Disseminating information to employees on the IPO is an important step in becoming a public company. As we have discussed before, there are certain topics that are critical to discuss with employees, including Regulation FD (Reg FD), insider trading, material non-public information (MNPI), and employee stock plans. Today, let’s go through the basics of insider trading and material non-public information.
When it comes to MNPI, the two definitions that matter are in the name: material and non-public. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to buy, hold, or sell a security. More simply, any information that could reasonably be expected to affect the stock price is material, including positive and negative information. Information is non-public if it is not generally known or available to the public. To be considered available to the public, information must be broadly released to the marketplace (such as by a press release or an SEC filing), and the investing public has had time to absorb the information fully. Both criteria must be met before information can be considered public knowledge.
Examples of potential MNPI are varying and can include things that may be surprising. To name a few:
- Number of customers, customer contracts, customer wins and/or launches
- Quarterly financial performance (prior to quarterly reporting)
- Sales quotas/expectations for future sales performance
- Key clinical and regulatory pathway progress
- Sales force headcount/hiring plans
- R&D pipeline initiatives
- Upcoming corporate actions (financing rounds, M&A, etc.)
- Legal disputes
It’s also important to consider whether the MNPI disclosures are intentional vs. unintentional. An intentional disclosure of MNPI occurs when the person making the disclosure either knows, or is reckless in not knowing, that the information he/she is communicating is both material and non-public. Unintentional disclosure occurs if a covered person makes an inadvertent disclosure. When this happens, public disclosure of the information is required promptly after a senior official learns of the disclosure.
A good rule of thumb is this: when in doubt, just keep company information to yourself. This includes sharing information among other company employees; this type of information should be shared only on an as-needed basis to do your job.
Now let’s discuss insider trading. This refers to transactions in a security when the person buying or selling is in possession of material non-public information about that security. It is important to remember that insider trading can be done by anyone, including company executives and employees, their friends and relatives, or just a regular person on the street, as long as the information is not publicly known. Insider trading violations also include “tipping” of such MNPI to other individuals. In fact, roughly half of the insider trading cases brought to the government involve tipping, rather than direct trading from the insider. Insider trading is highly scrutinized by the SEC, and penalties for violation can include fines and imprisonment for the individual and significant civil and/or criminal fines for the company. It’s important to remember the responsibility for avoiding improper trading and violating insider trading laws rests with you. Here are a few key considerations for insider trading:
- The law applies to anyone who knows MNPI at the time of the trade or tip
- Even if the “tipper” doesn’t trade, it is still illegal to pass along information or tips
- Most cases are based on circumstantial evidence
To wrap it up, here are some Dos and Don’ts regarding external communication that employees should consider:
- Do pass requests for information off to a designated individual (a CFO, general counsel, etc.) in the company
- Do contact this designated individual if you think you may have accidentally made a company-related statement
- Don’t speak on behalf of the company
- Don’t respond to rumors
- Don’t give anyone (including clinicians or customers) information that is not publicly available (e.g., disclosed via press release or earnings call)
- Don’t use personal or corporate social media accounts to post or interact with anything related to the company, unless you are interacting on a site used for professional development (e.g., LinkedIn) and/or in the normal course of business
- Don’t like, retweet, or favorite any use of the company’s product that is an unauthorized use of the product or in a market where the product is not approved
Gilmartin has partnered with many clients to achieve public company readiness. For additional information, contact our team today.
Sam Bentzinger, Analys