What are Bearer Securities?

Bearer securities are a type of security that can be owned and traded by anyone who holds them. The person who has the bearer security is called the “holder”. The holder can be different from the person who actually owns the security, who is called the “beneficial owner”.

With bearer securities, you don’t need to prove that you own them. This is different from many other types of securities, where you have to show that you are the real owner. This makes it easier and cheaper to trade bearer securities.

How Bearer Securities Work

Let’s look at how bearer securities work in the real world. Say a company issues some bearer bonds. Anyone who buys those bonds from the company gets a physical piece of paper representing their ownership. That piece of paper is the bearer bond itself.

Now, whoever has that piece of paper owns the bond. They can collect interest payments from the bond. And when the bond matures, they get paid back the face value of the bond. It doesn’t matter if they were the original buyer or not. As long as they have the physical bond certificate, they are considered the owner.

This is very different from registered securities. With those, the security has the owner’s name written on it. And the company keeps a record of who owns their securities. To sell a registered security, you have to change the ownership in the company’s records. That takes extra time and paperwork.

But with bearer securities, you can just hand them to someone else. Or sell them to another investor. The company doesn’t keep track of who owns them. And the new holder instantly becomes the new owner. No extra steps needed.

Advantages of Bearer Securities

The big advantage of bearer securities is how easy they are to transfer. You don’t have to go through a bunch of legal processes to change ownership. A bearer security is almost like cash – whoever holds it, owns it. This “bearer” quality is why they are called bearer securities.

This makes them very “liquid”. Liquidity means how quickly and easily something can be sold for cash. Bearer securities are extremely liquid because they can be sold to any buyer at any time.

Another plus is privacy. With registered securities, there is a record of who owns them. But bearer securities are anonymous. The company has no idea who owns them after they are issued. For investors who want to keep their finances private, this is appealing.

Disadvantages of Bearer Securities

Of course, there are also some drawbacks to bearer securities. The biggest one is security. If you lose a bearer security, it’s like losing cash. Whoever finds it becomes the new owner! There is no way to recover them, since you can’t prove you owned them in the first place.

This is a big risk. It’s the trade-off for the ease of transfer. With registered securities, you can prove ownership. So if they get lost or stolen, you can get them replaced or transferred back to you. Not so with bearer securities.

Another issue is that governments often frown on bearer securities. They make it easier to evade taxes or launder money. So many countries have placed restrictions on them.

Types of Bearer Securities

There are a few different kinds of bearer securities that you might come across:

Bearer Bonds

The most common type of bearer security is the bearer bond. These are debt securities that companies or governments issue to raise money. The bond certificate promises to pay the holder a certain amount of interest, and to pay back the face value when the bond matures. Bearer bonds can be bought and sold on the secondary market at any time.

Bearer Shares

Bearer shares are shares in a company that are owned by whoever holds the physical stock certificate. Most company shares these days are registered. But some companies still issue bearer shares. With these, the company doesn’t keep any record of who owns its shares. Whoever has the share certificates, owns that portion of the company.

Bearer Savings Bonds

Some governments issue bearer savings bonds to encourage citizens to save money. These tend to be non-transferable, meaning they can’t be sold to someone else. Only the original holder can redeem them. But they are still bearer securities in the sense that no registration of ownership is required.

History of Bearer Securities

Bearer securities used to be very common. In the past, most bonds and shares were issued in bearer form. It was seen as the simplest way for securities to change hands.

However, attitudes have shifted over the past century. Governments began to crack down on bearer securities. They were often used for tax evasion and illegal activities. It’s much harder to track them compared to registered securities.

Many countries have now outlawed bearer securities entirely, or placed heavy restrictions on them. In the US for example, the Tax Equity and Fiscal Responsibility Act of 1982 essentially killed the use of bearer bonds. And no US shares have been issued in bearer form since 1960.

Still, some bearer securities persist. They are still used in some countries. But they are becoming rarer as financial regulations get stricter around the world.

Controversy Around Bearer Securities

As mentioned, bearer securities are often associated with shady practices like tax evasion and money laundering. The anonymity they provide makes them appealing for anyone who wants to hide money.

There are plenty of legitimate uses for bearer securities. But there is no denying that they have been abused. Criminals have long used them to hide illegal profits. And even law-abiding citizens have used them to avoid paying taxes.

This is why so many governments have restricted them. They want to cut down on financial crimes. And they want to make sure everyone is paying their fair share of taxes.

But some argue that the restrictions have gone too far. They say that investors should have the right to privacy. And that banning bearer securities won’t stop crime, it will just make things harder for honest people.

It’s a tricky balance. Governments need to prevent crime and collect taxes. But they also need to respect individual rights and not overburden the economy. The debate over how to handle bearer securities will likely continue.