Why Bearer Shares Are A Bad Thing

By Garrett Sutton, Esq.

Bearer shares have been used by some to engage in fraudulent conveyances. As a result, Nevada and Wyoming have outlawed the use of bearer shares.

Bearer shares are stock certificates that, instead of listing the owner by name, list the owner only as “The Bearer.” The supposed advantage of this was to maintain privacy of ownership. The bearer was whoever held the certificate, so shares could be transferred from one person to the next without notice to anyone or it being recorded anywhere.

But bearer shares bore problems. If someone comes to you with a bearer certificate, how do you know the certificate wasn’t stolen or forged? The idea of simply handing a certificate from one person to the next may sound nice and easy (if a bit crafty), but such a transfer can create all sorts of tax problems. If you hand a certificate representing a million-dollar business over to your friend you’ve made a significant gift, for which gift taxes are due. And when by prearrangement he hands the certificate back to you there’s another taxable event. Worse yet, what if your “friend” won’t give you the certificate back?

The reason bearer shares were outlawed in Nevada and Wyoming had to do with fraud. Less than ethical corporate promoters would sell their less than ethical corporate clients on the idea that by simply handing the bearer certificate over to a friend they could deny a judgment creditor (one with a court-awarded judgment) access to the business or other asset. Of course, such a transfer is a fraudulent conveyance, meaning that a court could overturn the transfer if anyone ever found out about it. The problem was that it could be very difficult to find out about it. Look for bearer shares to be outlawed everywhere.