Rule 10b5-1(c) – An Interesting Way for Insiders to Trade During “Quiet Periods”
A few weeks ago, Retractable Technologies, Inc. (RVP) released its earnings report, and within it, there was a notable section on insider trading.
On August 22, 2023, Thomas J. Shaw, the President, Chairman, and CEO, adopted a written plan to purchase shares of Retractable Technologies, Inc. stock with the intent to comply with the protective provisions of Rule 10b5-1(c). According to the plan, trading began on November 20, 2023, and may continue until November 19, 2024, unless terminated earlier. During this period, the plan instructs a broker to purchase shares for a total amount of up to $0.8 million within certain price parameters. Mr. Shaw’s purchases under this plan are reported on forms filed with the SEC in accordance with Section 16(a) of the Securities Exchange Act of 1934.
What’s interesting about this arrangement, as we understand it, is that because the purchases are made by a third party at predetermined amounts and price ranges, they can buy shares at any time – even during quiet periods before earnings reports. However, to do this, it must be disclosed in the company’s reports.
Rule 10b5-1(c) is a regulation issued by the SEC that aims to provide corporate insiders, such as executives and board members, with a way to trade the company’s stock without risking accusations of insider trading. The rule was created to offer protection against such accusations by allowing insiders to establish predetermined trading plans.
An insider can establish a trading plan when they do not possess any material non-public information about the company. The plan must specify when and how many shares are to be bought or sold, or include a formula or method for determining these factors. This means that the trades occur according to a plan set up before the person has access to non-public information.
If an insider follows a properly established 10b5-1 plan, they cannot be held liable for insider trading, even if the trade later occurs during a time when they have material non-public information. This is because the trade was already pre-determined.
Insiders can modify or terminate a 10b5-1 plan, but such changes can raise suspicions that the plan is being used opportunistically, which could reduce the protection that the rule offers.
I understand your point and it’s a valid one because it is better when management eats its own cooking so to speak. However, I always find open market purchases, especially when a stock has fallen, to possibly be more bullish. When it happens in clusters even more so, but that doesn’t mean you can’t be duped either. Read David Einhorn’s book Fooling Some of the People All of the Time. A more recent case is probably B. Riley $RILY.
Personally, I don’t like plans where insiders are buying shares based on a plan. In effect, they are buying at a predetermined date irregardless of price. I toss these away as meaningless because the insider is not necessarily purchasing shares because the stock is cheap or at a discount. I prefer to see open market buys. As an example of the former take a look at $YORW and whether you would value the company as a bargain. Now it may be small enough for someone to acquire at any time, but it would be preferable to acquire shares at a discount as an investor would or should any other company, but I do not believe the trading in $YORW is indicative of that reason