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Corporations • Federal Securities Laws
CORP#067
Legal Definition
A traditional insider is one connected to the issuer, including a shareholder, director, employee, officer, CPA, attorney, or banker.
Plain English Explanation
There are three main types of "insider", one of which is the traditional insider.
Traditional insiders are about as obvious as you would expect. They are people who are, in some way, connected to the company. It is through this connection that they were able to become aware of the insider information. In other words, if HypoCorp is secretly discussing the possibility of laying off a bunch of employees, the first people to know about it would likely be traditional insiders, since they are likely the ones either having the discussions or being in a position to hear them before the public does.
Traditional insiders are about as obvious as you would expect. They are people who are, in some way, connected to the company. It is through this connection that they were able to become aware of the insider information. In other words, if HypoCorp is secretly discussing the possibility of laying off a bunch of employees, the first people to know about it would likely be traditional insiders, since they are likely the ones either having the discussions or being in a position to hear them before the public does.
Hypothetical
Hypo 1: Bob and Sam are directors at HypoCorp. HypoCorp is considering acquiring TinyCorp, a publicly traded company. The day before HypoCorp announces its plan, Bob decides to purchase 1,000 shares of TinyCorp for $1 per share. After HypoCorp announces its plan, TinyCorp shares jump to $10 per share. Result: Bob is a traditional insider and used his privileged access to information within HypoCorp to preemptively purchase shares of TinyCorp knowing that it's share price would increase when the public learned of HypoCorp's intention to acquire it.
Hypo 2: Bob and Sam are directors at HypoCorp. HypoCorp just purchased a new parcel of land to build an office and is having it inspected by Amy, a geologist. Amy discovers that there is a large amount of oil under the land. Bob and Sam decide they will announce this news at their next shareholder meeting in 1 month. Result: Anyone aware of this information is precluded from buying shares of HypoCorp until the shareholder meeting, because the news will obviously increase the value of HypoCorp stock. This includes Bob, Sam, and even Amy.
Hypo 2: Bob and Sam are directors at HypoCorp. HypoCorp just purchased a new parcel of land to build an office and is having it inspected by Amy, a geologist. Amy discovers that there is a large amount of oil under the land. Bob and Sam decide they will announce this news at their next shareholder meeting in 1 month. Result: Anyone aware of this information is precluded from buying shares of HypoCorp until the shareholder meeting, because the news will obviously increase the value of HypoCorp stock. This includes Bob, Sam, and even Amy.
Visual Aids
Related Concepts
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