Quick Take: Insider Reporting Requirements
The FKBR quick-take series explores trending legal topics to provide quick answers to common questions. In this edition, our Corporate & Securities team discusses the Insider Reporting Requirements under Sections 13 and 16 of the Securities Exchange Act of 1934 (the “Exchange Act”).
Quick Takes
What are the core insider reporting requirements and who do they apply to?
Officers, directors, and 10% or more shareholders (collectively, “Insiders”) are required to report their share ownership of a company’s equity securities to the Securities and Exchange Commission (“SEC”).
Holders of more than 5% of a company’s stock (“Above 5% Holders”) also have reporting requirements.What are the required filings and their deadlines?
There are three basic forms used for Insider reporting:Form 3. Form 3 is an initial statement of beneficial ownership of securities. The purpose of filing a Form 3 is to determine and disclose the holdings of Insiders at the time such persons become subject to reporting requirements. Form 3 must be filed within ten days of the event by which a person becomes an Insider.
Form 4. Form 4 is filed when there is any change in beneficial ownership of securities. Form 4 must be filed before the end of the second business day after a change in beneficial ownership has occurred. All transactions resulting in a change of beneficial ownership in the company’s securities and all exercises and conversions of derivative securities must be reported on Form 4.
Form 5. Form 5 is an annual report that must be filed within 45 days of the company’s fiscal year end by every person who was an Insider at any time during the fiscal year.
Above 5% Holders must report to the SEC on a Schedule 13D or Schedule 13G (depending on the filer) within five business days from the date of acquisition of the stock.
Where Above 5% Holders retain more than 5% after an Initial Public Offering (“IPO”), they must file a Schedule 13G within 45 days after the year in which the IPO occurred, and thereafter, must file an amendment if there is any change to the information in the originally filed Schedule 13G. The requirement to file a Schedule 13D or Schedule 13G applies in addition to filing any required Insider filings.
3. Can a company file reports on behalf of its Insiders or Above 5% Holders?
No. Insiders and Above 5% Holders need to file their reports personally and electronically through the SEC’s EDGAR system.
4. Are there any restrictions or prohibitions on securities transactions of Insiders?
Yes. Insiders are liable for “short swing trading.” An insider who purchases and sells or sells and purchases in market transactions, within a period of less than six months, equity securities of a company, will incur liability to the company if they realize a profit. For example, Mr. X is an officer, director, or 10% shareholder of a company. If Mr. X buys 100 shares of common stock of that company on the open market on January 4, 2024, and on June 15, 2024, Mr. X sells the 100 shares on the open market and realizes a profit of $1,000. Mr. X must disgorge this profit to the company as the buy and sell were within six months of each other.
Insiders also cannot engage in short sales of the company’s equity securities. This typically involves borrowing the company’s securities for the purpose of selling and repurchasing them at a lower price.
5. What best practices should Insiders and Above 5% Holders follow to ensure compliance?
To ensure compliance with these sections, Insiders and Above 5% Holders can:
Maintain accurate and up-to-date records of their transactions and holdings.
Set up automated alerts or calendar reminders to meet filing deadlines.
Work closely with legal counsel to understand the nuances of filing requirements.
Utilize any company-provided training sessions on compliance matters.
Companies can assist with compliance by advising Insiders and Above 5% Holders on their reporting obligations. Companies can also monitor their shareholder data and send the appropriate forms to Insiders and Above 5% Holders with a request that they complete the required forms and file with the SEC within the allotted time.
This is an overview of shareholder reporting requirements; it is not intended to be comprehensive; each report and situation is unique and will require its own drafting, review, and analysis and special situations will arise and circumstances will change. This is intended for general information purposes and should not be construed as legal advice. If you have questions or would like more insights on the topic discussed in this edition, please contact any of the following members of our Corporate & Securities team:
Lynne Bolduc, Partner (lbolduc@fkbrlegal.com)
Josephine Rachelle Aranda, Senior Associate (jaranda@fkbrlegal.com)
Ikechukwu Ubaka, Associate (iubaka@fkbrlegal.com)
