Company Stock: How to Monetize It & Reduce Risk Through a 10b5-1 Plan
Key Points
A Rule 10b5-1 plan allows corporate executives to set up a trading plan for their company stock that eliminates corporate insider trading risks while abiding by SEC regulations.
Because they specify predetermined criteria, these plans allow you to make trades during blackout periods, which can otherwise hamper your opportunities to buy or sell stock in the future.
Most corporate executives aren’t aware of Rule 10b5-1 plans, but they’re an essential tool when you’re an insider at a publicly traded corporation.
If you’re holding company stock, you’re aware of U.S. Securities and Exchange Commission rules around insider trading. What you may not know, however, is that a Rule 10b5-1 plan helps you avoid the risk while continuing to maximize or monetize your holdings.
What Is a Rule 10b5-1 Plan?
Created in 2000 by the U.S. Securities and Exchange Commission, a Rule 10b5-1 plan allows executives of publicly traded corporations to create a legally binding trading plan. This formal plan predetermines when you’ll purchase or sell your company stock and how much you’ll purchase or sell (both in amount and price). By setting up these parameters in advance, you avoid the risks of insider trading accusations. It also makes it easier to report all transactions to the SEC.
These 10b5-1 Plans typically specify 3 key criteria:
Share Quantity
Share Price
Trade Timing
Rule 10b5-1 plans are very flexible. For example, you can base the share amount on a percentage, number, or even value (e.g., sell whatever number of shares is worth $100,000). You can sell on a specific date or set up a repeated transaction schedule. You can set limit orders to ensure your shares aren’t sold below your desired value. You can specify how you want to execute trades through a Rule 10b5-1 plan.
The plan’s value comes from the fact that it’s all specified in advance. The plan is created before you have any material, non-public information (MNPI) that might trigger SEC scrutiny.
Selling Company Stock Through a Rule 10b5-1 Plan.
More often than not a 10b5-1 plan will be used to sell stock or exercise stock options. Selling your company stock at a specified cadence comes with several benefits, letting you:
Monetize your holdings
Diversify your investment portfolio
Make stock transactions during blackout periods
During “Blackout periods,” you are not allowed to buy or sell your company stock. They’re meant to prevent insiders from making any moves based on non-public knowledge. Typical blackout periods are 2-4 weeks; however, we’ve seen blackout periods stretch up into 6 months.
How to Set Up a Rule 10b5-1 Plan.
You’ll want to first check with your organization to see if they have a boilerplate document. If not, an experienced lawyer can create one. At Capstone, we work with our clients to set the parameters that ensure the plan meets their overall investment goals. Each person’s situation is different, so having someone familiar with your short- and long-term objectives is essential.
In general, a Rule 10b5-1 plan is set for one year. At the end of that year, you’ll want to review your situation and draft another one, adjusting for any changes you’d like to make.
At Capstone, we base your financial needs on your personal needs. A Rule 10b5-1 plan is one way to protect both. If you’d like to know more or have any questions, please contact us today.
Disclosures:
This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.