Helitron transposons capture and mobilize gene fragments in eukaryotes, but experimental evidence for their transposition is lacking in the absence of an isolated active element. Here we reconstruct Helraiser, an ancient element from the bat genome, and use this transposon as an experimental tool to unravel the mechanism of Helitron transposition. A hairpin close to the 3'-end of the transposon functions as a transposition terminator. However, the 3'-end can be bypassed by the transposase, resulting in transduction of flanking sequences to new genomic locations. Helraiser transposition generates covalently closed circular intermediates, suggestive of a replicative transposition mechanism, which provides a powerful means to disseminate captured transcriptional regulatory signals across the genome. Indeed, we document the generation of novel transcripts by Helitron promoter capture both experimentally and by transcriptome analysis in bats. Our results provide mechanistic insight into Helitron transposition, and its impact on diversification of gene function by genome shuffling.