Insider trading is a term commonly used in the capital markets space, but what exactly does it mean, and how do you identify an insider? This article will provide a simplified overview into insider trading, and the penalties for committing such an offence in British Columbia.

What is insider trading?

Insider trading occurs when a person who is in a “special relationship” with an Issuer (a listed company) buys or sells a security of that Issuer when in possession of material non-public information (MNPI). Because the information is not widely known and was acquired by virtue of the person’s special relationship with the Issuer, it gives them an unfair advantage, and therefore trading/selling securities with this knowledge, or sharing such MNPI, is against the law. 

What is considered “material information”?

Material information includes, but is not limited to, any documents, data, facts or financials which, if disclosed to the public, would reasonably be expected to have a significant effect on the market price of the security. Material information also includes changes in an Issuer’s business, operations or capital that would be reasonably be expected to have a significant effect on the market price of the security.

What is “tipping”?

In addition to the prohibitions on trading while in possession of material non-public information, persons in a “special relationship” with an Issuer are also prohibited from disclosing material non-public information unless such information has been generally disclosed or disclosing the information is necessary in the course of business of the Issuer. This kind of disclosure is called “tipping”.

Who is in a “special relationship” with an Issuer?

Only those in a “special relationship” with an issuer are captured by the insider trading and tipping rules.

A person is deemed to be in a special relationship with an Issuer if:

  1. they are an “insider” of the Issuer (a director, officer, or person holding more than 10% of the voting securities of the Issuer), or an insider of a company that is considering or proposing a significant transaction with the Issuer; 
  2. they have engaged in or are considering or proposing to engage in any business or professional activity with or on behalf of the Issuer or a company that is considering or proposing a significant transaction with the Issuer;
  3. they have acquired material non-public information while in a special relationship described in (a) or (b) above with the Issuer; or
  4. they have acquired material non-public information, having acquired that information from another person at a time when (i) that other person was in a special relationship described in (a), (b), or (c) above, and (ii) they knew or reasonably ought to have known that the person from which they acquired such information was in a special relationship with the Issuer.

As a result of paragraph (d), a person does not need to be in a close relationship with an Issuer to be deemed to be in a “special relationship” with the Issuer. Paragraph (d) can create a “chain” of special relationships, where the insider trading and tipping rules can apply not only to MNPI received directly from insiders, but also to MNPI received from “tippees”.  As a result, there is “a potentially infinite chain of tippees who are caught by the prohibitions against tipping and insider trading”, and “material may be third or fourth hand and still be subject to the prohibitions”.

What are the penalties for insider trading?

If an insider commits an offence under the Securities Act (British Columbia), they can be held liable and a person may have a right of action against them. The penalties for insider trading are hefty and those fined could be ordered to pay the equivalent of any profit made or loss avoided by all persons as a result of Insider trading, tipping or recommending.

Navigating the requirements and regulations can be daunting, therefore obtaining legal advice and representation is highly recommended if you are dealing with shares in any capacity and concerned about the implications of being in possession of MNPI.

For more information on any of the above, or to connect with one of our experienced securities lawyers, feel free to contact us at 604-629-5400 or via e-mail at: [email protected]

Disclaimer

 ***The above blog post is provided for informational purposes only in the province of British Columbia and has not been tailored to your specific circumstances or location.  This blog post does not constitute legal advice or other professional advice and may not be relied upon as such. *** 

Links 

https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/96418_01

https://www.bcsc.bc.ca/industry/issuer-regulation/continuous-disclosure-obligations/insiders-faq