| Insider Dealing: Where Do I Stand?

16th Jul '19 by fwyburd

4 comments 931 reads

Last week, Paul Scott wrote the following about the recent Sosandar (LON:SOS) placing

So imagine my surprise, when my broker rang me on 5 July, to ask in the usual way, if I wanted to be made an insider on a fundraising. That's the way it's done, on a recorded line, I have to give specific consent to be made an insider (which only happens rarely).

This got me thinking about insider dealing and how it is legally constituted. In particular, there are two situations currently where I am unclear as to where I stand legally:

I was approached a few weeks ago by a friend of mine asking if I wanted to subscribe to a placing which is due to happen at the end of this month. The approach came by email, unsolicited, and with no mention beforehand as to whether I wanted to be made an 'insider'. My friend has been hired by the firm, an AIM listed company, to generate interest in the placing from his network and will presumably earn a commission from the investors he recruits. So am I an 'insider'? Am I allowed to publish here or other forums the name of the firm? Am I allowed to trade the stock (I don't currently hold)?
The second story relates to an AIM firm who I approached recently with a business development idea which could have big implications for its earning. They are currently researching the idea and early indications are positive but there is nothing to write home about yet. So the question again is am I an 'insider' to the idea (again nothing has been said or signed) and does that prevent me from trading the shares? Or, if they formally decide to develop it, do I then become an insider automatically until this is made public?

All opinions, especially legal ones, would be most welcome.

cheers

Francis

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roddy10

16th Jul '19

I am not a lawyer. I do have a number of years of professional experience in the City. The relevant rules are:
1. Criminal Justice Act 1993
2. Market Abuse Regulation (Regulation 596/2014)

A useful starting point is https://uk.practicallaw.thomsonreuters.com/8-107-6269?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1

In summary if you have information which relates to a specific security (or securities), it is specific and precise, and has not been made public but if it were to be made public it is likely to have a significant impact then it is inside information.

In the case of your numbered para (1) I would suggest strongly that your friend avails himself of rules and regulations before trying to raise money. It sounds distinctly like your friend is undertaking a regulated activity for which he ought to be regulated and aware of the rules.

In the case of your numbered para (2) you state that the impact on earnings could be 'big'. Whether the company formally informs you or not, you are in possession of material private information that is specific and precise. Hence you are an insider.

Insider rules apply to all market participations even if they invest their own money and are not part of a regulated entity. You do not have to be informed that you are an insider to be an insider.

The general rule is if you think you might be then don't trade (and probably speak to a lawyer / compliance officer with relevant experience).

Hope that helps.

fwyburd

Many thanks Roddy, that was a clear and concise answer and helpful to boot.
My friend is actually a regulated broker but I was surprised not to have been asked in advance (as Paul Scott was) whether I wanted to be made an 'insider'. Which in effect I am it seems but not because I chose to be one.
cheers
Francis

xcity

I doubt that you could be found to be an insider with (2).
Pitching an idea is not sufficient. Ideas are pitched all the time.
And most people who pitch ideas believe the impact on earnings would be big.
It needs to be much more concrete to qualify.
If you have reason to believe it would significantly impact the share price then that would be different.

Vsihv

I tend to agree on point 2, that it is unlikely to be insider unless you know it to be that material. The tech behemouths / banks partner with disruptors every other day (out of fear) and everything could be material, which is why they listen.
That said, the legal definition provided by Roddy is the one to go on.

On Para 1, I would suggest invariably if you have been told of a planned fundraising, you are an insider. Having worked in the industry, I have been brought inside because an email re HK was sent to me in error (escalated by me - asked to deleted the email and brought over the wall as it was sensitive) and again when some information around placement allocations was left on a photocopier.
In the scenario your friend is talking about, to not become an insider it would be a strictly controlled script (approved by compliance/legal) on a no names basis (and with the permission and recording of the recipient of no name information).
Typically, you would expect the buy side to figure out what the no name is - often you will find they will reject request, as they do not to be in a position where they cannot trade the name (Punch and David Einhorn is probably one of the reasons fund managers are more circumspect than they used to be).

Roddy's last sentence is particularly pertinent - unless it is Argentina (and I am not being facetious!)

Insider dealing: Where do I stand?

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Fwyburd

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