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by Laura Anthony, Esq.

SEC Files Dozens of Charges for Violations of the Section 16 and Section 13 Corporate Insider Reporting Requirements

ABA Journal’s 10th Annual Blawg 100

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Introduction

On September 10, 2014, the SEC filed 28 separate actions against officers, directors and major shareholders and an additional 6 actions against reporting companies, all stemming from violations of the reporting requirements contained in Sections 13 and 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”).  The SEC announced that it had created a task force to investigate violations using quantitative data sources and ranking algorithms to identify repetitive late filers.  The SEC settled with all but one of the charged for a total of $2.6 million in penalties.

The actions against insiders and major shareholders were based on direct violations of their individual reporting requirements.  The actions against reporting companies were for “contributing to” the violations.  In these cases, the companies had contractually agreed to take on the responsibility of making the filings for their insiders, and had been delinquent in doing so.

Historically the SEC has rarely pursued separate actions for violations of Sections 13 or 16; rather, such claims would generally only be included when coupled with other claims.  However, in its press release regarding the current actions, the SEC states, “we are bringing these actions together to send a clear message about the importance of these filing provisions” and continues with, “[O]fficers, directors, major shareholders, and issuers should all take note: inadvertence is no defense to filing violations, and we will vigorously police these sorts of violations through streamlined actions.”

A company becomes subject to the Reporting Requirements by filing an Exchange Act Section 12 registration statement on either Form 10 or Form 8-A.  A Section 12 registration statement may be filed voluntarily or per statutory requirement if the issuer’s securities are held by either (i) 2,000 persons or (ii) 500 persons who are not accredited investors and where the issuer’s total assets exceed $10 million.  Although companies that file a Form S-1 registration statement under the Securities Act of 1933, as amended (“Securities Act”) become subject to Reporting Requirements under Section 15(d) of the Exchange Act, only the shareholders of companies that have a class of securities registered under Section 12 of the Exchange Act are subject to the Sections 13 and 16 filing requirements.

The SEC Enforcement Actions

Each of the individual filings, which appeared as 37 separate administrative proceedings under Section 21C of the Exchange Act, begins with a commentary of the Section 13 and 16 reporting obligations.  I discuss such legal obligations in further detail below, as well.

Regarding Section 13, the SEC states:

Section 13(d) of the Exchange Act and the rules promulgated thereunder require any person or group who directly or indirectly acquires beneficial ownership of more than 5% of a Section 12 registered equity security to file a statement with the Commission disclosing certain information relating to such beneficial ownership. Section 13(d) is a key provision that allows shareholders and potential investors to evaluate changes in substantial shareholdings.  See 113 Cong. Rec. 855 (1967).  The duty to file is not dependent on any intention by the stockholder to gain control of the company, but on a mechanical 5% ownership test.

The SEC notes that under Section 13(d)(1), any person that has acquired more than 5% beneficial ownership of a reporting company’s equity securities must file either a Schedule 13D or 13G within 10 days after the acquisition.  The disclosure statement includes among other things, the identity of the beneficial owners, the amount of beneficial ownership, and plans or proposals regarding the issuer.  The term “beneficial owner” is defined to include “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise” has or shares voting or investment power with respect to a registered equity security.”  Based on the definition, more than one person can be a beneficial owner of the same security and generally beneficial ownership by an entity includes beneficial ownership by such entities’ beneficial owners.

Regarding Section 16, the SEC states:

Section 16(a) of the Exchange Act and the rules promulgated thereunder require officers and directors of a company with a registered class of equity securities, and any beneficial owners of greater than 10% of such class, to file certain reports of securities holdings and transactions. Section 16(a) was motivated by a belief that “the most potent weapon against the abuse of inside information is full and prompt publicity” and by a desire “to give investors an idea of the purchases and sales by insiders which may in turn indicate their private opinion as to prospects of the company.” H.R. Rep. 73-1383, at 13, 24 (1934). Reflecting this informational purpose, the obligation to file applies irrespective of profits or the filer’s reasons for engaging in the transactions. The Sarbanes-Oxley Act of 2002 and Commission implementing regulations accelerated the reporting deadline for most transactions to two business days and mandated that all reports be filed electronically on EDGAR and posted on the company’s website to facilitate rapid dissemination to the public.

The SEC notes that under Section 16, every person who is an officer or director or beneficial owner of more than 10% of equity securities of an issuer must file an initial statement on Form 3 within 10 days of the event triggering such filing and continuing changes on Form 4 within two business days following such change.  Transactions required to be reported on Form 4 include purchases and sales of securities, exercises and conversions of derivative securities, and grants or awards of securities from the issuer.  An annual report on Form 5 is used to report changes and information that should have been, but were not included in prior Forms 3 or 4.

Neither Sections 16 nor 13 require intent or contain subjective standards.  The failure to file, regardless of explanation, is a violation.  Each of the SEC orders contained a cease-and-desist from committing any future violations and civil penalties.

Refresher on Section 13

Section 13 of the Exchange Act requires any person acquiring more than five percent of a voting class of a company’s Section 12 registered equity securities directly or by tender offer to file a Schedule 13D or 13G. Depending upon the facts and circumstances, the person or group of persons may be eligible to file the more abbreviated Schedule 13G in lieu of Schedule 13D.  Generally, the obligation to file an initial beneficial ownership statement on Schedule 13D or 13G is triggered by the person directly or indirectly acquiring or possessing beneficial ownership of more than 5% of a class of equity securities.

The obligations to file Scheduled 13D and 13G are in addition to and separate from any other filing requirements, including Forms 3, 4 and 5 under Section 16 of the Exchange Act.  Generally officers and directors have the ability to directly or indirectly influence the management and policies of an issuer and therefore are considered control persons who would not qualify to file a Schedule 13G as opposed to a Schedule 13D.

Schedule 13D

A Schedule 13D is lengthier than a Schedule 13G and is often referred to as a long-form beneficial ownership disclosure statement. Following a company’s IPO or initial going public transaction, any shareholder that acquires 5% or more of the company’s stock may be required to file a Form 13D.  The requirement to file a Schedule 13D is triggered by an acquisition.  The full contents and instructions of a Schedule 13D can be found HERE.

A Schedule 13D must be filed within 10 days of the triggering event requiring the filing.  The filing discloses ownership on the date of such filing.  Accordingly, if a person acquires 5% of the company’s securities, the filing requirement is triggered.  If that person then makes additional acquisitions or dispositions during that 10-day period, the filing would report the ownership as of the date of filing.  Schedule 13D requires disclosure of all transactions in the company’s stock that were effected during the past sixty days or since the most recent filing of Schedule 13D, whichever is less, and accordingly would include a description of the acquisitions and dispositions during the 10-day period between the event that triggered the filing requirement and the filing itself.

Although changes in the number of outstanding securities that result in an increase of ownership to over 5% are not acquisitions resulting in an initial Schedule 13D filing, they would result in the requirement to file an amended Schedule 13D to report the “material increase or decrease” in the percentage of the beneficial ownership.

A shareholder that already owns 5% of the company’s stock at the time of an IPO or going public transaction must file a Schedule 13G within 45 days of the IPO or going public transaction.  These shareholders are referred to as “exempt shareholders” and are only required to file a Schedule 13D if they acquire more than 2% of the company’s stock in a 12-month period following the IPO or going public transaction.

Subject to certain exclusions, including the ability to file a Schedule 13G rather than a Schedule 13D, any event that results in an acquisition resulting in a beneficial ownership of more than 5% triggers the 13D filing requirement.  Accordingly, the formation of a group and the transfer to a trustee could result in a Schedule 13D filing requirement, in addition to straightforward purchases of stock.

Under the authority of Section 13d of the Exchange Act, the SEC has enacted certain exemptions to the Schedule 13D filing requirement.  Generally, these exemptions only allow the filing of the shorter 13G and not a relief from any filing.  Executors or administrators of a decedent’s estate generally will be presumed not to have acquired beneficial ownership of the securities in the decedent’s estate until such time as such executors or administrators are qualified under local law to perform their duties.

Schedule 13D filers are required to file amendments to report any change (increase or decrease) in beneficial ownership of 1% or more.  For purposes of Section 13 of the Exchange Act, beneficial ownership includes the right to acquire securities within 60 days of the reporting date.  Accordingly, a shareholder that owns convertible notes, warrant or option that entitle that shareholder to acquire securities under the convertible instrument must include the securities which the shareholders could acquire in the calculation of beneficial ownership.  Moreover, if the number of shares that a convertible note holder owns changes by 1% or more due to fluctuations in a conversion price that is tied to market price, each such 1% change requires the filing of an amended Schedule 13D.

The 60-day beneficial ownership period is calculated based on securities that the shareholder has a right to acquire within the 60 days.  If the right to acquire securities is pre-conditioned on an event (such as a transaction closing) that has not occurred, or contractually limited (such as a provision limiting the acquisition right to no more than 4.9% of outstanding securities), the right to acquire such securities is likewise limited as is the concurrent ownership reporting obligation.

Any material changes in a previously filed Schedule 13D require an amendment to such filing, even if that material change is not in beneficial ownership.  For instance, a Schedule 13D requires reporting of plans to acquire additional securities and material contracts related to the securities.  Therefore, if a shareholder acquired warrants to purchase more than 1% of the outstanding securities, not exercisable for six months, its beneficial ownership would not have changed but its plan to acquire additional securities and contracts related to such securities would have materially changed, triggering the requirement to file an amended Schedule 13D.

The requirement to file amendments to a previously filed Schedule 13D continues until such filer has reported ownership below 5%.  Accordingly, if a change of beneficial ownership results in ownership below 5%, but such change is not a 1% change that would otherwise trigger the requirement to file an amendment, that shareholder can voluntarily file such an amendment to relieve themselves of the Schedule 13D filing requirement going forward (or at least until a new triggering event required such filing in the future).

Schedule 13G

A Schedule 13G is a shorter and simpler form than a Schedule 13D.  Schedule 13G eligible filers include (i) qualified institutional investors; (ii) passive investors; and (iii) exempt investors.  The full contents and instructions of a Schedule 13G can be found HERE.

Qualified Institutional Investors

Rule 13d-1 allows qualified institutional investors to file on Schedule 13G instead of 13D.  A qualified institutional investor is an investor that acquired the securities in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer and is also one of the following:

  • A registered broker-dealer;
  • A registered investment adviser;
  • A registered investment company;
  • A church plan excluded from the definition of an investment company;
  • A bank;
  • A savings association under the FDIC;
  • An insurance company;
  • A parent holding company holding less than 1% of the outstanding stock;
  • An employee benefit plan subject to the Employee Retirement Income Security Act;
  • A non-U.S. institution that is the functional equivalent of any of the above institutions, provided it is subject to a comparable regulatory scheme; and
  • A group provided that all members of the group qualify as any of the above institutions.

Qualified institutional investors must file a Schedule 13G within 10 days of the end of the month of the triggering event requiring the filing and must amend the Schedule 13G each year within 45 days of the end of the calendar year to report changes in beneficial ownership.  However, if a 13G filing shareholder acquires in excess of 10% of the company’s stock, an amended 13G must be within 10 days of the acquisition.  Moreover, an amendment must also be filed within 10 days to report increases or decreases of beneficial ownership of more than 5%.

Passive Investors

Shareholders who are passive investors can file or continue to file reports on Schedule 13G, avoiding the more burdensome Schedule 13D. Passive investors must file their Schedule 13G within 10 days of the triggering event requiring the filing.  Rule 13d-1(c) defines a passive investor as a person that: (i) has not acquired the securities with any purpose, or with the effect of, changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having that purpose or effect, other than a qualified institutional investor; and (ii) is not directly or indirectly the beneficial owner of 20% or more of the class.

A change in the number of outstanding securities that results in a passive investor owning more than 5% of the outstanding class of securities will trigger a Schedule 13G filing requirement.  A shareholder that receives a dividend in a subsidiary spin-off, in excess of 5% of the outstanding securities of the spun-off subsidiary, would be considered a passive investor and eligible to file Schedule 13G, as long as such shareholder was not in fact an officer, director or otherwise a control person of the spun-off subsidiary.

Such passive investor loses Schedule 13G eligibility and must file a Schedule 13D within 10 days of acquiring 20% or more of the company’s stock.  A person in a control position, such as a director or executive officer, will not qualify as a passive investor.

Exempt Investors

Exempt investors include every person or entity that beneficially owned more than 5% of the company’s stock at the time of the IPO or going public transaction.  The filing requirement for Schedule 13D is triggered by an acquisition of 5% or more of securities of a company with securities registered under Section 12 of the Exchange Act.  Accordingly, these initial 5% shareholders are referred to as exempt shareholders because their shares were acquired prior to the company’s IPO or going public transaction – i.e., prior to the company having a class of securities registered under Section 12 of the Exchange Act.

Exempt investors must file a Schedule 13G within 45 days following the end of the calendar year in which a company completes its IPO or other going public transaction.

Generally, a shareholder must amend a Schedule 13G each year within 45 days of the end of the calendar year to report changes in beneficial ownership.  However, if a 13G filing shareholder acquires in excess of 10% of the company’s stock, an amended 13G must be filed within 10 days of the acquisition.  Moreover, an amendment must also be filed within 10 days to report increases or decreases of beneficial ownership of more than 5%.

Moving from Schedule 13G to Schedule 13D

If an exempt investor who previously reported on Schedule 13G later becomes subject to Rule 13d-1(a) due to a nonexempt acquisition, then a Schedule 13D must be filed within 10 days of the acquisition.  Nonexempt transactions that require the filing of a Schedule 13D include any acquisition with a view towards changing or influencing the control of the issuer.  In addition, any acquisition of the beneficial ownership of a security which, together with all other acquisitions by the same person (or group of persons) of securities of the same class during the preceding twelve months, that results in ownership in excess of 2% of that class eliminates the ability to rely on Schedule 13G and requires the filing of a Schedule 13D.

Accordingly, if a group of exempt investors reporting on Schedule 13G adds a new member who owns more than 2% of the same class of equity securities, then each member of the group loses their exempt investor status as a result of acquiring the equity securities owned by the new group member, and a Schedule 13D must be filed within 10 days of the acquisition.  A passive investor or qualified institutional investor loses that status upon acquiring or holding a class of equity securities with a purpose or effect of changing or influencing control of the issuer. Similarly, a passive investor also loses that status upon acquiring 20% or more of a class of equity securities.

Only security holders who were once eligible to file on Schedule 13G and were required to switch to a Schedule 13D may switch back to a Schedule 13G filing.  Security holders who were initially required to report on Schedule 13D must continue to report on Schedule 13D thereafter.

Refresher on Section 16

Section 16 is intended to prevent unfair use of inside information and discourage speculative trading by insiders by requiring them to report holdings and transactions in a reporting company’s securities (under Section 16(a)).  In addition, Section 16 also requires insiders to pay over to the reporting company any “profits” realized from any purchase and sale (or any sale and purchase) of the reporting company securities within a six-month period (under Section 16(b)).  Under Section 16(c), insiders are precluded from making short sales (sales of shares they do not own at the time of the sale) of the reporting company’s securities.  Moreover, the SEC requires that the reporting company disclose in its annual proxy statement the names of insiders who have failed to make required Section 16 filings on a timely basis, and also to note the existence of such disclosure on the cover of its annual report on Form 10-K.

The rules under Section 16 are complex and contain a number of “gray” areas and potential traps for the unwary. Insiders should consult with counsel before engaging in any transactions in the company’s securities, particularly transactions involving “derivative” securities (such as options or warrants).

Who is an Insider?

Section 16(a) requires directors and executive officers of a reporting company to report their beneficial ownership of and transactions in the company’s securities to the SEC and the public. A “director” refers to a person who is a member of the board of directors of the reporting company.  Section 16 only covers certain named executive officers, including the (i) president and principal executive officer; (ii) any vice president in charge of a principal business unit, division or function; (iii) principal financial officer; (iv) principal accounting officer; and (v) any other person who performs similar policymaking functions for the company.  The key determination is the level of control and ability to perform significant policymaking functions for the reporting company.  The SEC recognizes that reporting companies may give titles to individuals that include terms like “vice president of…” or “director of…” which individuals are not in a high-level control position.  These individuals are not considered Section 16 filers.

In addition to directors and executive officers, persons, including entities, who beneficially own more than 10% of a class of the company’s registered securities are subject to Section 16(a) reporting requirements.  As with other SEC rules and regulations, 10% ownership is based on beneficial ownership and not the legal title or record ownership.  Beneficial ownership is determined by the person’s ability to control the voting power of the securities, investment decisions related to the securities (whether to buy or sell), and monetary interests in the securities.  A monetary interest is the direct or indirect ability to profit from purchases or sales of securities.

An insider is considered to have a beneficial ownership interest of securities held by members of the insider’s immediate family sharing the same household.  Immediate family household members include grandparents, grandchildren, siblings and in-laws, as well as the insider’s spouse, children and parents.

An insider is considered a beneficial owner of shares in a trust for Section 16 purposes if the insider has or shares investment control over the trust securities and the insider is a: (i) trustee and such trustee or trustee’s family members have a monetary interest in the securities; (ii) beneficiary; or (iii) settlor with powers to revoke the trust. An insider who has control or a controlling influence over a partnership or corporation will generally have beneficial ownership of the securities held by that partnership or corporation.

Disclaimer of Beneficial Ownership.  When there is doubt as to the beneficial ownership of securities, an insider should report such securities as being beneficially owned.  Such report will not amount to an admission of beneficial ownership if accompanied by a disclaimer of beneficial ownership.  To disclaim beneficial ownership, the following statement can be included on a Form 3, 4 or 5:

The undersigned disclaims beneficial ownership of the securities indicated, and the reporting herein of such securities shall not be construed as an admission that the undersigned is the beneficial owner thereof for purposes of Section 16 or for any other purpose.

Section 16 Reporting Obligations

Section 16 requires insiders to file an initial statement of beneficial ownership of the company’s securities on Form 3 at the time that such insider becomes subject to Section 16 (when they become an insider), as well as periodic statements reflecting changes in such beneficial ownership.  Most changes in beneficial ownership (as defined below) must be reported electronically within two business days.  In addition to common stock ownership, insiders must report derivative securities ownership.  Derivative securities include options, stock appreciation rights, warrants, convertible securities or similar rights. Derivative securities also include third-party contracts: puts, calls, options or other rights to acquire the company’s securities.

The following are several relevant times and basic filing requirements:

  • (a)An initial statement of beneficial ownership of equity securities on Form 3 must be filed by the date that the registration statement for the company’s initial public offering becomes effective or, thereafter, within 10 days of the date a person becomes an insider.  The initial Form 3 must include all of the insider’s holding of the reporting company’s securities.  An insider must file a Form 3 even if they do not have any beneficial ownership in the company’s securities.  For example, a newly elected director or newly appointed executive officer must file a Form 3 even if such director or officer does not have a beneficial interest in a single share of stock.
  •  (b)Generally, any change in an insider’s beneficial ownership of the company’s securities is reported on a Form 4 by the second business day following the transaction date.  The Form 4 must be filed for transactions, even if such transactions are exempt from the short swing profit rules discussed below.
  • (c) The remaining reportable transactions (such as gifts), including any (late) reports of transactions and holdings not previously reported, must be reported on Form 5 within 45 days of the company’s fiscal year end, unless the insider voluntarily reports the transaction or holding earlier on Form 4.

A few transactions (such as acquisitions under certain tax qualified plans) need not be separately reported (although their effect on an insider’s holdings will ultimately be reflected).  In particular, exemptions from the two-day Form 4 filing requirement include (i) gifts; (ii) inheritances; and (iii) small acquisitions other than from the company that do not exceed in the aggregate $10,000 in market value within a six-month period, provided the insider makes no nonexempt dispositions during the six months thereafter.

Insiders are not required to report on Form 4 or 5 transactions that effect only a mere change in the form of the insider’s beneficial ownership. For example, a distribution to the insider of securities previously beneficially owned by the insider through an employee benefit plan merely changes the form of ownership (from indirect to direct) and is exempt from Forms 4 and 5 reporting requirements.

At the conclusion of this blog is a table of typical transactions an insider may encounter and when such insider must report them.  Even though the reporting of a few transactions may be deferred, it is advisable to report all reportable transactions on a Form 4 at the time of the transaction because it is possible that the insider may not recall the transaction when it is time to file the Form 5.  If Form 4 is filed for every reportable transaction, no Form 5 filing is required at the end of the company’s fiscal year.

Section 16 reports must now be filed using EDGAR, the SEC’s electronic filing system, so an insider must obtain a personal EDGAR access code before making a filing.  Forms 4 and 5 contain an “exit” box, which may be checked when an insider ceases to be an insider.  However, the insider would still be required to report a transaction after they cease to be an executive officer or director if the transaction (such as a sale) “matches” with any transaction (such as a non‑exempt purchase) while they were an executive officer or director.

Section 16 rules mandate that companies post on their corporate websites all Forms 3, 4 and 5 filed by their insiders and 10% beneficial owners by the end of the business day after the date of filing. Companies must keep the reports posted for at least 12 months. Most post by hyperlinking to third-party service providers or to the EDGAR database on the SEC’s website. The hyperlink must link directly to the forms or a list of the forms, and the link caption must clearly indicate access to insider Section 16 reports.

Filing Deadlines

Form 3’s are due on the date the company goes public or, thereafter, within 10 days of the date a person becomes an insider.  Form 4’s (other than voluntary filings) must be filed on or before the second business day after the reportable transaction occurred.  A voluntary Form 4 may be filed at any time.  Form 5 is due within 45 days after the end of the company’s fiscal year.  If any transactions should have been reported earlier, the delinquent reports of those transactions must be included in the Form 5 and a special box must be checked indicating that reporting delinquencies have occurred.  If all holdings and transactions have previously been reported, no Form 5 need be filed.  If the due date falls on a weekend or a national holiday, the form is due on the next business day.

Avoiding Short-Swing Liability

In addition to making complete and timely reports under Section 16(a), an insider must also be careful to plan transactions to avoid short-swing liability under Section 16(b).  Section 16(b) is designed to discourage trading on inside information, and presumes that certain people inevitably benefit from their “insider” status.  Under Section 16(b), any purchase and sale, or sale and purchase, of a reporting company’s securities by a company insider made during any given six-month period will be matched.  Any “profit,” whether inadvertent or intentional, realized by matching a purchase and sale within a six-month period is recoverable by the company.  If the company fails to recover such profit, any shareholder of the company may sue to recover it on behalf of the company.  Forms 3, 4 and 5 filed with the SEC are publicly available and are routinely monitored by attorneys who make their living by threatening to file Section 16(b) suits on behalf of shareholders.  In the event of a violation of Section 16(b) by an insider, these attorneys are generally able to compel the company and/or the offending insider to pay their fees and expenses if the company had not acted to obtain restitution of the deemed “profit” from the insider prior to receiving a communication from the attorney.

Except in the case of options and other derivative securities (for which there is a special rule for calculating profits), transactions are paired with mechanical rigidity so as to match the lowest purchase price with the highest sale price, thus squeezing out the maximum amount of “profit.”  Thus, although an insider may have realized an economic loss, they may be treated for Section 16(b) purposes as having realized a “profit.”

The table at the end of this blog includes typical transactions and how they would be treated.  It does not matter for Section 16(b) purposes whether the purchase or sale comes first.  It makes no difference that the particular shares sold happen to be shares held more than six months, since it is not necessary for the same shares to be involved in each of the “matched” transactions.  The rules apply not only to individual transactions but also to transactions engaged in by others if the insider is deemed to have a pecuniary interest in those shares.  Thus, a purchase by an insider could be matched with a sale of shares by the insider’s spouse.  Public and private transactions also can be matched.  In the case of officers and directors, transactions occurring while an insider may be matched with transactions after the person ceases to be an insider.  A 10% beneficial owner must, however, be a 10% beneficial owner at both the time of purchase and the time of sale to trigger Section 16(b) matching liability.

The purchase and sale of securities that are convertible into or exercisable for the purchase of shares of common stock may be matched either against the sale and purchase of other securities which are so convertible or the sale and purchase of shares of common stock.  For example, a sale of common stock might be matched either against a purchase of convertible securities or a purchase of common stock within six months before or after such sale.  The acquisition of options, warrants or convertible securities will also generally be treated as an acquisition of the underlying equity security, but the exercise of such option or warrant or conversion of such convertible securities will not be treated as a matchable purchase.

Any acquisition by an officer or director (but not a 10% holder) from the company, or any disposition by an officer or director to the company, is exempt from matching if approved in advance by the board of directors or a properly constituted committee of the board.  Thus, neither the grant nor the exercise of an option issued under the company’s stock option plans will generally be treated as a matchable “purchase” for purposes of Section 16(b).  Acquisitions of common stock under the company’s employee stock purchase plans will not generally be treated as matchable purchases for purposes of Section 16(b).  If the officer or director elects to pay the exercise price (and/or any tax withholding obligations) by withholding option shares or tendering previously held shares to the company, the disposition of such shares will likewise be exempt from matching if properly approved in advance.  However, the sale of shares by a broker to pay the exercise price and/or tax withholding would be treated as a matchable “sale” for purposes of Section 16(b).

Short Sales

In general, Section 16(c) of the Exchange Act makes it unlawful for an insider to make “short sales” or “sales against the box” when the securities sold are not delivered within the time periods set forth in Section 16(c).  A “short sale” is any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller.  A “sale against the box” is the type of short sale in which the seller actually owns sufficient shares to make delivery but chooses to borrow shares to cover the sale.  The seller subsequently can either buy securities or use his own securities to repay the lender to complete the transaction.

MATCHING AND REPORTING UNDER SECTION 16 RULES

Event Report on Form 4
(due within 2nd
business day after event)
Report on Form 5
(due within 45 days of
end of fiscal year)
Not Required to
be Reported (2)
Grant to officer or director
under company’s stock option plan
Exempt (1)Code A
Exercise of option Exemption acquisition of
common stock and
exempt disposition of
optionCode M
Cashless option exercise by
officer or director through issuer
(by withholding shares or delivering previously held shares)
Exempt acquisition (of gross shares) Code M and exempt disposition (of
shares tendered) Code F (1)
Cashless option exercise
through broker
Exempt acquisition
(of gross shares) Code MMatchable sale
(of shares sold) Code S
Expiration of option for no value Exempt disposition
Acquisition under company’s employee stock purchase plan Exempt acquisition
Conversion of preferred stock Exempt acquisition of common stock and exempt disposition of preferredCode C
Stock dividend Exempt acquisition
Transfer pursuant to domestic relations order Exempt acquisition or disposition
Distribution from limited partnership to general partner Exempt change in form of beneficial ownership
Distribution from limited partnership to limited partner Matchable purchaseCode J
Other acquisition from issuer, including receipt of securities in merger Exempt acquisition, if by director or officer (1)Code AMatchable purchase if by 10% holderCode P
Acquisition from someone other than issuer Matchable purchaseCode P
Sale to issuer or tender in connection with merger into another company Exempt disposition, if by officer or director (1)Code DMatchable sale, if by 10% holderCode S
Sale to someone other than issuer Matchable saleCode S
Gift ExemptCode G
  • Assuming that the specific approval of the transaction required by new Rule 16b‑3 has been obtained or, in the case of an acquisition, the security is held for at least six months.
  • Transactions that are not required to be reported as separate line items must be reflected in end-of-period holdings.  Insiders may choose to indicate, by a footnote, that the report reflects the results of transactions which are not required to be itemized.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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