Bearer Form Securities: Definition, Characteristics, and Usage
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Summary:
Bearer form securities, once prevalent, have largely faded from use due to their susceptibility to misuse, particularly in money laundering and tax evasion schemes. While bearer bonds and stocks were once common, they are no longer issued in the U.S. or many other countries. This article explores the concept of bearer form securities, their characteristics, implications, and reasons for their decline in use. It also discusses modern examples of bearer securities and regulatory changes that have influenced their usage globally.
What is a bearer form?
A bearer form is a type of stock or bond certificate that is not registered in the issuing corporation’s books but is instead payable to the person possessing it. Essentially, possession of the physical certificate serves as proof of ownership. These instruments, also known as bearer instruments, lack records of ownership maintained by the issuer, making physical possession the sole evidence of ownership.
Understanding bearer form securities
Bearer form securities can be contrasted with registered instruments, where the issuing corporation maintains records of ownership and sends payments directly to the registered owner. In the case of bearer securities, ownership is determined solely by possession of the physical certificate. To transfer ownership, the current owner endorses the certificate and presents it to the issuer’s transfer agent, who then issues a new certificate to the new owner.
Bearer securities have faced increased regulation due to concerns over tax evasion and money laundering. Many jurisdictions now require corporations to maintain records of ownership and prohibit the issuance of share certificates in bearer form.
Bearer bonds vs. bearer stocks
Bearer bonds, also known as coupon bonds, feature detachable coupons representing scheduled interest payments. Holders collect interest by presenting these coupons for payment. Bearer stocks, on the other hand, are negotiable instruments transferred upon delivery, with dividends payable upon presentation of dividend coupons.
Frequently asked questions
Why were bearer bonds phased out?
Bearer bonds became obsolete due to their susceptibility to theft, misuse in money laundering and tax evasion, and advancements in technology making coupon clipping unnecessary.
Where are bearer bonds outlawed?
Bearer bonds have not been outlawed outright but have been rendered obsolete by regulations in the European Union and the United States, among other jurisdictions.
What is a modern example of a bearer security?
Eurobonds are often issued in bearer form, despite being delivered electronically. They remain unregistered, with physical possession serving as the only proof of ownership.
Key takeaways
- Bearer form securities rely on physical possession as proof of ownership.
- Bearer bonds and stocks were once common but have been largely phased out due to regulatory changes and susceptibility to misuse.
- Modern examples of bearer securities include Eurobonds, although their usage has declined in many jurisdictions.
- Increased regulation and concerns over money laundering and tax evasion have contributed to the decline in use of bearer securities globally.
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