Question of the Week: Can I buy stock in the company I work for? Part I

We received a question recently from an investor looking for information on whether it would be considered insider trading for him to purchase stock in the company he works for. There’s no simple yes or no answer to this question, so we’re going to answer it in two parts.

This week in Part I we’ll look at what it means to be an ‘insider’ and how it can impact the potential for insider trading.

The term insider is defined in the Nova Scotia Securities Act. One test for an insider is a director or officer of the company. Another test is a person or company who owns securities greater than 10% of the voting rights for all the outstanding voting securities. There are other ways that a person or company can be an insider, but it depends on the facts and circumstances of the situation.

In layman terms insiders are typically someone in an executive role at a company, such as the CEO or CFO, that would be privy to important information about that company (financials, management changes, scandal) before the public.

Why is this important? Insider trading is using this kind of information to inform a purchase or sale of securities before the information has been made public, to either make a profit or negate a loss. How can we be sure that insiders are not getting ahead of the market when buying or selling securities? All trading done by insiders must be reported on SEDI – the System for Electronic Disclosure by Insiders. Reports filed on SEDI can be viewed by the public and are reviewed by securities regulators.

Now you know what an insider is and how they must act. In Part II next week we’ll look at how an employee can go about purchasing stock in the company they work for and what disclosures may be necessary.