypto because the crypto goes up 100%. It also goes down 99% sometimes. Yeah, so when it comes to the fees, for alternative investments, and let's just even put art aside, if some of your viewers invest in other alternative investments, whether it's private equity or hedge funds or others along those lines, the pretty standard management fees and performance fees for alternative investments in the industry is let's say 1.5% to 2% management fee and 20% of profits. Our business, we are basically, we think very much average or even slightly below, we're actually at 1.5% management fee and 20% profits. So we think we're pretty much right in the ballpark with other alternative investments. That 20% on profits, I just want to be clear what that specifically refers to, because let's just say in general, I can totally imagine that somebody who just hears the number 20% fee, that on its own is probably a little bit terrifying to hear, but that's a fee on profits. So as an example, let's say we have a painting that we make available for a million dollars, and let's say a few years go by, we sell the painting for $2 million, that means there's been a million dollars in profit, right? It went from one to two, that means a million dollars in profit. So 200,000 of that would go to us, and 800,000 of that goes to investors. And the reason why investors are so interested in having asset managers who actually have a fee on profits, and investors actually want managers to charge a fee on profits, is because it is probably the biggest and strongest form of incentive that you can give an investment manager to do a good job with what they're doing, because they know that the more they are able to generate in terms of performance, that means that they'll be able to generate more for their investors as well as generate more for themselves. You actually want that. Yeah, I'm okay with that, with paying those types of prices. And then, like we just took a look at the track record, not a little bit ago, but we can see that so far, I mean, annualized profits themselves are looking pretty reasonable, as far as like the pennies are sold, 33%, net of all costs in fees, 27%, golem, condo, so on and so forth. So yeah, I think it's just something to say that this is all after everything. Yeah, I mean, that's really, that's one of the important considerations. I think a lot of investors, if you focus too much on the fees alone, almost like in a vacuum, you sort of lose sight of what's, I think, significantly more important, which is, is the performance that the manager generating, is that performance still really good after you pay the fees? And I think what the performance of our platform has shown, I mean, we've sold paintings, you just ran through some of the example, we've sold paintings that had net returns, meaning after fees of over 30%, there have been a number over 25%, a number over 20%. So I think at the end of the day, what it goes to show is, if you are able to generate those types of performance numbers, especially in the market we're in today, that's really what matters most. And sometimes I kind of struggle bringing up the performance of stocks and bonds this year, because it has been challenging and it's been challenging for a lot of investors' portfolios, but it does in a way highlight one of the points I've been trying to make about fees, which is to invest in stocks these days, the fees you're going to pay are effectively zero. I mean, they're not literally zero, but they're close to zero. But despite the fact that you're paying close to zero, the stock market this year is still down nearly 20%. With bonds, you're also paying close to zero in terms of fees, but bonds are down over 10% this year too. So I guess it's all just a way of saying it's important to look at fees, but you need to give those fees some context. What's the performance you're getting for the fees? Yeah, that's a big thing. And that would actually leave me up to the next point here, and I'll kind of roll into this as the secondary markets. And before I roll into that, I would just say that now we talked about sharp ratios before, I'm not going to do it here. Again, there'll be a link in the description. You can check out what Alan talks about sharp ratios, but anything above one is doing pretty good. And 1.5 to almost two is utterly incredible. And we can see sharp ratios being quite high. But on top of that, there's just one little piece here I want to make mention. Less than 2.4% of artworks reviewed by Masterworks actually gets bought up and offered to persons. So Artist Market Analyze 7100 selected 74. They were offered 5677. And this is what they have. So again, it's not like they get every single one out there. They're trying to get the best because they're trying to give us a great return and go from there. That's the idea. I mean, I'm sorry to interrupt, but it's so important to emphasize this because the truth is we've had several paintings over the last few months. These are several multimillion dollar paintings that actually sold out in 15 minutes. So if you were to take that into consideration, and you would probably very quickly realize, wait a minute, if they have paintings that sell out in 15 minutes, they probably should want to buy up as many paintings as they possibly can and make those available because there's so much demand for what they're doing. However, we would be throwing the investment process entirely out the window if we actually decided to do that. We are entirely focused on generating attractive performance for our investors. And that requires being extremely selective. And if that means that our paintings sell out in 15 minutes and we're not just buying anything and everything under the sun, then so be it because we are committed to generating attractive performance. And then this will be leading to the next part about liquidity in the last question. So when we talk about these holds, because in our space, you can see like 100-200% increase in price in a week. That's just the bench of the beast. However, here, we're talking about year-long holds, two, three, five-year type of thing, right, Allen? The guidance that I give investors all the time is to expect three to seven years, roughly. That would be five years on average. I also point out though that there's some irony when I say that because most of the paintings that we've actually sold so far were opportunistic sales in the sense that we were approached and we were given very attractive offers for the paintings, so we decided to sell them sooner than our anticipated three to seven-year timeframe. Most of them actually got sold at two years. However, I'm always trying to sort of advise and caution investors that when you go into this, expect it to be three to seven. Doesn't mean it can't be shorter, but expect it to be three to seven. The long game. And then people ask me, well, what happens, Rob, because this is a very e-liquid market. I mean, it really is. So what happens if I need to get money out? Something happens and whatnot. There's a secondary market. And here, this is my account itself. If I go over to trading on the very top, from what I remember you telling me, Allen, it's after three months, after all of the shares have been purchased by the consumer or by the retail market, once they're all totally sold out, three months from then, then these shares, these fractionalized shares of fine art, get put on your secondary market and you can trade if you so need to. So I'm going to look at my Banksy. This is a gift shop. That's mine. So I bought it for $20 per share. Right now it's at a whopping $19.98. I'm okay. If something happens to me and I illiquidate, okay, I'll liquidate, but it's there for me. Is there something I'm missing now? You actually just explained it exactly the way that I would have explained it. You can see that there was that button on the right just now on the screen that said you don't have a Templom account signup. So Templom is basically the, it's a firm that we partnered with to sort of automate the trading that takes place on the secondary market. That's sort of been sort of a big advance for our business. We were very forward thinking when we first started Masterwork several years ago in even having a secondary market in the first place, but admittedly that secondary market, it operated kind of like a bulletin board. There was not a lot of automation. So yes, it functions, but you would imagine that something in this day and age should function a lot more efficiently than it did. So we've had, now we have this partner, you sign up for an account and basically there's a lot more automation that happens in the buying and selling. So think of it as, you know, a natural sort of progression and improvement in our business. And we are always looking to improve our business to every extent possible. Excellent. Alan, thanks again for stopping by. Everybody, if you're looking for more information, we did a deep dive into this. There's a link in the description. It looks just like this. And underneath there where it says deep dive video, you can go more in depth also to sign up or just to talk to the people over at Masterworks like we talked about in the beginning. You can do so, but just be aware it's going to be like a 30 to 45 minute conversation just like what I had. So Alan, I appreciate it. You stop and buy. Thanks so much for having me.