Legal Definitions - bearer paper

Bearer paper refers to a type of financial document or instrument where ownership and the right to receive payment are determined solely by who physically possesses it. Unlike documents made out to a specific person or entity, bearer paper is payable to "the bearer," meaning whoever holds the document can claim its value.

Transferring ownership of bearer paper simply involves handing it over to another person. This characteristic made it highly liquid but also raised significant concerns about its potential for misuse, such as in money laundering. As a result, the use of bearer paper has been largely abolished in the United States through legislative action.

Here are some examples illustrating how bearer paper historically functioned:

• Historical Corporate Bond: Imagine a physical bond certificate issued by a company in the 1950s, which explicitly stated it was "payable to bearer." If an investor owned such a bond, they could sell it by simply handing the certificate to another person. The new holder, by virtue of possession, would then be recognized as the owner and entitled to receive interest payments or the principal amount upon maturity, without any formal transfer registration.

  This illustrates bearer paper because ownership and the right to payment were tied directly to who physically held the bond, allowing for easy transfer by simple delivery.

• Old-Style Dividend Coupons: Some historical stock certificates or bonds came with attached "bearer coupons" for collecting dividends or interest. Each coupon would state it was "payable to bearer." To receive a dividend payment, the holder would simply detach a coupon and present it to the company or its agent. Whoever presented the coupon, regardless of who originally owned the bond, would receive the payment.

  This demonstrates bearer paper as the right to receive the dividend payment was conferred entirely by possessing and presenting the physical coupon, not by being a named owner on a registry.

• An Early Promissory Note: Consider a promissory note from the 1800s that simply stated, "I promise to pay John Doe, or bearer, $500 on demand." If John Doe later gave this note to Sarah, Sarah would become the legal holder by mere possession. She could then present the note to the issuer and demand payment, without needing John Doe's endorsement or any formal transfer documentation.

  This example highlights how the phrase "or bearer" meant that anyone in possession of the note could claim its value, making physical delivery sufficient for transferring the right to payment.