What Is a Bearer Form?
A bearer form is a security that is not registered in the issuing corporation's books and is payable to the person possessing the stock or bond certificate. Thus, one must only possess ("bear") the instrument as proof of rightful ownership. These are also known as bearer instruments.
Unlike traditional registered instruments, no record is kept of who owns bearer instruments or of transactions involving the transfer of ownership. This means that the security is traded without any records and physical possession of the security is the sole evidence of ownership.
- A bearer form security is one that has no records of ownership in the issuer's books and the only evidence of ownership is physical possession of the certificate.
- To transfer ownership of a bearer security, the owner signs the certificate and sends it to the issuer's transfer agent—the certificate is then canceled and a new certificate is issued to the new owner.
- Bearer bonds pay regular payments requiring the holder to send in coupons to receive payments.
- Bearer stock securities pay dividends that are delivered to the owner upon presentation of a dividend coupon to the issuer.
- Some countries ban bearer securities due to concerns over tax evasion and money laundering.
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. The name and address of an owner of a registered security are engraved on a certificate. Dividend or interest payments can only be made out to the named security owner.
A bearer form may be exchanged informally from one individual to another as 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 especially the case if the security promises some sort of cash flows 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 during a period of time and is able to make interest and dividend payments to the appropriate owner. However, it can take time for a new security to be issued in another name.
An 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.
For this reason, 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 in areas of tax evasion, movement of funds, and money laundering.