Are Bearer Shares Legal in the United States?

The issuance of new bearer shares is not permitted in the United States. A bearer share is a physical stock certificate that grants corporate ownership to whoever holds the document. Unlike modern registered shares, the owner’s name is not recorded in the company’s records, providing a high degree of anonymity. Because this untraceable nature made them a vehicle for illicit activities like tax evasion and money laundering, federal and state governments took action to eliminate their use.

The Prohibition of Bearer Shares

The elimination of bearer shares in the United States began with the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). This federal law made the instruments commercially impractical by imposing significant tax penalties on any corporation that issued them. These sanctions were designed to remove any financial incentive for a company to issue securities in bearer form, steering the market toward registered securities.

Under TEFRA, a corporation that issues a registration-required obligation in bearer form is denied any tax deduction for the interest it pays on the obligation. The law also imposes a substantial excise tax on the issuer at the time of issuance, creating a large upfront cost.

Following the federal government’s lead, states enacted their own laws directly prohibiting the issuance of new bearer shares. Many state statutes also established deadlines for existing bearer shares to be converted into registered form. More recently, the Corporate Transparency Act further solidified this prohibition, forbidding corporations, LLCs, and similar entities from issuing certificates in bearer form.

Requirements for Modern Share Ownership

The modern system is based on registered ownership, which mandates detailed record-keeping. Every corporation is required to maintain a stock ledger, which serves as the official record of its shareholders. This ledger, which can be a physical book or a digital file, tracks all ownership details and transactions for transparency and regulatory compliance.

A corporate stock ledger must contain the full name and address of the shareholder, the number and class of shares they own, and the associated certificate numbers. It also records the date the shares were issued or transferred and the price paid. This record-keeping creates a clear chain of title for every share a company has issued.

For publicly traded and many large private companies, maintaining the stock ledger is outsourced to a transfer agent. A transfer agent is a third-party entity registered with the Securities and Exchange Commission that acts as the official record-keeper for a company’s shareholders. Its functions include issuing and canceling stock certificates, processing ownership transfers, distributing dividends, and handling shareholder communications.

The registered share system ensures every transaction is formally recorded, and the owner’s identity is always known to the corporation. This structure is important for corporate governance, tax administration, and the prevention of financial crimes, as it removes the secrecy that made bearer instruments problematic.

Handling Existing or Discovered Bearer Shares

Individuals who possess old bearer share certificates may find they have value, but they cannot be traded or used until converted into registered shares. The first step is to determine if the corporation that issued the certificate still exists. This can be done through online searches of business registries maintained by the secretary of state where the company was incorporated.

Once the company’s existence is confirmed, the holder must contact the corporation or its transfer agent to request the conversion. The company or agent will provide instructions for the process, which requires the physical surrender of the original bearer share certificate.

To complete the conversion, the shareholder must provide personal identification, including their legal name, address, and tax identification number. After the company verifies the certificate’s authenticity and receives the required identification, it will cancel the old certificate and issue new shares in registered form, either as a physical certificate or as an electronic book-entry position.

This process can present challenges. If the issuing corporation has dissolved or been acquired, the shares may be worthless. In some cases, state laws may have automatically voided bearer shares that were not converted by a specific deadline. A holder may need to conduct research or consult a legal professional to determine the status and value of the shares.