Bearer Form: What It Meant and How It Worked

What Is a Bearer Form?

A bearer form is a stock or bond certificate that is not registered in the issuing corporation's books but is payable to the person possessing it. Thus, one must only possess (bear) the instrument as proof of rightful ownership. These were also known as bearer instruments.

Unlike registered instruments, the issuer does not keep a record of who owned bearer instruments or of the transfer of ownership in them. This means that the security is traded without any records and physical possession of the security is the sole evidence of ownership.

Bearer bonds are no longer issued in the U.S. because they are ripe for use in money laundering and tax evasion schemes. However, they continue to be issued in many countries.

Understanding a Bearer Form

Securities can be issued in two forms: registered or bearer. Most securities issued today are in registered form, which means that the issuing firm keeps records of a security's owner and mails them any payments that are due them. Dividend or interest payments can only be made out to the named security owner.

A bearer form may be exchanged informally in a private transaction. More officially, one may elect to transfer ownership of a bearer security by endorsing the certificate, which is then presented to the issuer’s transfer agent. This is routine if the security promises some sort of cash flow like the interest payments due on a bond or dividends on equity shares.

The transfer agent verifies the endorsement, cancels the certificate, and issues a new one to the new owner. The issuer, in such a case, will have a record of who owns the security and makes interest and dividend payments to the owner. However, it can take time for a new security to be issued in another name.

The issuer of a bearer form security keeps no record of who owns the security at any given point in time. That is, whoever produces the bearer certificate is assumed to be the owner of the securities and can collect both dividends and interest payments tied to the security. Ownership is transferred by transferring the certificate, and there is no requirement for reporting the transfer of bearer securities.

Securities in bearer form can be used in certain jurisdictions to avoid transfer taxes, although taxes may be charged when bearer instruments are issued. Two types of bearer form certificates are bearer bond and bearer stock certificates.

Bearer Bonds vs. Bearer Stocks

A bearer bond, also known as a coupon bond, has part of its certificate as a series of coupons, each corresponding to a scheduled interest payment on the bond. When an interest payment is due, the coupons are clipped from the security and presented in order to receive interest payments.

This is why interest payments on bonds are referred to as coupons. The bearer of the bond certificate is presumed to be the owner and collects interest by clipping and depositing coupons semi-annually. The issuer will not remind the bearer of coupon payments.

A bearer stock certificate is a negotiable instrument without endorsement and is transferred upon delivery. Someone who has physical possession of the stock certificate in bearer form is entitled to exercise all legal rights associated with the stock. Dividends are payable upon presentation of dividend coupons, which are dated or numbered.

Most jurisdictions now require corporations to maintain records of ownership or transfers of shareholdings and do not permit share certificates to be issued in bearer form.

Bearer form instruments are often used by investors and corporate officers who wish to retain anonymity. However, these securities are banned in some countries because of their potential for abuse such as tax evasion and money laundering.

The Bottom Line

Stocks and bonds are no longer issued in bearer form by corporations or governments in the U.S. These are unregistered securities whose ownership is proven only by their possession. Once popular, their vulnerability to theft or loss rendered them archaic.