Pg 52

Question 1

Who is considered to be a beneficial owner such that they are a corporate insider?

Answer 1

Any shareholder that has more than 10% of any class of equity security stock registered under the securities exchange act. Note that this is the beneficial owner (person that has the power to vote and invest the shares), not necessarily the record owner. This also includes derivative securities like options to acquire stock and any other exercise options are treated as shares.

Question 2

If a corporation has two classes of common shares and both are registered with the SEC and both have 100,000 outstanding shares, and you own 15,000 of the one and none of the other, are you considered to be a beneficial owner such that you are a corporate insider?

Answer 2

Yes, because you own 15% of that class of stock and you only need to own 10% of any class of registered security stock, not all of the corporation’s equity security. Watch out though, because the classes must be registered. If they are not, then insider trading does not apply

Question 3

What is the rule about timing with regard to corporate insiders?

Answer 3

The person must be a corporate insider immediately prior to the purchase or sale. If the transaction happened before the person became a corporate insider, it doesn’t count.

Question 4

If insider trading happened after someone stopped being a corporate insider, such as a director or officer, does it still count?

Answer 4

Yes, if it matches with the purchase or sale being made while the person was an officer or director. The reasoning is that after someone stops being an insider, he still has information that he had as an insider, so there’s still a danger of him trading on it. But there cannot be a suit more than two years after the date the profit was realized.

Question 5

What are the prerequisites for a security holder to sue someone else for insider trading?

Answer 5

– he must request that the issuer sue
– the issuer must fail to sue within 60 days
– the person must be the owner of any security of the issuer in any amount
– he needn’t have been an owner at the time the violation happened, he just had to own securities at the time of suit if he don’t own securities when the litigation concludes, he can only recover if he had a continuing financial interest in the outcome of the litigation.

Question 6

If you violate 16B are there criminal sanctions?

Answer 6

No

Question 7

What is an issuer?

Answer 7

The corporation

Question 8

What are profits with regard to sale of stock?

Answer 8

The highest sales price minus the lowest purchase price

Question 9

Any time that an insider buys or sells equity securities, what must he do to avoid getting in trouble for insider trading?

Answer 9

Report his ownership to the SEC on the second business day after the transaction. This can be done online with a fillable PDF.

Question 10

What are the things that the SEC requires from insiders with regard to buying and selling securities?

Answer 10

• initial reporting requirements: when the person first becomes subject to reporting
  – transactional reporting requirement: when the person buys or sells additional securities

Question 11

What is the timing for filing with the SEC when you initially buy stock if you are an insider?

Answer 11

At the time of registration of the security on the national security exchange or within 10 days of becoming a beneficial owner, director, or officer. If there has been a change in ownership, you must file before the end of the second business day after the day the transaction was executed.

Question 12

What does rule 16B say about insiders buying stock?

Answer 12

If insiders buy stock and then sell within six months of purchasing, or sell shares of stock and then buy shares of the same stock within six months after the sale, there’s an automatic presumption that insider information was used. Then the corporation is allowed to recover the profits of the insider made from the transaction and the corp does not have to prove that it involved insider information.

Question 13

What does rule 16B say about transactions of purchase and sale or vice versa that happened in periods longer than six months by insiders?

Answer 13

Those are fine

Question 14

What are the elements of 16B?

Answer 14

– D must be an insider: director, officer, or beneficial owner of at least 10% of one class of stock
– matching purchase and sale within six months of each other
– a profit was realized

Question 15

For rule 16B, what is considered to be the same class?

Answer 15

The sale and purchase must be made from the same class or series of stock. If you sell common stock and then buy common stock, that’s not OK. If you sell common stock and buy preferred stock, that is fine

Question 16

What is an equity security for a rule 16B?

Answer 16

This includes stock, security futures on stock, security convertible into stock, warrants and options to buy stock, etc. This does not include bonds because they are not equities, they are debt, but it does cover bonds that are convertible into common stock

Question 17

If the wording says “traded privately“ does that expose a corporation to 16B liability?

Answer 17

No

Question 18

If there was conversion involved, would 16B apply?

Answer 18

That means that stocks are changed from one type of stock to another type. Conversions never count as purchases or sales, so the words must say “sale” or “purchase” in order for 16B to apply.