Fractional ownership in collectibles vs. real estate
A conversation with Simple Passive Cashflow
A few weeks ago, Lane Kawaoka invited us on his Simple Passive Cashflow podcast. He brought fresh insights and questions from the perspective of an investor who specializes in a different asset class: real estate!
If you’re new to Mythic Markets, don’t mind mucking around in the weeds a little, or want to learn more about fractional ownership - here’s a crash course.
Follow along as Joe and Lane discuss the similarities and differences between their two areas of expertise, collectibles and real estate.
Plus:
The real costs of running a fractional investment platform
What happens if Mythic Markets liquidates an asset?
How is the company structured, and why is it structured that way?
Why does Mythic Markets co-invest in every asset?
How might market events impact the value of collectibles?
How does Mythic Markets keep the lights on? Is there an asset management fee?
And more about starting and running the business
MythicMarkets.com Overview – Investing in Magic Cards, Spiderman, and other Geek stuff (56:18)
Excerpts with slides
LANE: Today we are going to talk about investing in a bunch of geek stuff like Magic cards, Pokemon cards, comic books. So we are talking to the owner, Joe from Mythic Markets. Thanks for coming on Joe.
JOE: For sure. So yeah, I'm Joe Mahavuthivanij, co-founder and CEO of Mythic Markets, and we are essentially creating an investment platform for geeks, for fans. I guess I'd start off with, this is not an offering of securities. We are not soliciting any investments at this moment. We are also not a broker dealer. But we do work with one. And, yeah, I am not a lawyer. I'm not your lawyer, please consult your financial advisor, lawyer, accountants, etc. before making any kind of an investment.
LANE: Yeah, we had a few other guys on the show doing wine. But the difference, the reason why we have to have all this disclaimer stuff, is these guys are securitizing the assets. So you as the investor, you can buy a fractional share. But as soon as you do that you've kind of triggered securities law. And that's why we need to get really formal with all this stuff.
It's just like investing in apartment buildings, when you don't own the title to the property. You own a LLC that owns title to the property. But as an investor, you need to understand that, hey, these guys are securitizing the investment. They're breaking it up as opposed to, I own the actual title on the actual asset.
Based on data from macrotrends.net
JOE: Cool. So like, why would you actually invest in this stuff? In truth, the collectibles, like Magic cards or comic books and that sort of thing, have outperformed not just the market and gold and real estate, but also alternatives over the last 10 years and beyond. But this is an asset class that most people aren't exposed to or familiar with.
But also, in general, this high value stuff - whether it's collectibles or real estate - is just out of most people's capacity, and certainly for some of the blue chip assets that we offer this is true. I mean, most people can't afford a $100,000 card or a million dollar comic book.
But there is a reason why high capacity investors do invest in this kind of stuff. It’s because they, aside from being diversified in other asset classes, this is something that they may understand better, have more intimate knowledge of, but also that it generally has outperformed. Of course, past performance is not indicative of future returns and all that.
LANE: A lot of you guys listening on the podcast here, you guys are affluent investors. You're investing in the right stuff, building that foundation of cash flow, and a lot of this stuff is more fliers. It's fun, right? Like, life's all about having fun after you get your bases covered. And a lot of you guys can partake in this type of stuff, because you've earned it.
JOE: So ultimately, we have structured these as a Regulation A+ Tier 2 public offerings. And what's unique about that is that allows both accredited and non-accredited investors to participate. So in like a typical, let's say, real estate deal that you may be accustomed to, there's a lot of platforms out there for buying fractional ownership in real estate. Those are probably…?
LANE: Mostly Reg D 506(b) or (c).
JOE: ...and that requires you to be an accredited investor.
LANE: So like 90-97% of real estate deals are for non accredited investors too - you just have to be in a network. You have to know who you're dealing with. As soon as you mass market out to the average Joe, it can only go out to accredited investors.
JOE: Right, so Reg A+ allows not just the accredited and non accredited investors, but also for this general solicitation, allowing you to essentially advertise these things.
Reg A+ Tier 2 allows up to $50 million to be raised for any new raisings qualified under that particular Reg A+ filing. And so for instance, in the previous slide, there's the $90,000 Lotus and the $200,000 Pokemon card and the comics and so forth - that comes nowhere near $50 million. And so we can put quite a few things into that single filing.
LANE: But the trouble with a Reg A+ offering is it takes a lot longer than a 506(b) or (c) to originate, a lot more paperwork and it's a lot more costly. Like we normally get our PPM done on the 506(b) and (c) stuff for like, 10 grand, on that magnitude. But the Reg A+ is probably about five times as much as that.
JOE: I will say that we've invested a lot more than $50,000 - and more importantly, time - into bringing all this together. I mean, we're here to build a business for the long term and that’s what we're doing.
And so the way that this ultimately works is that we acquire these, in our case, high value collectibles. And then we wrap them in a company, specifically a Series LLC. And that's what's broken up into shares, securitized with Reg A+, and then it's basically 80% or so to an actual IPO.
Ultimately what people are investing in are, in lay terms, shares of a company that owns the asset. So in our case, a membership interest is the shares - the shares of the LLC, which is the Series LLC, and the asset is that underlying asset - in this case, let's say like a Black Lotus, or the Pokemon card or the comic book, etc. And so ultimately, you are investing in Series Alpha Black Lotus, or Series Pikachu Illustrator, Series Amazing Fantasy 15. So for clarity, you are not, you know, buying a page of that comic book. You're buying a share of the company that owns and maintains that thing.
This is an overview of how everything’s organized. The Mythic Collection is the Company that is making these offerings - it's what's called the Issuer. And, as I've mentioned, the Series structure below that. You have the Lotus and basically everything else that would fall under that.
And so, that is managed by what's called the Manager up top, and that is our company that develops the software and employs our team and engineers and so forth.
LANE: So, right now, for those of you guys watching on YouTube, we have the org chart. It's kind of like an org chart, but the Mythic Collection LLC is sort of the manager of the underlying assets. So right now the LLC is structured to hold on to those assets and it's managed by the Manager. I think a lot of times investors they kind of key in on, ‘Oh, what's the structure, what's the structure?’ To me, it's the structure that the lawyer put together that makes sense for the management of the assets.
JOE: Yeah. So I guess the reason why it's structured this way, is that each of the Series, each of the assets are essentially shielded from liability from each other. If, for instance, the value of one goes down - it's shielded from every other deal. And so, it's important to kind of keep these walls up between the investors of each of these companies.
Trading is by far our number one most requested feature... So we'll be enabling that, you know, hopefully by end of year at the very latest. But like I said, these things generally take a lot longer to put together just because this is such a heavily regulated business and these are actual securities.
It's essentially a bid-ask marketplace. And so, if you buy shares - let's say, the Lotus at $45 - and you want to list it for sale at like, $50... Well, somebody else has to come in and be willing to pay you $50 for the shares. I guess much like the stock market, but lower cap, obviously. And there will be limited volume, at least at the outset. But that's something that we're building up over time.
LANE: Are there any times in the past handful of years where some event has happened, which greatly impacted the price of the cards? Because I mean, this is the fun part, right? I mean, the whole reason why you do this is because it's fun.
I can see basketball cards, like LeBron James wins another championship with LA, he might even be the GOAT, better than Michael Jordan. A lot of arguments there, that his card might go up in value.
Is there anything you can kind of point to that things have happened in the industry that push certain items higher or lower?
JOE: Absolutely. You give a great example with the Jordan stuff. Jordan's stuff has increased two or three times since The Last Dance came out, for instance.
But I'll give you an example from our fandoms. So the first Wonder Woman book was, you know, maybe a $25,000 comic book, but a high grade version of that sold for about $930,000 two months after the movie came out. Suddenly you had a worldwide audience and fan base of probably billions of people. And so that book skyrocketed in value because the film was so popular. And also, to that end, we saw the same things happen with Black Panther and Infinity War. Maybe not to the degree that Wonder Woman did, but certainly the movies are driving a lot of that fervor around and demand around those origination stories.
On the other hand, you know, Justice League is another [movie] where it just fell kind of flat and didn't really help the book much at all.
LANE: Like Fantastic Four - buy them now, right? You can't get any worse than the last movies.
JOE: So that's a great example. We actually did recently pick up a copy of Fantastic Four. And we'll be offering that soon. Now that the MCU and, frankly, Disney owns everything, including the Fantastic Four, X-Men, and a lot of other IP that they didn't have before - the expectation is that as they're integrated into the MCU, that they make amazing films. And so certainly I think a lot of people are betting on that, to drive the value of these collectibles.
JOE: So you got a slide up of an example of what happens if we liquidate the entire asset. ... It's trading for $80,000, and there's 2000 shares. So the share price currently would be $40 if there were 2000 shares.
If somebody comes in and says, Hey, I want to pay $125,000 for that thing, there's like a 50% or so premium - sort of comparable to somebody coming in and taking a public company private, for instance. And so there might be a premium on shares - aside from cost to wind down the company, to do all the accounting - that would all be factored into the payout per share prices. The proceeds from that sale would go toward the shareholders of that asset pro rata, so based on whatever their ownership happens to be. So, yeah, I mean, this is an oversimplified example. But essentially that's how it would work.
LANE: So we understand you guys are kind of the house? How does the house kind of keep the lights on and facilitate this marketplace? What is the asset management fee?
JOE: So how does Mythic Markets make money, ultimately? Number one, it’s not from trading fees. We are not a broker dealer and we cannot accept anything that even resembles a commission for trading. And so it's not from that.
Ultimately, our core business is going to be around this premium subscription model that will be similar, we envision, to be like Robinhood Gold, if you're familiar with Robinhood. Not necessarily options trading and margin trading and stuff, but, you know, potentially pro trading tools, early access to the IPOs, and opportunities to visit the collection and experience the collection, and all kinds of other benefits that we are currently still putting together.
With each IPO, there is a nominal sourcing fee that is included. And that covers some of the costs to bring that offering to market. It generally historically has been about 2%.
We also co-invest in every single deal. So, although these are structured as a Series LLC and as a company and intended to generate revenue, Mythic Markets essentially co-invests in each of these things - sort of like a GP and LP relationship. This aligns our interests with the investors as well, and so we hold that until any kind of a liquidity event.
And then what's called free cash flow - ultimately this serves as a potential management fee. For instance, we intend to have these at a gallery or show or whatever it happens to be. And half of that revenue is split equally between the Series, meaning like to run that business, and then with the shareholders as a dividend.
So for instance, if we take in $10,000 as part of a gallery - ticket sales or whatever it happens to be - half of that would go to the management fee, so like $5,000, and then half of that would go to the shareholders as a dividend.
I will say that we do not take any kind of a management fee if the asset is sold.
LANE: A distribution fee.
JOE: Right. So in the previous example, like the $45,000 delta, we're not taking $22,500 of that, for instance. That is all generally going back to the shareholders.
LANE: So the sourcing fee in a way, that's kind of your matchmaker fee or acquisition fee. What percent is that of the asset, or is it more fixed?
JOE: So it depends. But in general, historically, it's been about 2%.
LANE: Which is pretty much in line with, you know, trading any kind of asset out there.
JOE: Yeah. So again, this is not a trading fee of any kind. This is basically covering all of the legal expense, all of the expense of basically going out and transporting and bringing that to our vault.
LANE: Not just a bunch of dudes playing Magic cards, you guys are a business.
JOE: Right, exactly. I would say that our actual [expenses] are far greater than the sourcing fee would offset. It's something that we include to help cover some of those costs.
LANE: And this is interesting, that you guys are doing the co-investing model. So when you guys go into a deal - in a way it's like sponsoring an apartment deal. The general partner is also putting some money in the LP side. Is there a normal minimum you guys will do of the total money needed? Or is it you guys pick and choose too?
JOE: Our offering documents mandate that we pick up a minimum of 2%. In general, it is far more than 2%. Right now, we are taking up to 10%, but it just depends on the offering. But yeah, I think we're averaging about 8% as a co-investment. But in general, if you look at any sort of fund structure, the GPs are putting in around 5%.
LANE: Exactly. And that's the teaching point I want to pull out, you know, for apartment buildings - different asset class, different type of investment altogether - but normally for a newer operator, you want to see more than 10-20% of skin in the game. I think 5-10% is what most guys are doing. But yeah, right in line with that guidance.
JOE: Yeah, so like you said, this is totally our skin in the game, and ultimately aligns our interests with all of the investors.