Legal Ways Insiders of a Company Can Trade Stock Shares
Throughout the history of trading securities in America, outside investors and shareholders suffered enormous losses on their invested cash because of illegal insider trading activities. Securities Exchange Commission attempted to resolve this issue by tightening its laws and regulations to make the marketplace fair and safe for public trading. Violations can happen when there is a compromise of confidential and nondisclosure information released to a third party before it goes public. If the third party has a high stake in a stock and completes an insider buying or selling transaction based on that information, SEC can legally sue.
What Are Insider Trades?
Insider trades are shares of stock transactions conducted by insiders of a business or corporation to buy or sell. An insider can be a business owner, director, board member, CEO, vice president, and other stakeholders, such as a private institutional investor. The primary reasons insiders may decide to sell and purchase stock shares are to realize capital gains and the prospect of high future earnings.
Who SEC Considers As Insiders
- Officers of a corporation or business, including the president, CEO, vice president, CFO, and other executives who own ten percent or more of ownership
- Directors and board members who have a high stake in the company
- Employees, consultants, and family members of insiders who have access to nonpublic information
Four Examples of Legal Insider Buying and Selling Transactions
- On April 21st, 2021, Texas Pacific Land Company’s director bought three stock shares totaling $4,369.95
- The CEO of REEN Fund, Inc. purchased 675 shares of stock in the company for $1,755 on April 21st of this year
- CrossFirst Bankshares Inc.’s chief financial officer sold 500 shares at a total transaction payout of $6,655 on the 21st of April
- 3M’s executive vice president reported a sell transaction of 933 stock shares at $186,600 to SEC on April 21st
All examples of the transactions above are legal because each company reported the transactions to SEC as required by federal law. Publishers, such as Insidertrades.com publish this information daily to inform their subscribers of insider trading transactions within publicly traded companies. They can gain access to insiders’ trades through SEC’s Edgar website, where insiders must report their buy/sell transactions, within a specified time period. An insider usually reports the trade the same day of the completed transaction.
Any time an insider purchases additional assets, such as stock or real estate properties for the potential of capital gain, they must report the transaction to SEC. Suppose an insider of a real estate company purchases a lake house and uses it as a rental property as a part of a business, he or she will have to file a report. Investors seek capitalization opportunities to build wealth and increase their equities but want the marketplace fair when they invest in a company or properties.
Legal Practices of Insider Trading
All SEC-registered companies must implement strong insider trading policies to their insiders who have access to classified, nondisclosure information before it becomes public. If they disclose this information to a third party, such as a major shareholder who does not work within the organization, SEC can sue both parties. Participants can receive steep penalties and a criminal violation charge, serving up to six months to many years in prison for their unethical actions.
SEC and the United States Attorney’s Office will investigate and prosecute individuals for engaging in insider trading or tipping third parties. An insider trading policy applies to family members who are living with the insider and non-related people who live in the same household. Most employees of publicly traded companies working in finance and accounting, or closely with the chief financial officer, have to sign a non-disclosure agreement. If they violate the disclosure restrictions in the agreement, SEC can and will prosecute them.
The purpose of SEC regulations on insider trading is to ensure the marketplace is fair and to protect outside traders who invest in company stocks. All stakeholders, directors, executives, and other insiders must disclose immediately a stake in the company, purchased or sold stock shares, and declared or deferred previous transactions. Reporting this information is the best legal way to prevent violations of SEC regulations.