Asher Edelman put up a nice bit of financial erudition the other day on Artnet’s news site when he made the comparison between the offering of a security—with all the concomitant regulations—and the auction houses’ financial guarantees:
As has always been evident in past years, guarantees are arranged via the auctioneers, often with the houses committing or financing the guarantee early on and then replacing or reselling the guarantee to an investor or collector. The auction houses act as underwriters of these transactions, often as principal before, during, or after the sale is put together. Not all guarantees are passed on to third parties. What happens is that the auction house (the underwriter) mates an asset (an artwork) with a financial product (the guarantee) and then offers that combination (a security, by definition) to the public by way of the auction process.
But not much light has been trained on the fact that this coupling (an artwork and a guarantee) constitutes a security. If indeed such offerings are securities, then there are disclosure rules that should already been established and certainly need to be established now—and followed. Because if a concomitant level of disclosure is not offered to the buyers, it’s possible that the underwriter—the auction house—could be permanently liable for any losses incurred by buyers of guaranteed lots whether or not the house is the continuing guarantor or lays off the bet on a third party.