Bearing Bad News About Bearer Shares
March 23, 2010
Only a few decades ago, bearer shares were the normal way to establish ownership rights in a company. When you incorporated a company, you received share certificates with no one’s name recorded on it. Whoever possessed the certificate controlled ownership.
A company that issues bearer shares has no shareholder list or register for those shares. The identity of the shareholders is impossible to determine. You can change ownership simply by handing the certificate over to someone else.
Today, only a very few offshore jurisdictions (e.g., Panama) still offer bearer shares, and all have placed severe restrictions on them. The reason is that the opportunity for anonymous ownership via a bearer share company is too much for tax authorities and other busybodies to (pardon the pun) “bear.” As a result, an alphabet soup of international agencies, starting with the Financial Action Task Force, have demanded an end to all bearer share companies. And they’ve largely succeeded in eliminating them.
However, some online incorporators still tout bearer share corporations. These promoters claim that bearer shares offer anonymity, bulletproof asset protection, and even a way to avoid tax claims. These claims have little if any credence. Bearer shares have many traps, and if you’re subject to U.S. income, gift, estate or capital gains taxes, or U.S. securities laws, you should generally avoid them.
Advocates of bearer shares claim that by conveying your shares to a trusted friend or relative, you can state under oath that you don’t own them. However, if discovered by the IRS, the gratuitous transfer of bearer shares may trigger a gift tax of up to 35% (2010 rates) on their fair market value. Gift tax is again triggered when the friend or relative later returns the shares.
To avoid the tax, you might argue that the transfer to another party was merely for safekeeping. However, by making this argument you’ve admitted you own the shares. This defeats any asset protection purpose for which you transferred them in the first place.
In addition, if you make this transfer after litigation begins or you suffer a judgment, your creditors may (rightly) believe that it constitutes a “fraudulent transfer.” A court can invalidate a fraudulent transfer and order you to retrieve the property and turn it over to your creditors.
In addition, if you use a bearer share company to evade taxes, prosecutors can argue that you’re using “sophisticated means” to defraud the government. This can elevate a routine tax evasion prosecution into a money laundering case, with much harsher penalties.
The IRS isn’t the only three-letter agency you need to worry about, either. You may also violate securities laws if you transfer bearer shares to another person. If you haven’t registered the company with the SEC, or issued the shares under an SEC exception to registration, they’re not freely transferable. Selling unregistered shares to a U.S. buyer could result in possible civil or even criminal securities law violations.
There are also safety issues to consider with bearer shares. What if
you lose your bearer shares, someone finds them, and then tries the vote
the shares in your place? Lost shares can be replaced (assuming you
know about the loss), but the process can be time-consuming and
expensive.
Finally, bearer shares are mostly obsolete. In 2007, Wyoming and Nevada abolished bearer shares, ending their status as the last two U.S. states to permit their use. Most Internet based promoters offering bearer share companies incorporate them in these two states, blissfully unaware that they’re illegal. Most offshore jurisdictions have banned them as well. Those that still permit their issuance allow them to be used only if held by a licensed custodian.
For instance, the British Virgin Islands (BVI), the world’s most popular jurisdiction for offshore companies, recently announced that bearer shares would be “disabled” unless deposited into the possession of an authorized custodian. Disabled shares carry no entitlement to voting, distributions, or proceeds upon sale. On the plus side, if you lose disabled shares, or they’re stolen, the threat of financial loss would be much lower.
Are there any circumstances under which bearer shares still make sense? If you’re not a U.S. citizen and you live in a jurisdiction that doesn’t impose a gift tax, they can be useful in certain situations. For instance, you could use them to hold a specific asset, e.g., real estate. When you sell the real estate, rather than changing the title on the property, you simply transfer the shares to the purchaser. This preserves confidentiality and reduces transfer costs.
For anyone else, though, bearer shares aren’t a viable option. Just grin and “bear” it!
Copyright © 2010 by Mark Nestmann
