A question arises as to the amount of time, after the release by the Company of its earnings, that officers, directors and senior management can purchase or sell Company stock without running into the period when they would have knowledge, or the appearance of knowledge, of the Company’s results for the subsequent reporting period. The Company normally releases its quarterly results approximately forty five (45) days after the end of the quarter and ninety (90) days after the end of the fiscal year. Insiders should wait a period of time after release of information so as to assure that the information has been publicly disseminated. The Company has adopted a policy that insiders (officers, directors and senior management) shall not execute transactions in the Company’s stock until two (2) days after the release of the information. The Company’s policy would permit insiders a “window” to buy or sell Company securities of thirty (30) days, after the two day waiting period following the release of information, for quarterly results and of fourteen (14) days after the two (2) day waiting period following the release of information for year-end results. (The shorter “window” following year-end results is due to (i) the fact that earnings are released a month later than quarterly results and (ii) the first quarter ends one month after release of the year-end numbers and thus first quarter results are therefore known closer to the time of the release of the year end results then are subsequent quarterly results). Of course during the “window” periods if an insider becomes aware of any material undisclosed information regarding the Company it would be illegal for the insider to purchase or sell any Company stock.
In addition, it is the Company’s policy that officers and directors should not engage in any of the following activities with respect to the securities of the Company:
Section 16 of the Securities Exchange Act of 1934 (“1934 Act”) generally requires officers, directors and greater than ten (10%) percent stockholders of public corporations to file certain reports with the SEC, securities exchanges and their respective corporations disclosing ownership of, and transactions in, the corporation’s securities. Moreover, in certain instances, Section 16 requires disgorgement to the corporation of “short-swing” profits from transactions in these securities.
To ensure compliance with Section 16’s requirements, the Company requires that each officer and director confer with this firm, Salon Marrow Dyckman Newman & Broudy LLP, before purchasing or selling any securities that have been issued by the Company (including derivative securities such as options, puts and calls).
Moreover, under Section 16 the SEC requires that companies disclose, in proxy materials and/or Forms 10-K, the names of officers, directors and greater than ten (10%) percent shareholders who have failed to file required reports on a timely basis. To avoid the need to make such potentially embarrassing disclosures, it is particularly important that directors and officers understand and comply with the SEC’s requirements.
A person who becomes an officer or director of the Company must file a Form 3 (Initial Statement of Beneficial Ownership of Securities) with the SEC, and with the Company within ten (10) days after becoming an officer or director. (Note that directors and officers must file a Form 3 even if they own no securities of the Company -- the absence of beneficial ownership should be disclosed on the form.) A person who becomes an owner of more than ten (10%) percent of the Company’s common stock also must file a Form 3 within ten (10) days after acquiring such an amount of stock.
Subsequent to a Form 3 filing, any change in the filing person’s beneficial ownership of the Company securities must be reported on Form 4 (Statement of Changes in Beneficial Ownership of Securities). The Form 4 must be filed with the SEC, and the Company on or before the tenth day of the month following any such change.Please note the discussion of “beneficial ownership” and “pecuniary interest” further below.
In 1991, the SEC added an additional form, Form 5, which every person subject to Section 16 reporting is required to file within 45 days after the end of the Company’s fiscal year. Form 5 serves as an annual reconciliation of the person’s Section 16 reports, including disclosure of certain small acquisitions, exempted transactions, changes in ownership due to stock splits and stock dividends, and total beneficial ownership of the registrant’s equity securities at year-end. As with Forms 3 and 4, copies of Form 5 must be filed with the SEC, with the Company. However, insiders with no reportable transactions during the fiscal year end neednot file a Form 5. In those cases where no Form 5 is required the Company requests that officers and directors notify the Company of this fact. It has been Company policy to assist officers and directors in filing such forms.
Directors and officers should be alert to a potential trap: they will still be required to file a Form 4 for transactionsafter they cease to be a director or officer of the Company if the transactions occur within 6 months of their last transaction while a director or officer. Moreover, no later than 45 days after the end of the fiscal year in which the resignation occurs, a Form 5 may be required with respect to certain exempt transactions. On both of these forms, directors and officers should indicate that insider status has terminated. As noted above, failure to file these reports in a timely manner will result in potentially embarrassing disclosure in the Company’s proxy statement or Form 10-K.
For purposes of these reports, the SEC rules generally defines “officer” to include the president, principal financial officer, controller or principal accounting officer and those officers in charge of a principal business unit, division or function of the Company and others who perform significant policy-making functions for the Company. In addition, under certain circumstances officers of the Company’s subsidiaries could be required to file reports if they perform significant policy-making functions for the Company. In many cases, officers for purposes of Section 16 reporting are the same persons designated as “executive officers” in the Company’s proxy statements and other periodic reports. Unless you have been designated an executive officer for the purposes of the Company’s proxy statement, you are probably not an “officer” subject to Section 16’s reporting requirements.
In addition, Section 16(a) of the 1934 Act speaks in terms of “beneficial ownership” rather than legal or record ownership. The SEC’s rules essentially include two beneficial ownership concepts. The first, used in determining who is a greater than 10-percent shareholder required to file Section 16 reports, focuses on a person’s voting or investment power over securities as a major factor in determining beneficial ownership. As a practical matter, if a person has sole or shared voting or investment power over securities, that will usually be sufficient to find that those securities are beneficially owned for purposes of Section 16.
Once a person is required to file Section 16 reports, the SEC uses a second beneficial ownership concept, based on a person’s direct or indirect “pecuniary interest” in securities, to determine which transactions need to be reported and are subject to potential profit disgorgement. Essentially, this second test is predicated on an insider’s ability to profit from purchases or sales of securities. In determining the existence of a pecuniary interest, there is a rebuttable presumption that a person has a pecuniary interest in securities held by members of his or her immediate family if they share the same household. A person may also be held to be the beneficial owner of securities registered In the name of a partnership, corporation, trust or other entity over which he or she has a controlling influence. Finally, special rules exist for fiduciaries and beneficiaries of trusts and partners of partnerships.
Given the difficulty of applying Section 16’s “beneficial ownership” concepts, this firm is prepared to assist officers, directors and other filing persons in making such determinations.
Although the Company may help in the preparation and filing of the forms, the ultimate responsibility to file Form 3, 4 and 5’s rests with the officer, director or greater than ten-percent shareholder. For each form three copies (at least one of which is manually signed by the individual) must be filed with the SEC and, as noted above, copies must be provided to the Company.
- 4 -
| | |
| 2. | Disgorgement of Profits Under Section 16(b) |
Supplementing the reporting requirements of Section 16(a) is the so-called short-swing trading provision contained in Section 16(b) of the 1934 Act. This section provides that any profit realized by an officer, director or more than ten-percent shareholder from any purchase and sale or sale and purchase of any equity security of the Company within any period of less than six months shall inure to and be recoverable by the Company. Unlike other provisions in the federal securities laws, intent to take unfair advantage of non-public information isnot required for recovery under Section 16(b). In other words, transactions in the Company’s securities within 6 months of one another can lead to disgorgementirrespective of the reasons for or purposes of the transaction.
It is irrelevant for Section 16(b) purposes whether the purchase or the sale comes first. Furthermore, the courts will match the lowest purchase price with the highest sale price. Thus, although the officer or director may have realized an economic loss, he may be treated for Section 16(b) purposes as having realized a “profit”.
Potential profit disgorgement also may attach to transactions in derivative securities. For example, the purchase of a call option on the Company’s stock and a sale of either the option or shares of the Company’s stock within six months would be subject to potential disgorgement rule of Section 16(b).
In the past, Section 16(b) liability could also attach where an officer and director exercised an employee stock option granted many years previously and then sold the stock within six months of the option’s exercise. Fortunately, the SEC has revised its rules to treat the grant or purchase of the option -- rather than its exercise -- as the date of acquisition for purposes of measuring the six-month period. Thus, in many cases an Option held for over six months can be exercised and the stock sold immediately without fear of profit disgorgement.
| | |
| 3. | Prohibition of Short-Sales |
Section 16(c) of the 1934 Act prohibits any short sale or short sale” against the box” of Company securities by any officers, directors of greater than ten percent shareholders. A short sale is the sale of a security not owned by the seller, or if owned, not delivered (the so-called short sale “against the box”), which involves the borrowing of shares by the seller’s broker for the account of the seller and delivery of the borrowed shares to the buying broker. At some point in the future, the short seller must purchase the securities to cover the short position. Because the short seller hopes that he or she will be able to purchase at a price lower than the price which the short sale was made, a short seller expects a security to decline in market value from present levels.
Under the Securities Act of 1933 (“1933 Act”), an “affiliate” of the Company (i.e., all directors and almost all officers) may not sell securities of the Company unless such sale is covered by a 1933 Act registration statement or such sale is made pursuant to an exemption from the registration requirement. The usual exemption relied on by affiliates is Rule 144 under the 1933 Act which, among other conditions noted below, generally requires that the securities have been held for at least one year and any sales be made through transactions with broker-dealers. It is important that the broker-dealer through whom or to whom an affiliate is selling his securities be informed that the securities are being sold pursuant to Rule 144.
Rule 144 essentially restricts an affiliate of the Company from selling during any three-month period an amount of the Company’s securities more than the greater of:
| | |
| (a) | one percent of the outstanding securities of that particular class of securities, or |
| | |
| (b) | the average weekly trading volume of that class of securities during the four calendar weeks preceding the date a broker is directed to execute the transaction. |
In addition, if the sale involves over 500 shares or other units, or a sales price exceeding $10,000, a Form 144 must be filed, at the time the sale order is placed or executed, with the SEC and securities exchanges where that class of the Company’s securities trades.
- 5 -
ACKNOWLEDGEMENT
I acknowledge receiving a copy of a memorandum titled “Federal Securities Considerations for Management of REPRO-MED SYSTEMS, INC.
Please return this acknowledgement to Andy Sealfon
- 6 -
