nonprofit art gallery fundraising - a hypothetical

If you're a seller of stock in an initial public offering, the SEC makes rules about when you can sell, and what methods you can use to alert the public ahead of time, to prevent insider advantages or favoritism.

The art market is traditionally a "wild west" where individual discretion of galleries determines such rules. "Pre-selling" a show -- where the dealer calls around to a few favored collectors to generate some "red dots" ahead of the opening -- is a fairly conventional practice. No one blames dealers for trying to keep their doors open in a tough, flighty business.

A non-profit gallery space must follow state and federal tax rules regarding its tax-exempt status. These rules allow selling artwork for fundraising, subject to various restrictions. "Pre-selling" isn't forbidden, but if a work is offered at a near-market price it may be subject to sales tax. Regardless, the nonprofit wants to maintain an appearance of fairness in how sales are structured.

Let's say, hypothetically, a nonprofit is having a fundraiser with donated artwork. The gallery invites a number of artists, each of whom will contribute a single editioned work for sale. All donated artworks are offered for sale to the public for a standardized (low) dollar amount.

What is the best way to structure the sale to avoid the appearance of favoritism? Obviously collectors will be attracted by the prospect of buying a "name" artist at a trifling price. Some options:

1. Don't invite any name artists. Unfortunately you need these cash cows to generate buzz and/or sales for non-name work, so that's not really a choice. In any case, the gallerist is using personal connections, calling in favors, and/or exercising personal judgment regarding potential "hot" names to invite, so already this isn't a very democratic procedure.

2. Invite name artists, but structure the sale as a one night event, with online or walk-in sales afterward. This is fair, it gives every buyer the same chance to buy a name artist.

3. Have the opening, and call around a few favored donors ahead of time to alert them to the presence of hot artists in the show. Doesn't smell too good, for a nonprofit.

4. Have a "soft" or passive presale, where emails go out to press and/or regular gallery mailing list announcing that works will be for sale online in advance of the official opening. This effectively guarantees that all the name artists' work will be unavailable by opening night. Better than option 3 but not as squeaky-scrupulous as option 2. All in all, probably an acceptable compromise for a gallery looking to drum up excitement, raise money, but also avoid unseemly stampedes the night of the opening. Option 2 is still the best choice, though.