Insider trading is a term that most often appears in news stories about company executives going to prison and losing everything. However, contrary to what most members of the general public may believe, insider trading isn’t always illegal. There is a perfectly legal way of doing it, and thousands of people across the country do it every single day. Here’s what you should know in order to avoid inadvertently violating the law.
What is insider trading?
Insider trading simply refers to the act of buying or selling stock in one’s own company. For example, when Elon Musk – the CEO of SpaceX – purchases SpaceX stocks, that counts as insider trading.
You don’t have to be a CEO to engage in insider trading. The Securities and Exchange Commission (SEC) – the federal agency that investigates financial crimes such as illegal insider trading – has a specific definition of “insider.” An insider is any corporate officer, director or anyone with 10% or more of ownership in a company.
What can make insider trading illegal?
There are two ways you can make an insider trade that violates United States securities law. The first way is to fail to satisfy the reporting requirements.
The SEC requires all insiders who trade their own company’s stock to file a report of the trade. That way, they can track the trades and ensure that nothing illegal has occurred. Failure to report your trades could trigger an investigation and land you in hot water with the SEC.
The second way your insider trade can be illegal is if you make the trade based on nonpublic, inside information. In other words, if you decide to sell your company’s stock based on information that anyone in the public could access, you’re fine. But if you sell based on information you received from a private company meeting or memo, your sale may be illegal.
An important thing to note is that you can violate the law even if you’re not the one making the purchase or sale of stock: If you leak nonpublic information about your company to someone else, and they then trade on that information, you can get into trouble. That’s why you must be very careful about what you disclose regarding your company’s sensitive internal information (even to family members and close friends).
Securities law involves complex and ever-changing rules. It’s best to stay on top of the current legal requirements for stock trades so that you don’t accidentally do something that could give rise to an SEC or Department of Justice investigation. If you are already under investigation, it is imperative that you consult with an attorney as soon as possible who can advise you on how to respond.