Insider's Buy and Selling; Why They REALLY Buy or Sell
For almost a decade, we worked in the "Private Corporate Client" area of an international brokerage firm. "Private Corporate Client" is just another way of saying "Insider" as a majority of our clients were
insiders selling their restricted shares and companies themselves doing buybacks/repurhcases. Because of that experience, we know why insiders REALLY SELL or BUY their company's shares. The actual reasons will probably surprise you.
We're not talking about illegal insider trading;
that is, when someone with insider (non-public)
information trades a stock based on that information.
We're talking about when an officer, director, or
other executive buys or sell shares.
We were the guys that would help these
executives jump through the hoops they needed to
so that they would be allowed to sell shares on the open market. There are quite
a few hoops at that, but the most common are spelled out in
SEC Rule 144 and Rule 144(k). Actual paper stock certificates are used when
"restricted" shares are given to an insider and they actually are stamped
"Restricted" in red on the certificate. We even had a CFO of a $Billion
technology company pull up to our office, with his new speedboat being hauled
behind his new SUV, to hand us a restricted stock certificate he wanted to sell
that was worth several $Million. Yeah, those kind of "insiders".
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Rule 144 & Rule 144(k)
When you acquire restricted
(unregistered) securities or hold control securities, you must file for an exemption from the SEC's registration
requirements to sell restricted shares - or if they are registered, you must
file a public notification of the sale.
Rule 144 allows public
resale of restricted and control securities if a
number of conditions are met. This overview tells
you what you need to know about selling your restricted
or control securities. It also describes how to
have a restrictive legend removed.
Some of the restrictions on the sales include
how long that person has held those shares, the number of shares that can be
sold in a specific period of time and even how those shares can
be sold by the broker.
Restricted and Control Securities
Restricted securities are securities acquired in
unregistered, private sales from the issuer or from
an affiliate of the issuer. Investors typically
receive restricted securities through private placement
offerings, Regulation D offerings, employee stock
benefit plans, as compensation for professional
services, or in exchange for providing "seed
money" or start-up capital.
Rule 144(a)(3) identifies what sales produce restricted
Control securities can be restricted or unrestricted but are always those held by an affiliate
of the issuer. An affiliate is a person,
such as a Director, the CEO &
CFO, or large shareholder in a relationship
of control with the issuer. Control means
the power to direct the management and policies
of the company in question, whether through the
ownership of voting securities, by contract, or
otherwise. Most often, that means the top executives.
are given restricted securities because you are an insider or were a seed
investor, you almost
always will receive a certificate stamped with a "restricted"
legend. The legend is just a stamp that indicates that the securities
may not be resold in the marketplace unless they
are registered with the SEC or are exempted
from the registration requirements.
There are plenty of technical terms and other pieces
of information regarding these types of sales, but
that's not important. As long as you understand
the general restrictions, that's all you need to
know more than 90% of investors do.
Should I Sell When The CEO Does?
In a few words... probably not.
There are many, many reasons why an insider like
a CEO or a CFO will sell some of his or her shares.
Maybe he is looking to purchase a new vacation home (or payoff his new boat like
our CFO friend).
Or, his son or daughter is heading off to college
and he needs some cash for tuition and other expenses.
Or, most commonly (in our experience), the stock
has made a nice run and the executive is basically
looking to diversify.
We've seen in many times where a CEO was there at
the beginning. Maybe he had plenty of money before,
but he's spent years, if not decades making the
business into what it is today. During growth years, before the company became
as big as it is now, that CEO may have been paid only pittance in actual cash
compared to other CEOs in the same industry for those years. Instead of big
paychecks, he was given restricted shares of stock as additional compensation.
Doing that saved the company quite a bit of cash and gave that CEO a huge
incentive to grow that company and increase the stock price. On paper, he might
have $20 million in stock, but only a couple hundred
thousand in actual cash or other investments from all of those years of work. If
any of us were in that situation, the
wise thing would be to sell at least a portion of
those shares to diversify, buy an annuity, insurance,
whatever. Let's say that CEO does not sell anything,
and does not plan to until well after he retires,
only when he needs it. Now, he's left and still has his $20 million in stock only. The
next CEO is a crook and is caught with accounting
irregularities. The stock plummets and bankruptcy is coming. The shares are now worthless.
He should have sold some, no?
When an insider like a CEO sells shares (whether restricted or not), his broker
needs to file a Form 144 with the SEC. The information on that form is what is
made public and we all see online through financial websites like Yahoo that
list insider sales. Rule 144 limits the number of shares that an insider can
sell in a rolling 90 day period. The limit on the number of shares is tied to
the average volume of the stock or the number of shares outstanding and varies
from company to company and can even vary widely from one 90-day period to the
A wise broker will make ONE filing that mentions all of the shares that the CEO
plans to sell in the next 90 days or less. That way, services like Yahoo Finance
show just that one filing.
Many brokers have no experience with Rule 144 and make a filing each and every
day that shares are sold listing just the amount sold. That's fine as far as
disclosure laws go - but now Yahoo Finance might show 25 sales over 25 days
where the CEO is selling around 10,000 shares each day for each of those 25
Wouldn't it be less alarming as an investor if you saw that the CEO had just one
filing for 250,000 and that was it? Psychologically, seeing 10,000 share sales
over and over and over makes investors more likely to think the CEO is just
cashing out and thinks the stock will drop.
So when you see smaller sales over and over and over by an executive, take a
look at the history of his or her sales. It may be nothing more than a stupid
broker filing each day instead of filing just once for the entire sell order.
If you see a CEO selling and those sales significantly drop the number of shares he holds, that makes even us nervous.
That's a warning sign. We are also concerned when
the insider uses an idiot for a broker who files
for each and every sale. That insider is either not knowledgeable enough to use
someone who knows how to minimize the impact of shareholders seeing all of those
filings, or doesn't care enough to worry about the appearance of all of those
sales. Shouldn't a CEO be better than that? We think so.