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Rule 10b5-1: What Is It? Why Do I Care?

Rule 10b5-1: What Is It? Why Do I Care?

Do you understand your 10b-5 trading plan?

Rule 10b-5 was set forth by the SEC under the Securities Exchange Act of 1934 to allow insiders of a publicly traded corporation, like executives and board members, to have their own trading plan and invest in their own stock without any liability and avoid any charges of insider trading.

The qualifications for rule 10b-5 include that the individual must not be aware of any material non-public information, and the purchase must be made during an open window.  The rule 10b-5 trading plan also states that there should be detailed information of future plans to purchase or sell shares made by the individual at a time when the person has no knowledge of insider information. Furthermore, the individual must have documentation that shows all sales or purchases that were made in accordance with the preset trading plan. And of course, the plan must be adopted in good faith. 

My Stock Options provides a great example of a pre-established plan under rule 10b-5, “A written one-year contract between executive and broker instructs the broker to sell 10,000 shares on the first trading day of each month, and twice as many shares (20,000) if the price has increased by 5% since the prior sale date.”

Some best practices include:

  • All trades should be well documented.
  • Make and keep all copies of any documents related to the trading plan.
  • Review your organization’s trading policy.
  • Comply with all SEC requirements and filling deadlines.
  • Minimize if not eliminate modifications after a trading plan has been established.

If you are looking to start, make any changes or discontinue a rule 10b5-1 trading plan, it is imperative to check with your broker for information pertaining to your specific situation. Only an expert can guide you through the process and provide you with pertinent information regarding the fundamentals of the insider trading laws.

Stock Connections specializes in working with San Francisco Bay Area companies that are involved in mergers & acquisitions, are raising capital, or creating stock option or other equity plans. We help start-up, private and public firms become – and remain – SEC-compliant. Stock Connections’ services are designed to help both start-ups and established firms comply with SEC and other regulations in their equity compensation programs. If you or anyone you know is looking to get involved with any of the above, we encourage you to contact us today.

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