Why Do Insiders Have to Wait to Sell During Certain Periods?

Talk with any securities law attorney, and one of their greatest fears is that a client or someone who works for a company that's a client might have sold shares of stock at the wrong time. Doing so could potentially lead to fines or even insider trading charges. Let's look at why this is and what advice a corporate lawyer would give you for handling the problem.

1. Why Is It This Way?

Being an insider means having access to information that's actionable. A century ago, this was perfectly legal. In the aftermath of the 1929 stock market crash, the government added massive reforms to the system. Particularly, two bills that were both known as the Securities Act were passed in 1933 and 1934 to ban insider trading.

Beyond having actionable information, an insider has a fiduciary responsibility to represent the best interests of everyone who holds shares in a company. It is illegal to act in your best interests by buying or selling shares while inside information hasn't been released to the public. The logic is simple: insiders would be able to acquire or unload shares before big shifts in the market occurred, harming regular shareholders.

2. How Can You Sell or Buy Then?

Companies produce trading windows by making disclosures at specific times. While the disclosures are pending and unreleased, insiders can't trade without risking penalties, fines, and criminal charges. Once the disclosures have been released, a window for trading will open up. Notably, it's smart to always discuss your situation with a corporate lawyer before you set up a sale. They can help you determine when a trading window will be open so you can buy or sell.

3. Who Counts as an Insider?

Over the years since the Securities Act of 1934 was passed into law, the courts have significantly expanded the definition of an insider. At this point, it is reasonable to assume that anyone who has actionable information that's not in the public record is classified as an insider. This means, for example, that a friend who talked with the CEO about the company's internal financial situation is probably considered an insider for legal purposes. That label applies even if the friend has nothing to do with the company at the time, not even owning shares. Applying the concept this way ensures that parties can't legally sneak around the regulations.

Learn more about insider trading by working with services such as Carter West Law.