What are Bearer Shares? Benefits & Risks
- Last updated on . Written by Offshore Protection.
The infamous bearer share has long been part of offshore terminology. You may have come across the concept yourself when researching offshore financial strategies. There is a bit of a taboo surrounding these instruments, as in the past they were associated with dubious acts such as money laundering, evading taxes, or engaging in other illegal activities.
With all these ideas around, many still don’t fully understand what bearer shares are, how they work, and whether they still have a place in today’s world of offshore financial management. In this article we will aim to answer these important questions, and provide clarity and understanding about this somewhat mysterious financial vehicle.
Table of Contents:
- What are Bearer Shares?
- How do Bearer Shares work?
- What are the Benefits of Bearer Shares?
- What are the Risks of Bearer Shares?
- What Is the Difference Between Registered Shares and Bearer Shares
- Are Bearer Shares Still Available?
- Final Thoughts
What are Bearer Shares?
Bearer shares are much like ordinary shares in a company, with one important distinguishing feature: The name of the owner of a bearer share is not recorded anywhere.
Not on the company or public register, and not even on the stock certificate itself. In the register, the owner of a bearer share is simply recorded as “The Bearer” (hence its name “bearer share”). Whoever holds possession of the physical stock certificate associated with the bearer share is deemed the legal owner of the share.
How do They work?
The way bearer shares work is quite simple in practice. In addition to the ownership of the underlying stock, the holder of the bearer share certificate is entitled to all the rights and benefits of owning the share, namely of receiving dividends. In order to receive dividend payouts, the bearer will need to present the physical share certificate to the company at the time it distributes its dividends.
Due to the fact that there is no registered name associated with “The Bearer”, it goes without saying that bearer shares enable unparalleled confidentiality and anonymity for the owner’s identity. This is also what has led to their bad reputation, and it also comes with some additional risks.
The process of buying and selling bearer shares is also quite simple, as no official transfer of ownership is required to be recorded. The share certificate can be freely bought and sold and/or gifted like any other physical asset.
Due to their unique and confidential nature, bearer shares can of course be used to one’s advantage. However, it is important to be aware that this type of instrument also comes with its downsides and substantial risks. We will now explore these benefits and risks in turn.
What are the Benefits?
The primary advantage of bearer shares is the unparalleled level of privacy which they offer. The name or any contact information of the owner of a bearer share is not, and cannot be, tracked by anyone. Not registration agencies, not law firms, not banks, not anyone.
Even in the case where the name of the owner of a bearer share was initially recorded, it is impossible to keep track of transfers of ownership, which ensures complete anonymity for the current owner. Furthermore, there is no obligation for the company or its owners to determine how a person or individual came into possession of the share certificate. As long as someone presents the physical document, they have the rights to the share, regardless of how they obtained it.
Due to the high level of privacy which they offer, bearer shares are useful asset protection vehicles. Anyone who is worried about their assets being seized in a court of law due to divorce, liability suits, or bankruptcy, can use bearer shares to keep their assets well hidden. This is especially the case when the bearer shares relate to a company in a foreign jurisdiction with good asset protection laws, as it offers an additional layer of protection against domestic risks to one’s assets.
That being said, there are many other highly effective ways to protect one’s assets offshore and ensure high levels of financial privacy. High-earning individuals or people may prefer these more “legitimate” means which have fewer of the risks associated with bearer shares.
Another advantage of bearer shares is that they are extremely easy to transfer between owners. Seeing as physical possession of the share certificate is the only requirement to prove share ownership, the shares can be transferred simply by physically handing over the certificate to the new owner. This results in a number of advantages, the obvious being again confidentiality, as well as increased liquidity, reduced administrative and regulation requirements and zero transfer costs. However, this level of ease also comes with its risks, which we will now explore.
What are the Risks?
Although bearer shares have their benefits and legitimate uses, there are numerous disadvantages and risks involved, such as:
Theft and/or Loss
Bearer shares are highly vulnerable to theft and/or loss. This is because ownership is determined only by physical possession of the share certificate, and no transaction records are maintained of the rightful buyer or owner. Similarly, if the share certificate happens to get lost or physically damaged (e.g. due to a flood, fire, or any other natural disaster), the owner has no means of recourse.
Proof of ownership issues
There may be instances where proof of ownership is required, for example if the company wants to open a subsidiary and/or bank account in a foreign country, the shareholder/s would be required to provide proof of ownership. However, many countries like the UK and Switzerland, will not accept bearer share certificates as a valid proof of ownership as the individual’s name is not written on the certificate.
Problems with opening company bank accounts
Banks are generally reluctant to accept companies that have issued bearer shares, because they cannot keep track of the ownership of the company. This exposes the bank to unknown and undesired risks.
It is therefore difficult to find banks who will agree to open an account for companies which continue to issue bearer shares, and the number of banks which will accept such companies is dwindling.
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Historically, bearer shares may have been used to illegally evade taxes through the anonymity and secrecy which they offered. However, governments and regulators are seriously cracking down on such activities, making it difficult to get away with them. Furthermore, we would never recommend trying to illegally evade paying taxes.
It is far better to find legitimate ways to reduce one’s tax liability. This means reporting and complying with tax requirements fully. The trouble with bearer shares is that it can be difficult to do this, due to the lack of proper record-keeping. Thus, bearer shares can actually lead to increased tax complications and more traps than before, and the cost of hiring a professional to navigate these waters can be high.
Bearer shares have gained a somewhat poor reputation over the years due to the ways in which they have been (mis)used. In the past, they have been used to evade taxes, launder money, and fund various types of criminal activities.
Even if you or your company do not intend to engage in such shady activities and have a legitimate use for the bearer shares, the fact is that you will automatically be suspected of evading taxes or of other questionable activities. This can naturally lead to some unnecessary challenges and scrutiny.
What Is the Difference With Registered Shares
The primary difference between bearer shares and registered shares is that in registered shares, your name appears on the share certificate whereas with bearer shares your name does not. Therefore ownership of bearer shares is determined by whomsoever is in possession of the shares. As there is no record of ownership that is stated, ownership is determined by whomsoever is in physical possession.
This makes the transfer of shares to be much easier and can be done seamlessly and without any endorsement. Whereas in registered shares in order to effectively transfer it must be properly annotated and endorsed.
Are They Still Available?
The number of jurisdictions that allow the use of bearer shares has been steadily declining in recent decades as governments have begun cracking down on illegal financial activities and tax evasion. Now, there are really only a handful of countries in which these share instruments are recognised at all. Furthermore, most of these countries only allow the use of “immobilized” bearer shares.
These are special types of bearer shares which are overseen (and physically held) by a licensed fiduciary or bank, who in turn maintains records of ownership of the share and any transfers or transactions made. This “immobilizes” the share and removes many of the associated risks, however, it also eliminates the benefits of privacy and seamless transfer which were previously mentioned.
In some countries, such as Panama, the use of bearer shares is permitted but comes with a hefty price in the form of a 20% punitive withholding tax on dividend distributions to the share owners. Until recently, Marshall Islands was the only country that allowed the free use of mobile bearer shares without any additional costs or complications.
However, in 2015 the OECD took steps to shut this down, and by 2019 all information pertaining to the existing mobile bearer shares was either disclosed or they were cancelled, effectively ending mobile bearer shares once and for all.
Bearer shares had their place in the history of offshore finance, even though they were misused in the hands of some. There were indeed legitimate uses and benefits of this type of stock. However, it is clear that they are quickly becoming extinct, and in many ways no longer exist in their original form.
Furthermore, even if such shares could still be legitimately used, the risks involved are significant. Fortunately, there are numerous other legitimate and highly effective ways to obtain increased financial privacy, asset protection, and reduced taxes through the many offshore financial vehicles which are available today.