Do's and Don'ts: Insider Trading

If your business will be involved in issuing and trading stocks, it will need to comply with all applicable securities laws. While this area of law is particularly tedious and complicated, a basic understanding will help you avoid mistakes. It's particularly important to avoid anything that is (or could be considered) insider trading because it is a federal crime.

The Securities and Exchange Commission (SEC) enforces laws against insider trading and has been known to come down hard on violators. Inside information is that which you learn about your company or a closely-allied company, that is not generally available to the public, and which could cause the security's price to change if it became known to the public. The SEC has various insider trading rules and the following list provides the basic do's and don'ts of insider trading.

What Is Insider Trading?

Insider trading is a type of securities fraud, and is a serious crime. A person is an "insider" if he or she has confidential information of the financial state of a company. This can be a high level employee, a person in the financial department, or even a family member of an employee with inside information.

Insider trading occurs when an insider makes decisions about buying or selling stocks based on confidential information that has not yet been disclosed to the public. For example, if a member of a corporation's board of directors knows that a merger will be announced soon -- which will likely result in the stock prices going up -- and buys stocks based on this information, he may be prosecuted for insider trading.

THE DO's

• Do remember that it is a federal crime to trade securities based on inside information.
• Do keep all insider information confidential.
• Do check your company's trading policies, or speak with a company attorney, before trading in your company's or a closely allied company's securities.
• Do keep up to date with how trading laws and your company's trading policies apply to your position in the company, especially if you're an officer or director.

THE DON'Ts

• Don't ever trade securities on inside information.
• Don't act on someone else's "hot tips" that might be based on inside information -- it's just as illegal as trading on inside information you've learned about your own company.
• Don't tell anyone inside information, not even family.
• Don't "just recommend" a trade, even without giving a reason, based on inside information.
• Don't give out untrue or misleading information that others might think is an insider tip.
• Don't look for clever ways to trade on inside information. The U.S. government and the exchanges have many more clever ways of catching inside traders.

Getting Legal Help

Securities laws can be very complex and complying with the laws can be tedious. In addition, improperly complying with securities laws can result in severe consequences for your business, and even yourself personally. If you have any questions about insider trading, or securities laws in general, it's in your best interest to contact an experienced securities attorney in your area.

For more information and resources related to this topic, you can visit FindLaw's section on Business Finances.