5 Essential Considerations About 10b5-1 Plans

If you are an “insider” at a company, then not being able to sell your company stock during blackout periods could be a nauseating experience. To make matters worse, these periods usually happen around big corporate events and quarterly earnings reports, which tend to magnify price movements in the stock. 

Having your stock move the wrong way during these blackout periods, as was the case with META when they reported Q3 earnings in 2022 and were down ~25% in a day, could be devastating. 

So before you go running off thinking there is nothing you can do about your shares tanking during a blackout period, this guide unveils the top five considerations insiders should be aware of when it comes to 10b5-1 plans.

What is a 10b5-trading plan?

A 10b5-1 trading plan is a predetermined arrangement established by company insiders to facilitate the legal and systematic selling or purchasing of their company’s stock. This plan is designed to shield insiders from accusations of insider trading by executing trades automatically based on predetermined parameters, regardless of any non-public information they may possess.

What should I know about the rules of the 10b5 plan?

Don’t rush it. Before you begin executing this plan, it’s essential to understand the rules of the game, both to maximize your chances of success and to minimize the risk of infractions.

1. Insider Trading Rules

Due to strict corporate trading policies, employees that are categorized as “insiders” are only allowed to trade their company stock for a limited number of days per year. It’s possible that these restrictions will limit the number of days in open trading windows to less than 60 per year. 

As a result of these trading restrictions, company “insiders” are often unable to manage their stock positions and could face significant concentration risk within their portfolio because of their inability to trade. 

To stay out of trouble while getting around these insider trading rules, the “insider” can implement what is called a 10b5-1 plan. This will enable them to set up a system for buying, selling, or hedging their stock position.

2. Trading during blackout periods

Yes. Under Rule 10b5-1, insiders can trade company stock over a predetermined period and through blackout periods, even if they become aware of material, nonpublic information during the transaction (MNPI).  This holds true if the transaction is conducted in accordance with a pre-existing plan established when the insider was unaware of any material, nonpublic information.

 

3. Trading shares during blackout periods

Here are a few examples:

Period-sales approach:  Sell X number of shares on the first day of every month/quarter, if the price is above $Y. 

Price-only approach:  Sell X number of shares at any time during the plan when price reaches $B; sell an additional C number of shares if the price gets to $D. 

As a best practice, plans may encompass a 12-month period.  Insiders are often limited to 60 days of open trading windows, which can severely limit their ability to trade.  Having a longer-term timeframe may help to improve investment outcomes. 

As an FYI, 10b5-1 plans are flexible and highly customizable and can allow for all kinds of sophisticated trading strategies to sequence your sell transactions should price movements in the underlying stock accelerate to the upside or downside. 

When the plan is approved by corporate counsel and the 10b5-1 is on file, the institution (i.e., Schwab, Fidelity) holding your shares will carry out your trades in accordance with your instructions. 

4. Including shares in a 10b5-1 plan example

In the money non-qualified stock options (NSOs) are the most common shares that would be included.  You should pay attention to both expiration dates and the cost basis of your shares as this can prioritize how sell orders should be entered.  In general, it’s best to sell your shares with the highest cost basis first.  This would lower or delay the tax impact, especially in years where your overall income levels could be elevated.  By structuring your sales in accordance with not only price targets (covered above), but also tax impact, you end up optimizing your 10b5-1. 

It is generally not a good idea to include incentive stock options (ISOs) due to the tax preference that could get derailed if holding requirements are compromised. If you have ISOs, consult with your tax advisor to examine your income thresholds and associated AMT. 

Depending on the shares included in the 10b5-1 trading plan, you may also need to update your tax withholding elections and pay estimated tax as your plan plays out over time.  

5. Making changes to existing plans

The plan can be amended if the executive is not in possession of material, nonpublic information and the trading window is open. Typically, changes must be approved by the company before they can be implemented.

A 10b5-1 plan should be carefully designed to prevent future modifications or cancellations. Before a plan is changed or canceled, the executive should consult with their personal legal counsel and corporate counsel to determine if the modification will result in a negative consequence from an SEC investigation.

What’s next? 

To make sure you are complying with the SEC, and other company policies, it is best to reach out to your company’s general counsel and coordinate your strategy with a financial planner and tax professional. The 10b5-1 plan is complicated and can get you into trouble if not executed correctly.  

Sell xxx shares of STMP at a price of $xxx or better with a maximum of xxx shares sold in any given trading day

Sell xxx shares of STMP in total, xxx shares at a limit price of $xxx, xxx shares at a limit price of $xxx, xxx shares at a limit price of $xxx, and xxx shares at a limit price of $xxx

Exercise an incentive stock option for xxx shares of STMP if the market price exceeds the option strike price by $xxx

 

Who can I turn to for advice on 10b5-trading plans?

At Augustus Wealth, we provide a holistic approach to financial planning and investment management services. Whether you’re navigating blackout periods or crucial corporate events, our experienced team is here to guide you through the complexities of stock ownership. Additionally, we specialize in streamlining the filing process for 83(b) and providing you with insights into the meticulous process of 409A valuations. Trust diligent financial advisors in Los Angeles County to be your strategic partner in securing your financial future.